SSRN Id4366228

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

Jaelynn Oh
University of Utah, jaelynn.oh@business.utah.edu,
Chloe Kim Glaeser

University of North Carolina, chloe glaeser@kenan-flagler.unc.edu,
Xuanming Su
University of Pennsylvania, xuanming@wharton.upenn.edu,
Food ordering and delivery platforms generate online demand for restaurants and deliver food to customers.
In return, restaurants pay platforms a commission, typically a percentage of the order amount. Platforms
offer partner restaurants the choice of a range of commission rates, rewarding higher commission payments
with featured display slots and discounted delivery fees, both of which stimulate demand. Unfortunately,
the current environment is grim: platforms scurry to cover delivery costs while restaurants gripe about
excessive commissions. To understand current practice, we develop a game-theoretic model with a platform
and multiple restaurants. Our modeling results highlight two existing problems. (1) Platforms, on their
apps/websites, feature restaurants that are located too far away. Since these restaurants do not internalize
the platform’s delivery costs, they are willing to choose aggressively high commissions to earn featured
display. (2) Platforms charge delivery fees that are too high and set delivery boundaries that are too narrow.
This is because they bear the entire burden of delivery but earn only a fraction of food revenues. To solve
these problems, we propose a simple fix to existing commission contracts: beyond sharing food revenue,
platforms and restaurants can also split the delivery costs and fees. We show that our method attains first-
best, i.e., maximizes the total pie shared by platforms and restaurants. Using data on a representative city,
we numerically show that, on average, our coordinating contract lowers commission rates by 33.3%, lowers
delivery fees by 40.4%, increases restaurant profit by 25.0%, increases platform profit in 30.9% of the markets,
and increases total profit by 13.3%. We discuss the characteristics of markets that enable our coordinating
contract to yield a winning outcome for all parties.
Keywords: platforms, restaurants, food delivery, contracts
1. Introduction
The online food delivery market has steadily grown in many countries in the past decade.
The recent COVID-19 pandemic fueled this growth exponentially: lock-downs and social-
distancing requirements shifted consumer habits towards ordering foods via smartphone
apps. Consequently, the U.S. restaurant delivery business grew from $23 billion in 2019
to about $51 billion in 2020 (Oblander and McCarthy, 2021). Despite the boost in sales,
food delivery platforms still struggle to make profits (Rana and Haddon, 2021). Among
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Electronic copy available at: https://ssrn.com/abstract=4366228

Oh, Glaeser, and Su: Food Ordering and Delivery
2
the major food delivery platforms in the U.S., DoorDash is the only company that was
profitable for a quarter in 2020, while others have never been profitable over their multiple
years of operation (Yahoo Finance 2021, 2022a, 2022b, 2022c). Food delivery platforms
operate on thin margins from restaurant food commissions and delivery and service fees
charged to consumers, the majority of which are spent on operating expenses, such as
paying delivery drivers. As the pandemic wanes, food delivery platforms are working hard
to find a sustainable business model.
The recent controversy over food commissions adds another challenge to the platform’s
already tight operating profit margin. Various news media highlighted that given tradi-
tionally low profit margins of restaurant businesses, the typical 20 - 30% commission rate
charged by platforms leave restaurants with little to no profit (Forman, 2019). From the
perspective of restauranteurs, giving up a lion’s share of their profits in return for additional
demand streaming from the platform’s website does not appear to be a fair arrangement.
Many municipalities and state legislatures chose to support local restaurants by temporar-
ily capping what the platforms can charge to restaurants during the pandemic (Rana,
2021). Some city councils even permanently capped the commissions (Davalos, 2021). On
the other hand, platforms claim that their commissions are legitimate because they are
more than a demand aggregator. Apart from listing restaurants on their website, platforms
are also responsible for delivery. Although customers pay delivery fees, these fees often do
not fully cover operating costs, so platforms need to charge restaurants high commissions
to make the delivery model work (Haddon and Jargon, 2019). The fact that food delivery
platforms rarely make a profit supports this argument.
In response to the increasing pushback over commissions, major food delivery platforms
have recently changed their methods for setting the commission rates. For example, Door-
Dash now allows restaurants to choose from 15%, 25%, or 30% commission rates for every
order (DoorDash, 2022). Similarly, Grubhub offers three pricing packages (15%, 20%, 25%
food commission) with an option for a “sponsored listing” at a 5% commission premium
(Grubhub, 2022). On these platforms, paying higher food commissions increases the degree
to which the platform markets the restaurant by featuring them prominently (e.g., placing
the restaurant at the top of the page) and/or providing a delivery discount to customers of
that restaurant. However, some important operational questions about the pricing policies
are unanswered: (1) Based on the current industry norm, how much commission should

3
restaurants choose to pay? The extra commission restaurants need to pay to be featured is
not always straightforward because other restaurants may pay an even higher commission
and thus obtain a better position on the platform website. (2) What is the platform’s
optimal delivery fee pricing policy and how should the platform choose the restaurants to
feature? There is more than consumer conversion the platform should consider, because
beyond demand aggregation, the platform will eventually have to fulfill the order, i.e.,
deliver the food. In other words, the platform has to consider the associated fulfillment
costs to truly maximize its bottom line. (3) With the current food commission contract
being a source of conflict, is there a new contract that can be mutually beneficial for the
platform and the restaurants?
We build the following model to answer the questions. In our model, there is a platform
that connects restaurants to customers. Restaurants choose the commission rates they pay,
and the platform chooses a subset of restaurants to feature as well as delivery fees for
each restaurant. Both featured display and discounted delivery lead to higher restaurant
demand. For each order, the platform collects food revenue and the delivery fee from the
customer, and reimburses the food revenue less the commission to the restaurant.
We find the following results. First, the platform’s optimal delivery price follows a zone-
based pricing policy, where restaurants within the “discount radius” are in the low-priced
delivery zone, farther away restaurants within the “service radius” are in the high-priced
delivery zone, and even farther restaurants are not served. We find that the discount radius
and the service radius increase with the commission rates restaurants pay, which incen-
tivizes restaurants to pay higher commissions for delivery discount. When the platform
chooses featured restaurants, it ranks the restaurants in their “virtual surplus” and grants
premium display slots to those ranked the highest. The virtual surplus of a restaurant
increases with the commission rate it chooses, and the restaurants play a bidding game to
win a featured display slot. However, the virtual surplus decreases with delivery distance,
which increases the platform’s cost. When bidding for delivery discount and/or featured
display, restaurants that are very close to customers need not pay high commissions and
may still receive the benefits on the platform because of their low delivery cost. This result
is reminiscent of the internet advertising literature (e.g., Katona and Sarvary (2010) and
Jerath et al. (2011)), which finds that websites with high click-through rates need not bid
and may still be ranked high and receive many clicks. Thus, high click-through rates (for

4
websites) and short distance from customers (for restaurants) are similarly attractive to
the platform.
We find that existing commission contracts used in the industry create inefficiency in
two ways. Because restaurants take their share of the food revenue and leave only a portion
to the platform, double marginalization results in higher delivery price and smaller market
coverage than what would maximize the centralized system’s profit. Moreover, since the
restaurants do not internalize the delivery cost, restaurants situated far away have an
incentive to pay high commissions to “outbid” closer-by restaurants and win featured
display slots. In equilibrium, excess demand is directed to these distant restaurants. This
outcome increases the total cost of the system.
We show that a new contract which shares food revenue and splits delivery fees and
costs in the same fixed proportion leads the decentralized platform and the restaurant to
reach the outcome that maximizes the centralized system profit. In our numerical analysis,
we calibrate our model using data on a representative city consisting of 220 market areas.
For each market area, we compute the impact of our proposed coordinating contract on
platform profit, restaurant profit, and total profit. Averaged over markets, total restaurant
profit increases by 25.0% (since restaurants generally pay lower commissions under the
coordinating contract). The platform profit increases in about one-third of the markets but
decreases in the remaining markets. Put together, the social welfare increases by 13.3%
on average. These results suggest that, the new contract can be an attractive alternative
to the current food commission contract, by alleviating restaurants’ complaint regarding
high commission rates, while increasing the total platform profit through higher demand.
2. Literature
This paper builds on the recent literature on restaurant delivery platforms by analytically
modeling the interaction between the platform and partner restaurants. Our work is most
closely related to Feldman et al. (2022) and Chen et al. (2022). They study the interaction
between the platform and a single restaurant where customers can choose between dining
in and delivery. In their models, delivery orders have externalities on dine-in customers
by increasing the wait time for the shared kitchen capacity. They present revenue sharing
contracts that coordinate the system and maximize total (restaurant and platform) profit.
This elegant result no longer holds in our paper because we consider a different setting.
We focus on delivery customers who do not consider dining in, so cannibalization is not

5
an issue. More importantly, we consider multiple restaurants. We study contracts between

the platform and each individual restaurant, and our analysis sheds light on how these
contracts can interact (or interfere) with one another.
There are several papers that explore aspects of restaurant delivery other than our con-
tracting focus. Liu et al. (2021) focus on logistics and explore how to optimally assign
customer orders to delivery drivers in order to minimize delays. To predict travel times,
they explicitly incorporate drivers’ routing behavior using data from a restaurant delivery
platform. Gorbushin and Hu (2020) study courier sharing between restaurants and find
that courier sharing can lead to lower delivery costs, shorter wait times, and higher cus-
tomer welfare. Li and Wang (2020) and Cui et al. (2022) empirically study the impact of
restaurant delivery platforms on restaurant profitability. Karamshetty et al. (2020) study
the impact of food delivery platforms on food waste. Mao et al. (2022) discuss how food
delivery platforms operate and how empirical research can help improve their operational
performance.
Beyond restaurant food delivery, our work also relates to the literature on online grocery
delivery. Belavina et al. (2017) and Astashkina et al. (2019) study online grocery delivery,
focusing on the environmental impact. They find that smaller and more frequent grocery
orders lead to less food waste and higher delivery-related emissions, but the overall environ-
mental impact is positive. Separately, Glaeser et al. (2019) show that optimizing pick-up
locations for online grocery retailing can have a dramatic impact on operational efficiency.
These papers underscore the importance of spatial aspects of online grocery operations.
More generally, geographical considerations are also central in smart city operations. Mak
(2022) describes several areas, such as smart energy, urban logistics and autonomous vehi-
cles. For example, Mirzaeian et al. (2021) study how autonomous vehicles can solve down-
town parking issues, and Qi et al. (2022) study how shared autonomous electric vehicles
can be used to transfer energy within cities to improve solar-powered urban microgrids.
At a more detailed level, some of our results share some parallels with the internet
advertising literature, where websites submit a bid to compete for higher positions on the
search engine’s listing of sponsored links. Edelman et al. (2007) and Varian (2007) propose
the generalized second-price auction, in which websites that bid higher per-click prices win
higher ranks on search listings. Katona and Sarvary (2010) find that the highest-ranked
sites may not be the most popular sites and may not submit the highest bids, and Jerath

