Market Thickness and Delivery Efficiency in Food-delivery Platforms

Abstract

Market thickness, which measures the number of participants in a market, is a critical driver for online platforms to grow and thrive. For food-delivery platforms, market thickness refers to the restaurant density within a geographic area (i.e., a regional market) that they cover. We study the implications of market thickness and restaurant performance on food-delivery platforms. While the literature has shown competition to be one of the primary ways that thickening a market negatively affects restaurants on a food-delivery platform, we posit that market thickness can favor restaurants by improving their delivery efficiency. Using a canonical queueing model, we characterize the effects of the two major mechanisms induced by a thicker market, namely (1) intensified cannibalization resulting from more customer choices and (2) potential delivery efficiency gain (i.e., faster deliveries) resulting from drivers pooling in deliveries (i.e., drivers arrive at restaurants faster in a thicker market). To compare these two mechanisms, we collect panel data from a leading food-delivery platform and apply a two-way fixed effect model to empirically examine the hypotheses developed from the theoretical model. First, we find that higher market thickness leads to shorter order wait times, suggesting an improvement in delivery efficiency. Second, increasing market thickness is estimated to boost restaurants’ sales and revenue but also to reduce customers’ spend per order on the platform, indicating that delivery efficiency actually dominates the cannibalization in determining restaurants’ sales performance. Third, exploiting the heterogeneous effects of market thickness, we tease out the cause of improved delivery efficiency and attribute it to drivers’ delivery pooling. Our findings imply that the platform should prioritize partnerships with restaurants in regions with high market thickness (e.g., commercial areas) to harness the positive externality. As such, the platform can create a win–win–win scenario that not only fulfills its own growth but also provides its restaurants with greater revenue and its customers with faster deliveries.

Keywords: Food-delivery platforms, market thickness, platform expansion, delivery efficiency