Market Thickness and Delivery Efficiency in Food Delivery Platforms
Posted: 18 Oct 2022
Date Written: October 6, 2022
Market thickness, which measures the number of participants in a market, is a critical driver for platforms to grow and thrive. In food delivery platforms, market thickness entails the restaurant density in a geographic area (i.e., a regional market). We study the implications of restaurant density and performances in food delivery platforms. While the literature has shown competition as a way in which market thickness impacts platforms, we posit that this platform feature can dictate consumer behaviors via altering restaurants' operations performances---delivery efficiency. Using a theoretical model, we characterize two major mechanisms with the opposite effects by a thicker market. (1) The intensified competition as a result of wider consumer choices can hurt restaurants' sales from the platform, and (2) the speedy delivery as a result of drivers' efficiency gain in delivery pooling that can improve consumers' experiences. To this end, we collect panel data from one of the leading food delivery platforms in China, and exploit its market thickness changes in various regions. Then, the effects of market thickness are estimated by a two-way fixed effect model, with the control of regional temporal influences (e.g., consumer population in a region). We show that a higher market thickness leads to shorter order wait time; it also boosts restaurants' sales and revenues, indicating that the delivery efficiency benefit unexpectedly dominates the competition effect in our context. To understand the mechanisms, we further employ instrumental variables to identify the causal chain from market thickness increase to restaurants' sales and revenue boosts through delivery efficiency improvement. In addition to the novel positive externalities of market thickness, our findings have implications for food delivery platforms' expansion strategies.
Keywords: food delivery platform, market thickness, delivery
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