6
et al. (2011) show a “position paradox” where lower-ranked sites may receive more clicks
and earn higher revenue than higher-ranked sites. Similarly, in our analysis, we find that
close-by restaurants need not bid high commissions but may still be featured. Such display
advertising strategies have been widely studied in the literature (e.g., Liu et al. (2010),
Balseiro et al. (2014), and Amaldoss et al. (2015), L’Ecuyer et al. (2017)). We add to
this literature by incorporating fulfillment costs, which is an important part of platform’s
operation, in the bidding mechanism.
Our work is also related to the extensive literature on supply chain contracting. Cachon
(2003) and Lariviere (2016) provide a review of the literature. Cachon and Lariviere (2005)
shows that revenue-sharing contract achieves supply chain coordination by making the
retailer’s profit function an affine transformation of the supply chain’s profit function.
Our work extends this literature by showing that profit sharing can coordinate system
profit when restaurants with heterogeneous cost parameters choose their share of profit
as a decision in an auction-like bidding game to win a premium display slot and receive
discounted delivery on the platform’s website.
Broadly, our work also adds to the literature on online marketplaces and sharing plat-
forms. Many papers study the implication of prices and wages on matching individual
capacity with demand, particularly in the context of ride-sharing (e.g., Banerjee et al.
(2015), Cachon et al. (2017), Feng et al. (2021), Taylor (2018), Benjaafar et al. (2021b),
Besbes et al. (2021), Afeche et al. (2018), Ozkan and Ward (2017), Gurvich et al. (2019),
Bai et al. (2019), Bimpikis et al. (2019), Hu and Zhou (2019), Hu et al. (2021), Benjaafar
et al. (2021a)). Some papers study the impact of the peer-to-peer sharing economy on
usage and ownership of products (e.g., Benjaafar et al. (2018), Jiang and Tian (2016),
Fraiberger and Sundararajan (2015), Filippas et al. (2020), and Abhishek et al. (2021)).
More recently, papers such as Cachon et al. (2021) and Filippas et al. (2021) study whether
prices should be set centrally or decentrally on online platforms. There are also papers
that study operations of bike-sharing and vehicle-sharing platforms (e.g., Kek et al. (2009),
Shu et al. (2013), O’Mahony and Shmoys (2015), Boyacı et al. (2015), He et al. (2017),
Bellos et al. (2017), Kabra et al. (2020), and He et al. (2019)). Our paper adds restaurant
delivery platforms, a fast-growing segment of online marketplaces and sharing platforms,
to the list of applications studied above.

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3. Model
There are three parties that interact: the platform, N restaurants, and customers. Cus-
tomers order food delivery through the online platform, restaurants prepare the food, and
then the platform delivers the food to customers. Our model focuses on spatial heterogene-
ity: restaurants are identical in every respect other than their location. We assume that all
restaurants face unit demand, all customers are located at a single location, and restaurant
i is distance δi away. Thus, the cost of fulfilling the order from restaurant i is cδi , where c
is the delivery cost per unit distance. For this order from restaurant i, the customer pays
the food price V0 (which is the same for all restaurants) plus a delivery fee pi (which may
differ across restaurants). We also normalize food cost to 0. We assume that the platform
and the restaurants maximize their profits.
The platform can influence customer demand in two ways, through its pricing and listing
policies, as described next. The platform’s pricing policy determines the delivery fees that
customers pay. We assume that the platform chooses between a low fee and a high delivery
fee, i.e., pi ∈ {VL , VH }, where VL < VH . All customers are willing to pay the former but
only a fraction α (where α < 1) are willing to pay the latter. Thus, charging a high fee for
restaurant-i will decrease its demand by a factor of α. To ensure that both high and low
fees are viable options, we assume that V0 + VL > α(V0 + VH ), i.e., αVH − VL < (1 − α)V0 .
The second instrument available to the platform is display advertising. Specifically, the
platform can choose to feature a particular restaurant on its website more prominently.
Doing so will increase the restaurant’s demand by a factor of β (where β > 1). However,
the platform has limited space for featured display and thus can feature at most K out of
the N restaurants.
Consistent with practice, we study a commission contract that the platform uses to
share food revenue with the restaurants. Specifically, for each order with restaurant i, after
collecting the food revenue V0 from customers, the platform retains a fraction ϕi and sends
the remaining back to the restaurant. We call ϕi the commission rate, which is chosen
by the restaurant. Higher commission rates might motivate the platform to feature the
restaurant (which increases demand by β) or to offer discounted delivery (which increases
demand by 1/α). When negotiating with the platform, each restaurant is free to choose
any commission rate above a base minimum ϕ0 . The base commission rate ϕ0 is a fixed
constant, exogenously set by the platform. At this base commission ϕ0 , we assume that it

8
Restaurant-i chooses ϕi πid,p and πid,r realize
time
Platform chooses pi and S
Figure 1 Sequence of events
is profitable for the platform to contract with all N restaurants, i.e., ϕ0 V0 + VH > c maxi δi ;
equivalently, we drop unprofitable restaurants from the model.
For subsequent reference, we write down the profit functions for the platform and the
restaurants. The profit of the platform associated with restaurant-i can be summarized as

β(ϕi V0 + VL − cδi ), if featured and pi = VL ,







βα(ϕi V0 + VH − cδi ), if featured and pi = VH ,

πid,p (pi , ϕi , δi ) =
ϕi V0 + VL − cδi , if not featured and pi = VL ,







α(ϕi V0 + VH − cδi ),

if not featured and pi = VH ,
and the profit of restaurant-i is given as


β(1 − ϕi )V0 , if featured and pi = VL ,







βα(1 − ϕi )V0 , if featured and pi = VH ,

πid,r (pi , ϕi ) =
(1 − ϕi )V0 , if not featured and pi = VL ,







α(1 − ϕi )V0 ,

where the superscripts d, p and d, r represent “decentralized platform” and “decentralized

restaurant,” respectively. This is in contrast to the centralized system that we will later
analyze to establish the first-best benchmark.
The sequence of decisions in our model is as given in Figure 1. First, each restaurant
chooses its commission rate ϕi ∈ [ϕ0 , 1] to maximize its profit πid,r (pi , ϕi , δi ). Next, given
these commission rates, the platform sets its pricing policy (i.e., the delivery fees pi ∈
{VL , VH }) as well as its display policy (i.e., the set S of K featured restaurants), in order
to maximize its total profit N
P d,p
i πi (pi , ϕi , δi ).

9
We will demonstrate later that the platform’s equilibrium pricing policy exhibits a par-
ticular structure. We call these zone-based pricing policies, in which the platform sets
delivery fees to a restaurant located distance δ away and paying commission ϕ as

 VL , if δ ≤ x,


p(ϕ, δ) = VH , if δ ∈ (x, y],


∞, if δ > y.

In other words, restaurants within distance x away are in the low-priced delivery zone,
farther restaurants within distance y away are in the high-priced delivery zone, and even
farther restaurants are not served. We call x, y the discount radius and service radius
respectively.
4. Equilibrium Analysis
Our analysis proceeds as follows. In Section 4.1, we begin with the second stage subgame
and analyze the platform’s pricing and display policies. Then, in Section 4.2, we obtain
the full equilibrium by studying how restaurants choose their commission rates.
4.1. Platform Pricing and Display Policies

We begin by studying the second period subgame. Once the commission rates ϕi have been
set, how does the platform determine the delivery fees pi and the set S of restaurants to
feature? The following proposition characterizes the platform’s profit-maximizing decisions.
Proposition 1 (Second Stage Equilibrium) Given the commission rates ϕi ,

(i) the platform’s optimal pricing policy p∗i (ϕi , δi ) is a zone-based pricing policy, where the
discount radius x and the service radius y are given by
V0 VL − αVH
x(ϕi ) = ϕi · + ,
c (1 − α)c
V0 VH
y(ϕi ) = ϕi · + ,
c c
(ii) the platform’s optimal display policy is to feature the K restaurants that bring the
platform the highest profits under p∗i (ϕi , δi ) calculated above.
Proposition 1(i) shows that the optimal pricing policy in the second period subgame is a
zone-based pricing policy. This policy is applied to each restaurant separately. The platform
charges the low delivery fee VL if δi < x(ϕi ) and the high delivery fee VH if x(ϕi ) < δi < y(ϕi ).

