Hidden Externalities in the Power Dynamics Between Food Vendors and Food Delivery Service

Abstract

Food delivery companies play crucial roles in connecting food vendors to a wider clientele through the enabling tools of the Internet as well as a dynamic, efficient, and fast delivery network that abrogated the distance between client and food vendors. In essence, they serve both an advertising function as well as provision of logistic service. While it is interesting to examine the underlying economic factors that power the rise of the food delivery service that has taken a sizeable chunk of the food related revenue in many major cities around the world, little is known of the externalities and factors that play out daily between different food delivery service as they attempt to sign up new food vendors that feed into their larger network. Having enough food vendors in one’s network is important from the network effect perspective as more food choices from different vendors drive up viewership on the food delivery service’s website. But there lies deeper externalities in the power dynamics that guide the relationship between food vendors and food delivery service. Under a perfect competition model, food delivery service companies compete to sign up food vendors to their service based on a combination of economic factors that include delivery charge, commission, and quality of advertising service; thereby, tilting the position of equilibrium in the power dynamics towards the food vendors. But food delivery service companies regain some of the lost advantage in the relationship with food vendors through provision of rules that impose an exclusive relationship between food delivery service company and food vendor. In this way, food vendors could not sign up with many food delivery service companies that help to expand the reach of their food products and clientele. This then poses an interesting behaviour economics question in what factor ultimately tilt the decision-making process. In my opinion, the key governing factor is the number of clicks and viewership of the food vendor’s products on the food delivery service’s website. Knowledge of this statistic would guide the food vendor to use food delivery service that could use attractive advertising to expand the reach of the clientele. However, this statistic is not easily accessible or not available to the food vendor and constitutes an important hidden externality that guides the power relationship between food vendor and food delivery service companies. It is important to note that such power dynamics exist in many industries or sectors of the economy. For an industrial sector and the wider economy to function optimally, it is necessary to eliminate as many externalities as possible which would otherwise impose unnecessary burden to the economic players and ultimately driving up the cost for consumers. Hence, there is a necessity to take a clear-eye view on the externalities (especially hidden ones) affecting a particular industrial sector. These typically play out between the vendor and consumer of the service, and they share the characteristics of being difficult to eliminate. But, with proper regulatory control, the economic impact of these externalities at the micro and macro-scale could be ameliorated.

Keywords: power dynamics, food delivery service, hidden externalities, web viewership, signup commission