Service pricing strategy of food delivery platform operators: A demand-supply interaction model

Abstract

This study explores the pricing strategy for online food delivery platform operators using the demand-supply interaction model, and taking into account the relationship between consumer demand and courier supply as well as the impact of consumer choice behavior and price variation per order on platform profit. A mathematical model is formulated to determine the optimal service fee and wage rate under profit maximization. Results show that service fee reduction indeed brings in more orders and greater revenue. However, increase in revenue cannot compensate for decrease in service fee collected and extra courier wage costs due to increase in orders. Hence, platforms suffer profit decrease. Moreover, a high market share does not guarantee maximum profit for platforms. Findings reveal that profit can be maximized through increasing both service fee and courier wage. On one hand, fee increases do not reduce demand because consumers are less sensitive to higher price than longer waiting time. On the other hand, higher courier wage would ensure courier supply and delivery capacity. These results provide useful reference for online food delivery platforms in devising optimal service fee for attracting consumers and appropriate wage for enticing couriers so as to stay profitable in the competitive business environment.