10
Note that as a restaurant pays higher commission ϕi , both the discount radius x(ϕi ) and
service radius y(ϕi ) correspondingly increase. In practice, several platforms indeed offer
lower delivery fees and wider service areas to restaurants paying higher commissions.
Next, Proposition 1(ii) states that the platform’s optimal display policy is to feature the
restaurants that bring the platform the highest profits, i.e., those that maximize the value
of πid,p (p∗i (ϕi , δi ), ϕi , δi ) = ϕi V0 − p∗i (ϕi , δi ) − cδi . These platform profit shares are calculated
using the optimal delivery fees p∗i (ϕi , δi ) from the zone-based pricing policy obtained in first
part of the proposition. Notice that those platform profit shares increase with commission
rate ϕi but decrease with delivery distance δi . In other words, the platform finds it more
attractive to feature restaurants paying higher commission ϕi but less attractive to feature
a restaurant located farther away.
4.2. Restaurants’ Choice of Commission Rates
Now, we carry on the backward induction procedure and turn to the first period. How does
each restaurant decide whether to pay the base commission ϕ0 or offer a higher commission?
1
We begin with some notation. Let Φ(m, ϕ0 ) = 1 − m
(1 − ϕ0 ). To interpret this expres-
sion, observe that m(1 − Φ(m, ϕ0 )) = 1 − ϕ0 . In other words, the restaurant is indifferent
between paying commission rate Φ(m, ϕ0 ) with demand multiplied by m and paying the
base commission rate ϕ0 but with demand unchanged. This notation is useful in describing
upper bounds for commissions that restaurants are willing to pay. For example, restau-
rants are willing to pay commission rates of at most Φ(β, ϕ0 ) for a featured display slot
(which boosts demand by a factor β > 1). Similarly, restaurants are willing to pay at most
commission Φ( α1 , ϕ0 ) to induce the platform to charge lower delivery fees (which boosts
1
demand by factor α
). For convenience, we denote ϕα = Φ( α1 , ϕ0 ), ϕβ = Φ(β, ϕ0 ), and anal-
ogously ϕαβ = Φ(β/α, ϕ0 ). We also introduce shorthand notations for the corresponding
discount radii as x0 = x(ϕ0 ), xα = x(ϕα ), and xαβ = x(ϕαβ ). Note that ϕ0 ≤ ϕα ≤ ϕαβ , and
x0 ≤ xα ≤ xαβ . Similarly, ϕ0 ≤ ϕβ ≤ ϕαβ , and x0 ≤ xβ ≤ xαβ .
Our analysis of the commission rates that restaurants are willing to pay in the first
stage of the game proceeds with the following thought exercise. We consider two separate
scenarios. First, when there is absolutely no chance of being featured, what is the minimum
commission ϕmin the restaurant would pay, and in particular, could it exceed the base
commission ϕ0 ? Second, if the restaurant can bid a certain commission to be guaranteed
of a premium display slot, what is the maximum commission ϕmax it would pay? The
minimum and maximum commissions are characterized below, in two separate lemmas.

11
Lemma 1. When there is no chance of being featured, each restaurant i chooses the
commission rate 
 ϕ0 ,

 if δi ≤ x0 ,
ϕmin (δi ) = ψ(δi ), if δi ∈ (x0 , xα ],


ϕ0 , if δi > xα ,

L −αVH
where ψ(δ) = x−1 (δ) = Vc0 δ − V(1−α)V0
.
Lemma 1 considers the first scenario in our thought exercise. Interestingly, when restau-
rants have no chance of being featured, they might still have an incentive to pay com-
missions above the required ϕ0 . Doing so might lead the platform to lower delivery fees
for the restaurant. Thus, we can interpret ϕmin as the commission restaurants are willing
to pay to secure discounted delivery. Restaurants are divided into three zones depending
on their distances from the customers. Within the base-commission discount radius x0 ,
restaurants pay the base commission because doing so is sufficient for the platform to
charge a low delivery fee. Similarly, restaurants outside of distance xα also pay the base
commission (but the platform sets a high delivery fee) because they are too far away; for
these restaurants, bidding up to the upper bound of ϕα (which leaves them the same profit
as simply paying ϕ0 ) still does not lead to discounted delivery. Finally, restaurants in the
intermediate zone pay the commission rate ψ(δi ); this is the minimum commission rate
that induces the platform to charge a low delivery fee to a restaurant at distance δi . Thus,
when restaurants “bid” for delivery discount, restaurants within xα from customers receive
discounted delivery, i.e., endogenous bidding pushes the discount radius from x0 to xα .
Note that ψ(δi ) increases in δi so that restaurants with higher delivery distances need to
pay higher commission rates in order for their customers to receive a delivery discount.
The minimum commission rate ϕmin as a function of δi is depicted in blue in Figure 2
below.
Lemma 2. In order to secure a premium display slot, each restaurant at distance δi

chooses a commission rate that does not exceed
 


 Φ(β, ϕmin ) 

 ϕβ , if δi ≤ x 0 ,
 

 Φ(β, ϕ )  1 − 1 (1 − ψ(δ )), if

δi ∈ (x0 , xα ],
min β i
ϕmax (δi ) = =


 Φ(β/α, ϕmin ) 
 ϕαβ , if δi ∈ (xα , xαβ ],

 

Φ(β, ϕmin ) ϕβ , if δi > xαβ .
 

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The function ϕmax in Lemma 2 can be interpreted as the maximum commission restau-
rants are willing to pay for premium display. Most of the restaurants are willing to pay
up to Φ(β, ϕmin ) to be featured, which gives them the same payoff as not being featured
while paying the minimum commission rate ϕmin , i.e., β(1 − Φ(β, ϕmin )) = (1 − ϕmin ). How-
ever, restaurants at a distance between xα and xαβ are an exception. These restaurants
do not find it profitable to receive delivery discount when there is no featured display, so
ϕmin (δi ) = ϕ0 (as shown in Lemma 1). However, when featured display becomes available,
these restaurants may consider bidding a little extra to receive delivery discount on top
of featured display. Thus, the maximum commission rate these restaurants are willing to
pay is what the restaurants would pay for the total demand increase from both premium
display and discounted delivery, i.e., ϕmax = Φ( αβ , ϕmin ) = ϕαβ . Consequently, when restau-
rants pay the maximum commission rate, restaurants up to xαβ away from the customers
receive delivery discount, i.e., premium display further pushes the discount radius from
xα to xαβ . Figure 2 shows the maximum commission rate ϕmax as a function of δi in red.
Notice that the maximum bids ϕmax (δi ) increase over δi and then jump back down to ϕβ .
ϕαβ
— ϕmax
ψ(xα ) — ϕmin
ϕβ
ϕ0
x0 xα xαβ
Figure 2 Comparison between ϕmax and ϕmin
In Figure 2, the gap between the two lines represents the difference between a restau-
rant’s maximum and minimum commission bids. This gap is largest for restaurants located
between xα and xαβ away, due to discontinuities in ϕmin (δi ) and ϕmax (δi ) at δi = xα and
δi = xαβ . Therefore, by exploiting restaurants’ competition for scarce premium display slots,
the platform can expect to receive the greatest increase in commissions from restaurants
located at distances between xα and xαβ away. Equivalently, these are also the restaurants
that might bid most aggressively for those premium display slots.

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Bearing the above interpretation in mind, we now introduce some notation. Let the
virtual surplus function ∆f (δi ) be defined as ∆f (δi ) = βfmax (δi ) − fmin (δi ), where
fmin (δi ) = πid,p (p∗i (ϕmin (δi ), δi ), ϕmin (δi ), δi ),
and
fmax (δi ) = πid,p (p∗i (ϕmax (δi ), δi ), ϕmax (δi ), δi ).
Note that fmin (δi ) is the platform’s profit from restaurant i if it chooses the minimum
commission, while βfmax (δi ) is the corresponding platform profit if the restaurant chooses
the maximum commission and and consequently receives a premium display slot. The
difference can hence be viewed as the profit potential of allocating a premium display slot
to the restaurant. We term this the virtual surplus.
We are now ready to solve for the full equilibrium. The following proposition character-
izes the commission rates that each restaurant chooses in equilibrium.
Proposition 2 (First Stage Equilibrium) In equilibrium,

(i) the K restaurants with the highest virtual surplus ∆f (δi ) choose the commission rates
ϕ∗i with ϕ∗i ≥ ϕmin (δi ) such that they match the virtual surplus of the (K + 1)-th restaurant.
That is,
ϕ∗i = max{ϕmin (δi ), ϕ̂i },
where ϕ̂i is defined as
βπid,p (p∗i (ϕ̂i , δi ), ϕ̂i , δi ) − fmin (δi ) = ∆f (δK+1 ).
(ii) all other restaurants choose commission rate ϕmin (δi ).
The results of Proposition 2 can be explained by considering the profit motives of all
parties involved. For the platform, profit is maximized by allocating the premium display
slots to the restaurants with the highest virtual surplus ∆f . For these top K restaurants
(in terms of virtual surplus), it is sufficient to pay commission ϕ̂i that is just high enough
to keep the marginal (K + 1)-th restaurant out of contention. Note that ϕ̂i may be very
small for some of these top K restaurants that are located close by, and the platform may
find it profitable to feature the restaurant even at its minimum commission rate ϕmin (δi ),
which may also be the same as the base commission ϕ0 . With these commissions ϕ∗i , the K
restaurants with the highest virtual surplus will indeed secure the premium display slots.
Finally, since the remaining restaurants will not receive premium display, they will simply
choose the minimum commission ϕmin (δi ).

14
5. Centralized System
We now consider the first-best benchmark. In this scenario, the platform and the restau-
rants are integrated to form a centralized system. The centralized system’s profit from
restaurant-i is given as

β(V0 + VL − cδi ), if featured and pi = VL ,







(V0 + VL − cδi ),

if not featured and pi = VL ,
πic (pi , δi ) =
βα(V0 + VH − cδi ), if featured and pi = VH ,







α(V0 + VH − cδi ),

where the superscript c represents the centralized system. The centralized system chooses
pFi B and the set of K restaurants to feature to maximize the total profit N c
P
i=1 πi (pi , δi ).
The following proposition characterizes the first-best pricing and display policies.
Proposition 3 (First Best) For a centralized platform,

(i) the first-best pricing policy pFi B (δi ) is a zone-based pricing policy, where the discount
radius xF B and the service radius y F B are given by
V0 VL − αVH
xF B = + ,
c (1 − α)c
V0 VH
yF B = + .
c c
(ii) the first-best display policy is to feature the K closest restaurants.
Let us compare the first-best policies in Proposition 3 to the equilibrium outcomes in

Proposition 1. First, the discount radius and the service radius of the first-best pricing
policy are larger than those chosen in equilibrium. That is, xF B > x(ϕi ) and y F B > y(ϕi )
for all i, as long as ϕi < 1. In other words, as long as restaurant i retains a positive
share of its food revenue, equilibrium discount and service radii will be too small relative
to first-best. The first-best and equilibrium pricing policies coincide only when ϕi = 1,
i.e., under centralization. This follows from the classic double marginalization problem in
decentralized systems. In a decentralized system, the platform receives only a fraction of
the food revenue but it bears the entire burden of delivery cost. This distorted trade-off
leads to discount/service radii that are too low, which result in higher delivery fees and
smaller service coverage for the consumers.

