The Three-Sided Market of On-Demand Delivery

29 Pages Posted: 18 Oct 2021

See all articles by Sina Bahrami

Sina Bahrami

Eindhoven University of Technology

Mehdi Nourinejad

York University; Department of Civil Engineering

Yafeng Yin

University of Michigan, Ann Arbor

Hai Wang

Carnegie Mellon University - Heinz College of Information Systems and Public Policy; Singapore Management University - School of Information Systems

Date Written: October 18, 2021

Abstract

On-demand food and grocery delivery services are subject to cross-side interactions among customers, suppliers, and crowdsourced drivers in a three-sided market. Each customer places an order from a supplier via an on-demand delivery platform, and the order is delivered by an ad-hoc driver, who serves as system catalyst connecting suppliers to customers by acting as the delivery mechanism. This paper investigates the interplay of cross-side interactions, and studies the commissions paid by suppliers and customers and the wage offered to drivers. All three players are price-sensitive, but the customers are also time-sensitive as they avoid long delivery times. All players are heterogeneous in their valuation of the service, and their numbers from each side is endogenously dependent on the price, wage, and commission of the platform. We use continuum approximation of the vehicle routing problem to derive customer waiting times. We validate the results of the analytical model with numerical experiments on more realistic cases. The main insights are the following. First, the platform requests lower commissions and offers a higher wage when maximizing social welfare compared to profit. Second, sensitivity analysis on the market parameters shows that, for example, the driver wage is insensitive to the population of customers and suppliers. Third, the direction of change in the optimal commissions with respect to market parameters is the same in both social welfare and profit maximization. Fourth, the platform subsidizes customers when the market is over-supplied, and the suppliers when the market is under-supplied. Fifth, the supplier surplus is only marginally affected by the product price due to the counter-commissioning reaction of the platform.

Keywords: On-Demand Delivery, Sharing Economy, Multi-sided Markets, Continuum Approximation

Suggested Citation

Bahrami, Sina and Nourinejad, Mehdi and Yin, Yafeng and Wang, Hai, The Three-Sided Market of On-Demand Delivery (October 18, 2021). Available at SSRN: https://ssrn.com/abstract=3944559 or http://dx.doi.org/10.2139/ssrn.3944559

Sina Bahrami (Contact Author)

Eindhoven University of Technology ( email )

Department of Built Environment
Eindhoven, 5612 AZ
Netherlands

Mehdi Nourinejad

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Department of Civil Engineering ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Yafeng Yin

University of Michigan, Ann Arbor ( email )

2350
Hayward Street
Ann Arbor, MI 48109
United States

Hai Wang

Carnegie Mellon University - Heinz College of Information Systems and Public Policy ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Singapore Management University - School of Information Systems ( email )

School of Information Systems
80 Stamford Road
Singapore 178902, 178899
Singapore

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