Food Ordering and Delivery: How Platforms and Restaurants Should Split the Pie.

This article analyzes the commission-based contracting practices between online food delivery platforms and partner restaurants, focusing on how these contracts affect pricing, restaurant display, and delivery costs. It identifies two key inefficiencies in current decentralized systems: (1) platforms feature distant restaurants that overbid on commissions without internalizing delivery costs, leading to higher overall delivery expenses, and (2) platforms bear full delivery costs but receive only a fraction of food revenues, resulting in high delivery fees and limited service coverage. Using a game-theoretic model, the authors propose a coordinating contract where platforms and restaurants share both food revenues and delivery costs proportionally, aligning incentives and achieving the first-best outcome that maximizes total profits. Numerical analysis based on data from a representative U.S. city shows that this contract reduces commission rates and delivery fees, increases restaurant profits, and improves total system welfare, though platform profits increase only in certain markets, particularly those farther from restaurants. The study also extends the model to multiple markets and continuous demand, discussing practical implementation challenges and suggesting that sharing delivery costs alongside food revenues can better balance interests in food delivery marketplaces.