15
Based on the first-best prices above, we can calculate the profit that each restaurant i
can earn for the system. Denoting the value of restaurant-i as f F B (δi ), we have




 V0 + VL − cδi , if δi ≤ xF B ,

f F B (δi ) = α(V0 + VH − cδi ), if δi ∈ (xF B , y F B ],




0, otherwise.
Since f F B (δi ) is monotone decreasing in the delivery distance δi , the K closest restau-
rants have the highest f F B (δi ) values. Consequently, the centralized firm features these K
restaurants that are closest to the consumers, as shown in Proposition 3.
Although we find that the premium display slots should be allocated to the K closest
restaurants in first-best, they are allocated to the restaurants with the highest virtual
surplus ∆f (δi ) in equilibrium. We stress that restaurants with high virtual surplus may be
located far away. For instance, Figure 2 suggests that those located at distances between
xα and xαβ away might have high virtual surplus. In a decentralized setting, restaurants
maximizing their own profits do not consider the platform’s delivery costs when choosing
their commission rates. As a result, restaurants with high virtual surplus but located
far away may pay a very high commission rate, thus “outbidding” restaurants closer by.
Consequently, the platform allocates premium display slots to (and hence directs demand
to) these restaurants, even though it is more efficient for the centralized system to feature
closer-by restaurants with lower cost of delivery.
From the previous discussion, we see that compared to the centralized outcome, the equi-
librium is inefficient in two ways. In a decentralized system, restaurants take their share of
the food revenue leaving only a portion to the platform. This double marginalization makes
the platform choose a smaller discount radius and a service radius, increasing the price of
delivery for customers and decreasing market coverage. In addition, in the decentralized
system, only the platform bears the cost of delivery and the restaurants do not internalize
the delivery cost when they choose the commission rates. This creates an incentive for
farther-away restaurants to outbid the closer-by restaurants and win featured display slots,
which increases the total cost of the system. In summary, the food delivery system suffers
profit losses as a result of two problems: double marginalization and inefficient bidding.

16
6. Food Revenue Sharing and Delivery Cost Splitting

In this section, we consider a new contract under which the decentralized platform and the
restaurants can reach the outcome of the centralized system. Previously, we have considered
a commission contract in which only the food revenue V0 is shared, while the delivery cost
(and fee) pi − cδi is completely borne by the platform; that is the industry norm. In the
new contract, the platform and restaurants share the entire profit V0 + pi − cδi . In other
words, they not only share the food revenue, they also split the delivery cost (and delivery
fee).
Specifically, given any commission rate ϕi ≥ ϕ0 restaurant-i chooses, the platform pays

(1 − ϕi )(V0 + VL − cδi ),

if pi = VL ,
c,r
πi (pi , ϕi , δi ) =
(1 − ϕi )α(V0 + VH − cδi ), if pi = VH ,

to restaurant-i where the superscript c, r represents “coordinated restaurant.” We also

call this contract the “coordinating contract.” The following result shows that this new
arrangement (of sharing both food revenue and delivery cost) allows the system to achieve
the first best outcome.
Proposition 4 With food revenue sharing and delivery cost splitting, the platform’s opti-
mal pricing and display policies coincide with the first-best policies.
The key idea behind the contract we propose is that the platform and restaurants share
food revenue and split delivery cost in the same fixed proportion ϕi . This way, each party
receives a proportion of total system profit, regardless of pricing or display policies adopted
by the platform. Hence, the incentives of the platform and restaurants are aligned. Thus,
the platform will choose the discount radius and the service radius that are optimal for
the system. Moreover, since restaurants internalize the cost of delivery, our contract elim-
inates any incentive for far away restaurants to choose excessively high commission rates,
relative to closer by restaurants. In essence, our simple contract solves both the double
marginalization and the inefficient bidding problems described in the previous section.
With our contract, in equilibrium, restaurant i chooses the commission rate ϕi given by
 FB
max{ϕ0 , ϕ0 + 1 − 1 fK+1

}, if δi < δK+1 ,
β β fiF B
ϕi =
ϕ 0 ,

otherwise,

17
t(δi )
t(δi ) t(δi )
+ xF B yF B
δi
+ + yF B −
+ + − xF B δi −
yF B −
xF B − δi
α(VH −VL ) α(VH −VL ) VH −VL VH −VL
(a) V0 ≤ 1−α
(b) 1−α
< V0 < 1−α
(c) 1−α
≤ V0
Figure 3 Transfer t(δi ) as a function of the delivery distance δi
where fiF B = f F B (δi ) is the value of restaurant-i on the platform, as defined in Section 5.
Under the coordinating contract, restaurants that are very close to the customers set the
commission rate equal to the base rate ϕ0 . The platform still chooses to feature these
restaurants despite the low commission they chose because the cost of delivery is low. As
the delivery distance grows, the restaurants choose the commission rates large enough to
keep the (K + 1)-th marginal restaurant out of the bidding game. The commission rate ϕi
thus satisfies βϕi fiF B − ϕ0 fiF B = βϕβ fK+1
FB FB
− ϕ0 fK+1 . Since restaurant-i’s profit contribution
to the system f F B (δi ) decreases in the delivery distance δi , the equilibrium commission
increases with delivery distance. Finally, restaurants located beyond the (K + 1)-th restau-
rant choose the base commission ϕ0 since they will not be featured.
We now examine the term pi − cδi , which represents the delivery cost/fee attributed to
restaurant i in the coordinating contract. This term is important because in addition to
sharing a proportion of the food revenue V0 , the platform also transfers the same proportion
of pi − cδi back to restaurant-i. Let us denote the transfer amount by

(VL − cδi ),

if pi = VL ,
t(δi ) =
α(VH − cδi ), if pi = VH .

The transfer t(δi ) can either be positive or negative. When t(δi ) is positive, the restaurant
receives an additional payment over and above the food revenue (less commission); we can
view this as a subsidy. When t(δi ) is negative, the restaurant receives less than its share
of food revenue; it is essentially paying a premium to reimburse the platform for high
delivery costs incurred on that particular delivery. This occurs when delivery distances are
large: when delivery costs borne by the platform are high, the restaurants have to split the
delivery cost with the platform.

18
Observe that the transfer amount t(δi ) is a discontinuous piecewise linear function that
is non-monotone in the delivery distance. The transfer t(δi ) decreases in δi within the
discount radius xF B . Then it jumps upward at δi = xF B as the platform starts charging
the high delivery fee outside the discount radius. The profit then decreases in the delivery
distance again between xF B and the service radius y F B .
The sign of the transfer amount t(δi ) also depends on the parameter values. First, in Fig-
ure 3a, when the food revenue V0 is relatively small, the system does not have much leeway
to take big losses from delivery. As delivery distance increases, the platform increases the
delivery fee quickly, using short discount/service radii. The platform covers delivery cost
with delivery fees, and shares delivery profits with the restaurants. Next, as shown in Fig-
ure 3b, for intermediate values of food revenue V0 , regions where restaurants reimburse the
platform’s delivery costs (i.e., when t(δi ) is negative) are interspersed with regions where
deliveries are profitable (i.e., when t(δi ) is positive). In this case, the platform delivers to
moderately far away customers at a loss, but when the loss becomes too high, the plat-
form increases the delivery price, and delivery becomes profitable again until the delivery
distance approaches the service radius. Finally, in Figure 3c, for large values of V0 , the
platform sets the discount radius and the service radius very high to induce large sales
volume. Since the food revenue V0 is high, the platform is willing to deliver for remote
restaurants over large distances even at a loss. This is so because restaurants are splitting
the delivery cost with the platform.
7. Illustrative Example
We calibrate the performance of the coordinating contract using data collected from a food
delivery platform that provides in-house delivery. For a sample city, Figure 4 illustrates
restaurant and market locations represented by triangles and circles, respectively. There
are 202 restaurants and 220 markets. We define a market as a block group, which is a sub-
division of a census tract and generally contains between 600 and 3000 people. We obtain
block group level population estimates from the US Census 5-year American Community
Survey. In the figure, higher population markets are darker shaded than lower population
markets, based on their quantiles. We use the block group population to represent the size
of each market. After separately applying our model to each market, we use the market
sizes as weights to calculate the aggregated platform profit and social welfare across dif-
ferent markets within the city. We assume the inhabitants of each block group are located
at the centroid, consistent with our model.

19
Market (Block Group Population)

445 - 1041
1041 - 1294
1294 - 1678
1678 - 2167
2167 - 6616
Market Centroid
Restaurants
Figure 4 Map of Restaurants and Markets.
In our numerical study, we use the following parameter values. Since our partner platform
charges delivery fees between $3 and $6, we set VL = $3, VH = $6. Similarly, following
platform practice, we use base commission ϕ0 = 10%. We set the food revenue parameter
V0 = $20, since patrons often place minimum order sizes to match the platform’s minimum
delivery threshold. Next, since the platform uses 5 premium display slots on its website,
we set K = 5. We also set α = 0.7 (which is within acceptable range as implied by our
assumption αVH − VL < (1 − α)V0 described above) and β = 1.5 (which is within the ranges
estimated in Baye et al., 2009, and Ghose and Yang, 2009). Finally, similar to Belavina et
al. (2017), we use c = 2 for delivery cost per mile.
Now, we proceed to assess the performance of the coordinating contract (introduced in
Section 6) relative to the benchmark contract (studied in Section 4). We study the following
equilibrium outcomes: commission rates, featured restaurants, delivery fees, platform and
restaurant profits, and total profits (i.e., social welfare). To highlight the main insights of
our model, we first zoom into a single market and detail the above equilibrium outcomes
for that market. Our focal market is shown as a shaded area with a dotted boundary in
Figures 5 to 8 below, which is served by 99 restaurants based on our parameter choice.
First, Figure 5 shows each restaurant’s commission rates under the benchmark and coor-
dinating contracts. The lightest diamonds represent restaurants that pay the minimum
commission (10%), and darker shades represent higher restaurant commissions. Comparing

20
Bids - Benchmark Bids - Coordinating

0.10 0.10
0.25-0.30 0.38 - 0.40
0.50 - 0.55 Featured
Featured Market Centroid
Market Centroid Market
Market
(a) Benchmark contract. (b) Coordinating contract.

