Dinner at Your Doorstep: Service Innovation via the Gig Economy on Food Delivery Platforms

Boosted by greater demand for convenience and then turbocharged by the coronavirus disease 2019 pandemic, online food delivery (OFD) has witnessed rapid growth over the past several years. Despite such growth, however, it is still unclear how incentives and payoffs of various parties are affected by the three-sidedness of the OFD market, which involves consumers, restaurants, and gig drivers—beyond the traditional two-sided setting. In this paper, we study the OFD platforms’ optimal choices in a competitive setting where the platforms compete on both prices and service quality. Our analysis shows that conventional insights from two-sided platforms do not completely carry over to OFD markets. Specifically, we find that the three-sidedness may either soften or intensify the price competition in the buyer-seller market, consequently altering the subsidizing conditions of OFD platforms. Although two-sided platforms generally get hurt by network effects because of the pressure to induce participation, OFD platforms are able to mitigate such negative impact by flexibly adjusting their service strategies. Yet, OFD platforms may not always be better off by introducing gig labor because additional leverage for competing platforms could lead to a prisoner’s dilemma situation. We show further how the platforms’ pricing and service strategies critically depend on the strength of network effects. With the rising of the gig economy, the question of employment status for gig workers has become an increasingly controversial issue in the United States and elsewhere. We address this by showing that the introduction of minimum wage regulation, although benefiting the gig drivers, may be welfare diminishing to society at large. Our results can thus provide guidance to policy makers seeking a compromise between the interests of gig workers and society as a whole.