Figure 5 Restaurant Commission Bids and Featured Restaurants: Most of the restaurants pay lower commissions
under the coordinating contract
Figure 5a and Figure 5b, we see that, in general, restaurants pay lower commissions under
the coordinating contract than under the benchmark contract. Specifically, the average
commission rate is 12.9% for the benchmark contract but decreases to 11.3% for the coor-
dinating contract. In Figure 5b, with the coordinating contract, the only restaurants that
pay beyond the base commission are the ones that bid to be featured (marked with white
letter F in the figure). Other restaurants have no incentive to pay extra commission because
the platform will charge first-best delivery fees, independent of the commission chosen. On
the contrary, under the benchmark contract, some restaurants pay extra commission to
receive discounted delivery as shown in Figure 5a. The commissions restaurants need to
pay to receive discounted delivery increases with their distances from the customers, which
is illustrated by the darker shades of the diamond.
Figure 5 also shows that the sets of featured restaurants are different under the bench-
mark and coordinating contracts. The five closest restaurants are featured under the coor-
dinating contract, whereas restaurants that are farther away are featured under the bench-
mark contract. Under the benchmark contract, slightly farther away restaurants that are
already paying preponderant commissions to receive discounted delivery pay a bit more
to be featured, creating inefficiency to the system. In contrast, the coordinating contract
eliminates such incentive for the farther restaurants to bid aggressively high commissions,

21
Delivery Fee - Benchmark Delivery Fee - Coordinating

Low Fee Low Fee
High Fee High Fee
Market Centroid Market Centroid
Market Market
(a) Benchmark contract. (b) Coordinating contract.

Figure 6 Delivery Fees: Discount radius is larger and greater number of restaurants receive delivery discount
under the coordinating contract.
and the closest restaurants are featured. The average distance of featured restaurants is
1.38 miles in the benchmark contract and 0.71 miles in the coordinating contract.
Figure 6 illustrates the restaurants that receive discounted delivery under the bench-
mark contract and the coordinating contract, respectively. The restaurants that receive
discounted delivery are represented as stars in the figure. Figure 6a shows that under the
benchmark contract, only the restaurants that are sufficiently close to the customers receive
delivery discount after paying extra commissions. In contrast, Figure 6b shows that under
the coordinating contract, all the restaurants receive delivery discount because coordina-
tion has eliminated double marginalization. With the coordinating contract, restaurants
that are even 4 miles away receive the delivery discount, whereas with the benchmark
contract, the farthest restaurant receiving discounted delivery is 2 miles away. In addition,
with the coordinating contract, average delivery fee decreases from $5.75 to $3.00.
For each food order, the platform and the restaurant each earns a certain profit, and
Figure 7 shows the ratio of profit earned under the coordinating contract to the profit
earned under the benchmark contract. Figures 7a and 7b respectively show the profit
ratios for restaurants and platform. The green circles represent the cases where the ratio
is greater than one (i.e., higher profit under the coordinating contract), while the yellow
and red triangles represent the cases where the ratio is below one. We see that, for this
particular set of parameter values, all of the restaurants in this market benefit from the

22
Relative Change in Restaurant Share Relative Change in Platform Share

1.08 - 1.15 0.1 - 0.5
1.15 - 1.20 0.5 - 1.0
1.20 - 1.25 1.0 - 2.0
1.25 - 1.30 2.0 - 5.0
1.30 - 1.45 5.0 - 17.5
Market Market
(a) Restaurant profit ratio. (b) Platform profit ratio.

Figure 7 Profit ratio (profit under the coordinating contract/profit under the benchmark contract).
Relative Change in Restaurant Share Relative Change in Platform Share

1.08 - 1.15 0.1 - 0.5
1.15 - 1.20 1.0 - 2.0
1.30 - 1.45 5.0 - 17.5
Restaurant 1 Restaurant 1
Market Market
(a) Restaurant profit ratio. (b) Platform profit ratio.

Figure 8 Profit ratio for a subset of three selected restaurants.
coordinating contract as their shares increase by 8 to 45%. However, platform profitability

from individual restaurants vary depending on their delivery distance. Although platform
profits from individual restaurants might decrease, total platform profit (aggregated over
all restaurants) increases by 13.8%. In other words, the coordinating contract makes all
parties better off in this market.
To delve deeper into the picture, we focus on three representative restaurants. These
three restaurants are labeled Restaurants 1, 2, and 3 in Figure 8. For each of these three

23
1 2 3 1 2 3
20 15
15
Profit Per Order
Profit Per Order

10
Food Revenue Food Commission

10
Delivery Cost Delivery Cost
Delivery Revenue Delivery Revenue
5
5
0 0
Benchmark Coordinating Benchmark Coordinating Benchmark Coordinating Benchmark Coordinating Benchmark Coordinating Benchmark Coordinating
Profit Comparison for Individaul Restaurants Platform's Profit Comparison for Individaul Restaurants
(a) Restaurant profit components. (b) Platform profit components.

Figure 9 Comparison of profit components under benchmark and coordinating contracts, for three selected
restaurants.
restaurants, we dissect profit into its individual components (e.g., food revenue, commis-
sion, delivery cost, delivery fee) and study how each component changes under the coor-
dinating contract. Recall that the per-order profit consists of food revenue V0 ($20 for this
example) and the delivery profit pi − cδi (which can be positive or negative). The per-order
profit might be scaled up or down dependent on the delivery price (by α) and/or the
featured display decision (by β), and the total gain is split between the platform and the
restaurant according to the commission bid ϕi . Each of these terms above might change in
different ways. The results are summarized in Figure 9 and explained below.
First, Restaurant 1 is the restaurant closest to the market (0.74 miles away); it is fea-
tured by the platform under the coordinating contract but not under the benchmark. With
the demand boost from display advertising, total platform and restaurant profit (i.e., total
height of colored bars) increases under the coordinating contract, as shown in the leftmost
two bars in Figure 9a and Figure 9b. For each party, profit also increases under the coor-
dinating contract. Note that the delivery profit (which used to be reaped by the platform
alone under the benchmark contract) is shared with the restaurant under the coordinating
contract. That is, the transfer amount t(δi ) = (1 − ϕi )(VL − cδi ) to the restaurant is positive,
which is added to the restaurant’s profit.
On the other hand, situated at an intermediate distance of 1.66 miles from the market,
Restaurant 2 is featured under the benchmark (by paying an overwhelmingly high com-
mission of 50%) but not under the coordinating contract. Since the commission decreases
dramatically under the coordinating contract, platform profit decreases but restaurant
profit increases. Under both contracts, there is discounted delivery. The loss from delivery
(VL − cδi ), which used to be borne by the platform alone under the benchmark contract is

24
Aggregated Social Welfare Comparison Aggregated Platform Compare

1.04 - 1.10 0.00 - 0.60
1.10 - 1.15 0.60 - 0.75
1.15 - 1.20 0.75 - 1.00
1.20 - 1.25 1.00 - 1.50
Restaurants 1.50 - 44.10
(a) Change in Market Aggregated Social Welfare. (b) Change in Market Aggregated Platform Share.
Figure 10 Change in Market Aggregated Social Welfare and Platform Share.
shared with the restaurant under the coordinating contract. The delivery loss is represented
by a transparent portion of the bar graphs in Figure 9.
Next, Restaurant 3 is located even farther away (3.88 miles) and is not featured under
both contracts (paying base commission). Restaurant 3 receives discounted delivery under
the coordinating contract but not under the benchmark contract. As the coordinating
contract eliminates double marginalization, lower delivery price is charged and the total
gain from the restaurant is scaled up by 1/α. Then, the restaurant splits the delivery loss
(VL − cδi ) with the platform so the platform as well as the restaurant can enjoy the profit
increase from coordination. Ultimately, both the restaurant and the platform earn higher
profit under the coordinating contract.
After looking at Restaurants 1, 2 and 3 in detail, we now consider every restaurant in
the market. For each market, we examine the total profit of the platform and restaurants
(which we call market aggregated social welfare). Beyond our focal market, we calculate the
market aggregated social welfare for all 220 market areas. We find that market aggregated
social welfare always increases when the coordinating contract is adopted. As shown in
Figure 10a, the increase is usually larger (represented by darker shades) for markets that
are more distant from the restaurants. This increase can be as high as 23% and averages

25
15% over all markets. However, as shown in Figure 10b, platform profit ratios can be
greater or less than one. In other words, the coordinating contract benefits the platform
only in some markets (represented by shades of green) that again happen to be markets
situated farther away from most of the restaurants. For these markets (30.9% of markets
and 33.1% of population), the coordinating contract results in a win-win outcome for the
platform and restaurants.
In practice, our numerical results suggest that the coordinating contract can be imple-
mented in stages, beginning first with suburban market areas before moving to more
centrally located market areas. First, in suburban market areas (such as the market we
focused on at the beginning of this section), all parties are better off under the coordi-
nating contract. This can be understood by revisiting the case of Restaurant 3 above,
which is representative because for distant suburban service areas, many restaurants are
relatively remote, just like Restaurant 3. In this case, the coordinating contract brings
about a symbiotic arrangement in which the platform lowers delivery fees (thus boosting
demand) while the restaurant agrees to split part of the delivery cost. This outcome is
mutually beneficial, and can be targeted at long-distance deliveries. Once restaurant part-
ners are confident and comfortable with sharing delivery costs, the platform can try to
implement the coordinating contract in more central locations. In these cases, the coordi-
nating contract makes restaurants better off but the platform worse off, primarily because
commissions are generally lower. Thus, to reallocate social welfare gains, the platform has
to collect a transfer payment from restaurants.
8. Conclusion
How should food ordering and delivery platforms split the pie with partner restaurants?
The prevailing industry practice, in the form of commission contracts, has evolved steadily
over the past decade or so. The earliest and simplest approach is for platforms to negotiate
the commission rate with each restaurant separately. A popular next step is to introduce
an auction-like bidding process – restaurants can choose to pay extra commissions for a
chance to secure limited premium display slots on the platform’s app or website. Most
recently, commission rates have also been tied to delivery fees, i.e., restaurants paying
higher commissions enjoy discounted or even free delivery. All these innovations boost
customer demand and thus enlarge the pie, but they focus only on one part of the pie
associated with food revenues. The total pie, in fact, includes food revenues as well as

26
delivery costs and fees. In this paper, we argue that platforms should also split the part
of the pie associated with delivery. Specifically, restaurants located far away should split
the delivery cost with platforms, while restaurants located close by should enjoy a share of
the delivery profit. Doing so aligns incentives perfectly between platforms and restaurants,
and we show that it is the only way to truly maximize the total pie.
Nonetheless, our recommendations come with two important caveats. First, although
restaurants can easily see how much customers are paying for their orders, they do not
know the precise cost incurred by the platform to deliver these orders. This classic infor-
mation asymmetry issue might explain why existing commission contracts have focused
exclusively on the food revenue side. Fortunately, there are several readily available proxies
for delivery cost, such as distance and time taken for the delivery. Moreover, aggregate
data (e.g., total delivery miles over the month), which is easier to estimate, suffices for
implementation purposes. Second, although our analysis in this paper assumes that all
parties are profit-maximizing, it is possible that some platforms might have alternative
objectives. For instance, a platform new to a city might prefer to build a customer base,
possibly at a loss. In this case, long-distance deliveries might be attractive to the platform
but not to restaurants, and splitting delivery costs might be easier said than done. To safe-
guard against these scenarios, restaurants and platforms need to elucidate clear geographic
boundaries.
Moving ahead, in this area of contract design for restaurant delivery platforms, we feel
that a useful next step is to incorporate platform interactions. In this paper, we model
a monopoly platform, but in practice several restaurant delivery platforms co-exist. We
find it worthwhile to disentangle platform demand (e.g., customers going to a particular
platform to search for restaurants) from restaurant demand (e.g., customers having a
specific restaurant in mind before ordering from the platform). Once the demand system
is specified, our model can be applied at each platform to answer interesting questions,
such as: How do delivery fees and commission rates depend on the network structure
(i.e., which restaurants are on which platforms)? Should restaurants participate in every
platform or be exclusive partners on one platform? Is the existing market structure stable
or will it evolve such that platforms will eventually become local monopolies? We leave
these exciting questions for future research.

27
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32
Appendix
Proof of Proposition 1 (i): Given ϕi , platform’s optimal pricing policy p∗ (ϕi , δi ) should
satisfy p∗ (ϕi , δi ) ∈ arg maxp πid,p (p, ϕi ). The optimal prices can be characterized as the fol-
lowing.
(a) The optimal price for the platform is VL when ϕi V0 + VL − cδi ≥ α(ϕi V0 + VH − cδi )
L −αVH
and ϕi V0 + VL − cδi ≥ 0. The first condition holds when δi ≤ ϕi Vc0 + V(1−α)c , and the second
VL −αVH
condition holds when δi ≤ ϕi Vc0 + VcL . Since (1−α)c
< VL
c
, it is optimal for the platform to
L −αVH
charge VL when δi ≤ ϕi Vc0 + V(1−α)c , that is, when δi ≤ x(ϕi )
(b) The optimal price for the platform is VH when α(ϕi V0 + VH − cδi ) > ϕi V0 + VL − cδi
VL −αVH
and α(ϕi V0 + VH − cδi ) ≥ 0. The first condition holds when δi > ϕi Vc0 + (1−α)c
, and the
VH
second condition holds when δi ≤ ϕi Vc0 + c
. Therefore, VH is the optimal price when
δi ∈ (x(ϕi ), y(ϕi )].
(c) The optimal price for the platform is ∞ when 0 > ϕi V0 + VL − cδi and 0 >
α(ϕi V0 + VH − cδi ). The first condition holds when δi > ϕi Vc0 + VcL , and the second condition
holds when δi > ϕi Vc0 + VcH . The second condition implies the first. Therefore, ∞ becomes
the optimal price when δi > ϕi Vc0 + VcH , that is, when δi > y(ϕi ).
Proof of Proposition 1 (ii): The platform’s optimal display decision in equilibrium

is to feature K restaurants that bring the largest profit increase to the platform when
featured. We provide the formal proof of this statement before the proof of Proposition 2,
which comes after the manuscript defines the necessary notations.
Proof of Lemma 1: Let πid,r (ϕi , δi ) represent restaurant-i’s profit given ϕi and δi . Since
there is no consideration of premium display slot allocation, platform only decides whether
to charge a high or a low price for delivery. The restaurants only consider whether they want
high or low price for delivery when choosing their commission bids given the platform’s
pricing strategy given in Proposition 1 (i).
(1) δi ≤ x0 : In this case, from Proposition 1 (i), the platform chooses pi = VL even when
the restaurant pays ϕi = ϕ0 . Therefore, the restaurant chooses to bid ϕmin (δi ) = ϕ0 and
receives low price for delivery. Note that ϕ0 is the profit maximizing bid since for any
ϕ > ϕ0 , πid,r (ϕ, δi ) = (1 − ϕ)V0 < (1 − ϕ0 )V0 .

33
L −αVH
(2) δi ∈ (x0 , xα ]: Note that ψ(δ) = x−1 (δ) = Vc0 δ − V(1−α)V 0
is the minimum bid that guar-
antees low price delivery as x(ϕ) is the discount radius defined in Proposition 1, which
determines the distance limit under which restaurants receive delivery discounts. Given
that the platform follows its best response strategy described in Proposition 1 (i), we show
that ψ(δi ) is restaurant-i’s unique best response strategy. Consider any deviation ϕ with
ϕ > ψ(δi ). Then, πr (ϕ, δi ) = (1 − ϕ)V0 < (1 − ψ(δi ))V0 = πr (ψ(δi ), δi ). Consider deviation ϕ
with ϕ < ψ(δi ). Then, πr (ϕ, δi ) = α(1 − ϕ)V0 ≤ α(1 − ϕ0 )V0 = (1 − ϕα )V0 ≤ (1 − ψ(δi ))V0 =
πr (ψ(δi ), δi ). The first equality follows from the fact that ϕ < ψ(δi ). The first inequality
holds since ϕ ≥ ϕ0 . The second equality holds from the definition of ϕα , and the second
inequality holds since ψ(δi ) ≤ ϕα for δi ≤ xα . Therefore, ϕi = ψ(δi ) uniquely maximizes
restaurant-i’s profit.
(3) δi > xα : In this case, there is no profitable way for a restaurant to receive delivery
discount. Therefore, the restaurant chooses to bid ϕα∗
i = ϕ0 and receives high price for
delivery. Given platform’s pricing strategy, we show that there is no profitable deviation for
the restaurant. Consider deviation ϕ with ϕ ∈ (ϕ0 , ψ(δi )). Then, πid,r (ϕ, δi ) = α(1 − ϕ)V0 <
α(1 − ϕ0 )V0 = πid,r (ϕ0 , δi ). The first equality holds because bidding less than ψ(δi ) gives
high price for delivery. The first inequality follows from ϕ > ϕ0 . Consider deviation ϕ
with ϕ ≥ ψ(δi ). Then, πid,r (ϕ, δi ) = (1 − ϕ)V0 ≤ (1 − ψ(δi ))V0 < (1 − ϕα )V0 = α(1 − ϕ0 )V0 =
πid,r (ϕ0 , δi ). The first equality holds since bidding higher than ψ(δi ) guarantees low price
for delivery. The first inequality holds since ϕ ≥ ψ(δi ), and the second inequality holds
because ψ(δi ) > ϕα for δi > xα . The second equality holds from the definition of ϕα .
From (1), (2), and (3) we see that for each restaurant ϕmin (δi ) is the unique profit
maximizing commission rate.
Proof of Lemma 2: This lemma also means that ϕmax (δ) is the maximum commission
rate a restaurant is willing to pay for possible upgrades.
(1) δi ≤ x0 : In this case, ϕmax (δ) = ϕβ . Restaurants within x0 are charged VL for the
delivery with the base bid ϕ0 , and the restaurant only considers bidding more to qualify for
a premium display slot. The maximum bid the restaurant is willing to pay for a premium
slot should satisfy β(1 − ϕmax (δ))V0 = (1 − ϕ0 )V0 . Therefore, ϕmax (δ) = Φ(β, ϕmin ) = ϕβ .
(2) δi ∈ (x0 , xα ]: From Lemma 1, we know that it is profit maximizing for a restaurant
with δi ∈ (x0 , xα ] to bid ψ(δi ) without the consideration of premium display slots. Maximum

34
commission the restaurant is willing to bid for a premium display slot then should satisfy
β(1 − ϕmax (δi ))V0 = (1 − ψ(δi ))V0 . Therefore, ϕmax (δi ) = Φ(β, ψ(δi )) = 1 − β1 (1 − ψ(δi )).
(3) δi ∈ (xα , xαβ ]: From Lemma 1, we know that the minimum bid the restaurants would
pay without the consideration of premium display slot allocation is ϕ0 in this case, which
gives high delivery price. Therefore, the restaurant has an option to pay for both premium
display and delivery discount. The maximum bid the restaurant is willing to pay thus
should satisfy β(1 − ϕmax (δi ))V0 = α(1 − ϕ0 )V0 . Therefore, ϕmax (δi ) = Φ(β/α, ϕ0 ) = ϕαβ .
(4) δi > xαβ : The minimum bid the restaurants are willing to pay without the considera-
tion of premium slot allocation in this case is ϕ0 , which gives high price for delivery. Note
that for restaurants with δi > xαβ there is no profitable bid ϕ, which will guarantee low
price of delivery. This is because the maximum possible commission a restaurant is willing
to pay for both premium display and delivery discount is ϕαβ . However, since δi > xαβ ,
bidding ϕαβ will still give high price for delivery as one can see from Proposition 1.
Therefore, the restaurant would only pay for a premium display slot. The maximum bid
ϕmax (δi ) should satisfy βα(1 − ϕmax (δi ))V0 = α(1 − ϕ0 )V0 , and ϕmax (δi ) = Φ(β, ϕ0 ) = ϕβ .
Proof of Proposition 1 (ii): Given any commission rate ϕi from i = 1, 2, · · · , N , let κ

denote the set of restaurants the platform decides to allocate premium display slots. Then,
the platform’s profit π d,p (ϕ, κ) is given as
N
X X
d,p
π (ϕ, κ) = fmin (δi ) + (βf (ϕj , δj ) − fmin (δj )),
i=1 j∈κ
where 
ϕi V0 + VL − cδi ,

if pi = VL ,
f (ϕi , δi ) =
α(ϕi V0 + VH − cδi ), if pi = VH .

Therefore, the unique best response strategy for the platform is to allocate the premium
display slots to K restaurants with the highest βf (ϕj , δj ) − fmin (δj ) values.
Proof of Proposition 2: Given platform allocates the premium display slots to the K
restaurants with the highest βf (ϕj , δj ) − fmin (δj ) values as shown in Proposition 1 (ii), we
show that ϕ∗i is restaurant-i’s unique best response strategy. For the rest of the proof recall
that the restaurants are ordered so that ∆f (δ1 ) > ∆f (δ2 ) > · · · > ∆f (δN ).

35
Claim 1: Assume that restaurant-j bids to be featured as a best response strategy. Then,
it is profit-maximizing for any restaurant with i < j to bid to be featured.
Proof: If restaurant-j is featured, then from Proposition 1 (ii) it means that restaurant-
j found a commission rate ϕj that satisfies ϕj ≤ ϕmax (δj ) where βf (ϕj , δj ) − fmin (δj ) is
among the K highest. Then, for any restaurant-i with i < j can find ϕi which satisfies
βf (ϕi , δi ) − fmin (δi ) > βf (ϕj , δj ) − fmin (δj ) and ϕi < ϕmax (δi ). Since ϕi < ϕmax (δi ), it is
more profitable for restaurant-i to bid ϕi and be featured than to bid ϕmin (δi ) and not be
featured.
Claim 2: Assume that i < j, but ϕi and ϕj are set so that restaurant-j is featured but
restaurant-i is not. Then, ϕi and ϕj cannot form an equilibrium best response strategy.
Proof: Assume that restaurant-j is featured, but restaurant-i is not. Then their bids
should satisfy βf (ϕj , δj ) − fmin (δj ) > βf (ϕi , δi ) − fmin (δi ). Since restaurant-i is not fea-
tured with such commission rate ϕi ≥ ϕmin (δi ), restaurant-i’s profit is (1 − ϕi )V0 ≤
(1 − ϕmin (δi ))V0 . Now consider a deviation ϕ̂i < ϕmax (δi ) where βf (ϕ̂i , δi ) − fmin (δi ) =
(βf (ϕj , δj ) − fmin (δj )) + ϵ < βfmax (δi ) − fmin (δi ) with ϵ > 0 being a small positive number.
Then, bidding ϕ̂i wins restaurant-i a featured display slot and doing so is more profitable
for restaurant-i since β(1 − ϕ̂i )V0 > β(1 − ϕmax (δi ))V0 = (1 − ϕmin (δi ))V0 ≥ (1 − ϕi )V0 . The
first inequality holds from ϕ̂i < ϕmax (δi ); the equality holds from β(1 − ϕmax (δi ))V0 = (1 −
ϕmin (δi ))V0 ; the last inequality holds from ϕ̂i ≥ ϕmin (δi ). Therefore, a profitable deviation
ϕ̂i exists and ϕi cannot form an equilibrium best response strategy.
From Claims 1 and 2, we can conclude that if restaurants’ equilibrium best response
strategy exists, it has to be unique in the way that K restaurants with the highest ∆f (δi )
are featured and no other equilibrium structure exists.
Claim 3: For restaurants with i < K + 1, the unique best response strategy is to
choose the ϕi that brings the highest restaurant profit that satisfies βf (ϕi , δi ) − fmin (δi ) ≥
(βf (ϕmax (δK+1 ), δK+1 ) − fmin (δK+1 )).
Proof: For simplicity of notation, we use ∆f ∗ ≡ ∆f (δK+1 ). We show this by contradiction. If
restaurant-i with i < K + 1 chooses ϕi with βf (ϕi , δi ) − fmin (δi ) < (βf (ϕmax (δK+1 ), δK+1 ) −
fmin (δK+1 )), then restaurant K + 1 can win a featured display slot by bidding ϕK+1 which
satisfies βf (ϕi , δi ) − fmin (δi ) < βf (ϕK+1 , δK+1 ) − fmin (δK+1 ) < βf (ϕmax (δK+1 ), δK+1 ) −
fmin (δK+1 ). Then, restaurant-i loses the featured display slot and earns (1 − ϕi )V0 ≤ (1 −
ϕmin (δi ))V0 = β(1 − ϕmax (δi ))V0 < β(1 − ϕ∗i )V0 . Therefore, restaurant-i has an incentive to

36
deviate to ϕi with βf (ϕi , δi ) − fmin (δi ) ≥ (βf (ϕmax (δK+1 ), δK+1 ) − fmin (δK+1 )). Therefore,
ϕi with βf (ϕi , δi ) − fmin (δi ) < (βf (ϕmax (δK+1 ), δK+1 ) − fmin (δK+1 )) cannot form an equilib-
rium best response strategy.
Below, we show that the equilibrium does exist by showing that there is no incentive
for any of the restaurants to unilaterally deviate from bidding ϕ∗i given that the platform
allocates premium display slots to i ∈ {1, 2, · · · , K}.
(1) δi ≤ x0 : The equilibrium bid ϕ∗i for restaurant-i can be characterized as the following.




 ϕ∗i = ϕ0 , if βfmin (δi ) > fmin (δi ) + ∆f ∗ ,

 βf (ϕ∗i , δi ) = fmin (δi ) + ∆f ∗ , if βfmax (δi ) > fmin (δi ) + ∆f ∗ ≥ βfmin (δi ),


ϕ ∗ = ϕ ,

otherwise.
i 0
Case 1) βfmin (δi ) > fmin (δi ) + ∆f ∗ : We show that there is no incentive for the restaurant
to unilaterally deviate from ϕ∗i = ϕ0 . In this case, i ∈ {1, 2, · · · , K}, and bidding ϕ∗i = ϕ0
will give πid,r (ϕ∗i , δi ) = β(1 − ϕ0 )V0 . Now consider deviation ϕ > ϕ0 . Then πid,r (ϕ, δi ) = β(1 −
ϕ)V0 < β(1 − ϕ0 )V0 = πid,r (ϕ∗i , δi ). The inequality is from ϕ > ϕ0 .
Case 2) βfmax (δi ) > fmin (δi )+∆f ∗ ≥ βfmin (δi ): In this case, ϕ∗i should satisfy βf (ϕ∗i , δi ) =
fmin (δi )+∆f ∗ , and such ϕ∗i gives πid,r (ϕ∗i , δi ) = β(1−ϕ∗i )V0 . Consider deviation ϕ < ϕ∗i . Then
πid,r (ϕ, δi ) = (1 − ϕ)V0 ≤ (1 − ϕ0 )V0 = β(1 − ϕmax (δi ))V0 < β(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ). The first
equality holds because bidding less than ϕ∗i will not give premium slot allocation. The
first inequality holds because ϕ ≥ ϕ0 . The second equality is from Lemma 2. The second
inequality is from ϕ∗i < ϕmax (δi ) since βfmax (δi ) > fmin (δi ) + ∆f ∗ . Now consider deviation
ϕ > ϕ∗i . Then πid,r (ϕ, δi ) = β(1 − ϕ)V0 < β(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ).
Case 3) fmin (δi ) + ∆f ∗ > βfmax (δi ). This is when i ≥ K + 1 so that the restaurant bids
ϕ∗i = ϕmin (δi ) = ϕ0 , and πid,r (ϕ∗i , δi ) = (1 − ϕ0 )V0 . Consider deviation ϕ > ϕ0 . Note that since
fmax (δi ) < fmin (δi ) + ∆f ∗ , the restaurant cannot afford to bid high enough for a premium
display slot. Therefore, for any deviation ϕ ∈ (ϕ0 , ϕmax (δi )], the restaurant will not gain
premium display. Thus, πid,r (ϕ, δi ) = (1 − ϕ)V0 < (1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ).
From Case 1) through 3) we have shown that there is no profitable deviation from ϕ∗i for
restaurant-i with δi ≤ x0 .

37
(2) δi ∈ (x0 , xα ]: The equilibrium bid ϕ∗i is characterized as the following.





 ϕ∗i = ψ(δi ), if βfmin (δi ) > fmin (δi ) + ∆f ∗ ,



 ∗
 ϕi = ψ(δi ), otherwise.
Case 1) βfmin (δi ) > fmin (δi ) + ∆f ∗ : In this case, ϕ∗i = ϕmin (δi ) = ψ(δi ). Also, i ∈
{1, 2, · · · , K}, and bidding ϕ∗i = ψ(δi ) will give πid,r (ϕ∗i , δi ) = β(1 − ψ(δi ))V0 . Now con-
sider deviation ϕ > ψ(δi ). Then πid,r (ϕ, δi ) = β(1 − ϕ)V0 < β(1 − ψ(δi ))V0 = πid,r (ϕ∗i , δi ). The
inequality is from ϕ > ψ(δi ). Consider deviation ϕ < ψ(δi ) with βf (ϕ, δi ) ≥ fmin (δi ) + ∆f ∗ .
Then, πid,r (ϕ, δi ) = βα(1 − ϕ)V0 ≤ βα(1 − ϕ0 )V0 = β(1 − ϕα )V0 ≤ β(1 − ψ(δi ))V0 = πid,r (ϕ∗i , δi ).
The first equality holds from the fact that ψ(δi ) is the minimum bid required to receive
low delivery fee. The first inequality holds from ϕ ≥ ϕ0 . The second equality holds from
the definition of ϕα . The second inequality holds from the fact that ψ(δi ) ≤ ϕα for δi ≤ xα .
fmin (δi ) + ∆f ∗ , and such ϕ∗i gives πid,r (ϕ∗i , δi ) = β(1 − ϕ∗i )V0 . Also, note that in this case,
fmax (δi ) > f (ϕ∗i , δi ) ≥ fmin (δi ) so that ϕmax (δi ) > ϕ∗i ≥ ψ(δi ). Consider deviation ϕ with ϕ ∈
[ψ(δi ), ϕ∗i ). Then πid,r (ϕ, δi ) = (1 − ϕ)V0 ≤ (1 − ψ(δi ))V0 = β(1 − ϕmax (δi ))V0 < β(1 − ϕ∗i )V0 =
πid,r (ϕ∗i , δi ). The first equality holds because bidding ϕ ∈ [ψ(δi ), ϕ∗i ) will give low delivery fee
and no premium slot allocation. The first inequality holds because ϕ ≥ ψ(δi ). The second
equality is from Lemma 2. The second inequality is from ϕ∗i < ϕmax (δi ). Consider deviation
ϕ with ϕ ∈ [ϕ0 , ψ(δi )). Then πid,r (ϕ, δi ) = α(1 − ϕ)V0 ≤ α(1 − ϕ0 )V0 = (1 − ϕα )V0 ≤ (1 −
ψ(δi ))V0 = β(1 − ϕmax (δi ))V0 < β(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ). The first equality holds because
ϕ < ψ(δi ) will give high delivery fee. The first inequality holds because ϕ ≥ ϕ0 . The second
equality holds from the definition of ϕα . The second inequality holds because ψ(δi ) ≤ ϕα
for δi ≤ xα . The third equality holds from Lemma 2, and the third inequality holds because
ϕ∗i < ϕmax (δi ). Now, consider deviation ϕ > ϕ∗i . Then πid,r (ϕ, δi ) = β(1−ϕ)V0 < β(1−ϕ∗i )V0 =
πid,r (ϕ∗i , δi ).
Case 3) fmin (δi ) + ∆f ∗ ≥ βfmax (δi ). This is when i ≥ K + 1 so that the restaurant bids
ϕ∗i = ϕmin (δi ) = ψ(δi ), and πr (ϕ∗i , δi ) = (1 − ψ(δi ))V0 . Consider deviation ϕ < ψ(δi ). Then
πid,r (ϕ, δi ) = α(1 − ϕ)V0 ≤ α(1 − ϕ0 )V0 = (1 − ϕα )V0 ≤ (1 − ψ(δi ))V0 = πid,r (ϕ∗i , δi ). The first
equality holds because bidding less than ψ(δi ) gives high delivery price. The first inequality
holds because ϕ ≥ ϕ0 . The second equality is from the definition of ϕα , and the second

38
inequality holds because ψ(δi ) ≤ ϕα for δi ≤ xα . Consider deviation ϕ > ψ(δi ). Note that
since βfmax (δi ) ≤ fmin (δi ) + ∆f ∗ , the restaurant cannot afford to bid high enough for a
premium display slot. Therefore, for any deviation ϕ ∈ (ψ(δi ), ϕmax (δi )], the restaurant will
not gain premium display. Thus, πid,r (ϕ, δi ) = (1 − ϕ)V0 < (1 − ψ(δi ))V0 = πid,r (ϕ∗i , δi ).
From Case 1) through 3) we have shown that there is no profitable deviation from ϕ∗i for
restaurant-i with δi ∈ (x0 , xα ].
(3) δi ∈ (xα , xαβ ]: The equilibrium bid ϕ∗i is characterized as the following.

ϕ∗i = ϕ0 , if βfmin (δi ) > fmin (δi ) + ∆f ∗ ,





βf (ϕ∗i , δi ) = fmin (δi ) + ∆f ∗ , if βf (m(ψ(δi ), α), δi ) > fmin (δi ) + ∆f ∗ ≥ βfmin (δi ),






 ϕ∗i = ψ(δi ), if βf (ψ(δi ), δi ) > fmin (δi ) + ∆f ∗ ≥ βf (m(ψ(δi ), α), δi )


βf (ϕ∗ , δ ) = f (δ ) + ∆f ∗ ,

if βfmax (δi ) > fmin (δi ) + ∆f ∗ ≥ βf (ψ(δi ), δi )

 i i min i



ϕ ∗ = ϕ ,

otherwise.
i 0
Case 1) βfmin (δi ) > fmin (δi ) + ∆f ∗ : In this case, ϕ∗i = ϕmin (δi ) = ϕ0 . Also, i ∈
{1, 2, · · · , K}, and bidding ϕ∗i = ϕ0 will give πid,r (ϕ∗i , δi ) = βα(1 − ϕ0 )V0 . Consider deviation
ϕ ∈ (ϕ0 , ψ(δi )). Then, πid,r (ϕ, δi ) = βα(1 − ϕ)V0 < βα(1 − ϕ0 )V0 = πid,r (ϕ∗i , δi ). The inequal-
ity is from ϕ > ϕ0 . Consider deviation ϕ ≥ ψ(δi ). Then, πid,r (ϕ, δi ) = β(1 − ϕ)V0 ≤ β(1 −
ψ(δi ))V0 < β(1 − ϕα )V0 = βα(1 − ϕ0 )V0 = πid,r (ϕ∗i , δi ). The first equality holds since ϕ ≥ ψ(δi )
will give delivery discount. The first inequality holds from ϕ ≥ ψ(δi ). The second inequality
holds since ψ(δi ) > ϕα when δi > xα . The second equality holds from the definition of ϕα .
Case 2) βf (m(ψ(δi ), α), δi ) > fmin (δi ) + ∆f ∗ ≥ βfmin (δi ): The equilibrium bid in this
case satisfies βf (ϕ∗i , δi ) = fmin (δi ) + ∆f ∗ , and ϕ∗i < m(ψ(δi ), α) < ψ(δi ). Thus, πr (ϕ∗i , δi ) =
βα(1 − ϕ∗i )V0 . Consider deviation ϕ < ϕ∗i . Then, πid,r (ϕ, δi ) = α(1 − ϕ)V0 ≤ α(1 − ϕ0 )V0 =
β(1 − ϕmax (δi ))V0 ≤ β(1 − ψ(δi ))V0 = βα(1 − m(ψ(δi ), α))V0 < βα(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ).
The first equality holds because bidding less than ϕ∗i will not give premium display. The first
inequality is from ϕ ≥ ϕ0 , and the second equality is from Lemma 2. The second inequality
holds because ψ(δi ) ≤ ϕmax (δi ), and ψ(δi ) guarantees both low price and premium display.
The second equality holds from the definition of m(ψ(δi ), α), and the last inequality holds
since ϕ∗i < m(ψ(δi ), α). Consider deviation ϕ with ϕ ∈ (ϕ∗i , ψ(δi )). Then, πid,r (ϕ, δi ) = βα(1 −
ϕ)V0 < βα(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ). Consider deviation ϕ with ϕ ≥ ψ(δi ). Then, πid,r (ϕ, δi ) =
β(1 − ϕ)V0 ≤ β(1 − ψ(δi ))V0 = βα(1 − m(ψ(δi ), α))V0 < βα(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ). The first

39
equality holds since with ϕ ≥ ψ(δi ), the restaurant qualifies for both low price and premium
display. The first inequality holds since ϕ ≥ ψ(δi ). The remaining follows from what we
have already shown previously with the deviation ϕ < ϕ∗i .
Case 3) βf (ψ(δi ), δi ) > fmin (δi ) + ∆f ∗ ≥ βf (m(ψ(δi ), α), δi ): In this case, ϕ∗i = ψ(δi ), and
such ϕ∗i gives πid,r (ϕ∗i , δi ) = β(1 − ψ(δi ))V0 . Also, note that in this case, fmax (δi ) > f (ϕ∗i , δi ) >
fmin (δi ), and ϕmax (δi ) > ϕ∗i > ϕ0 . Consider deviation ϕ with ϕ < ϕ∗i and βf (ϕ, δi ) ≥
fmin (δi ) + ∆f ∗ . Then, πid,r (ϕ, δi ) = βα(1 − ϕ)V0 ≤ βα(1 − m(ψ(δi ), α))V0 = β(1 − ψ(δi ))V0 =
πid,r (ϕ∗i , δi ). The first equality holds because with ϕ < ψ(δi ) and βf (ϕ, δi ) ≥ fmin (δi ) + ∆f ∗ ,
the restaurant receives high delivery price and a premium display slot. The first inequal-
ity follows from the fact that βf (ϕ, δi ) ≥ fmin (δi ) + ∆f ∗ ≥ βf (m(ψ(δi ), α), δi ). The sec-
ond equality is from the definition of m(ψ(δi ), α). Consider deviation ϕ with ϕ < ϕ∗i and
βf (ϕ, δi ) < fmin (δi ) + ∆f ∗ . Then πid,r (ϕ, δi ) = α(1 − ϕ)V0 ≤ α(1 − ϕ0 )V0 = β(1 − ϕαβ )V0 ≤
β(1 − ψ(δi ))V0 = πid,r (ϕ∗i , δi ). The first equality holds since the restaurant receives high
delivery price and no premium slot when ϕ < ϕ∗i and βf (ϕ, δi ) < fmin (δi ) + ∆f ∗ . The first
inequality holds since ϕ ≥ ϕ0 . The second equality holds from the definition of ϕαβ , and the
second inequality holds from the fact that ϕαβ ≥ ψ(δi ) for δi ∈ (xα , xαβ ]. Consider deviation
ϕ with ϕ > ϕ∗i . Then, πid,r (ϕ, δi ) = β(1 − ϕ)V0 < β(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ).
Case 4) βfmax (δi ) > fmin (δi ) + ∆f ∗ ≥ βf (ψ(δi ), δi ): The equilibrium bid in this case
satisfies βf (ϕ∗i , δi ) = fmin (δi ) + ∆f ∗ , and ψ(δi ) ≤ ϕ∗i < ϕmax (δi ). Thus, πid,r (ϕ∗i , δi ) = β(1 −
ϕ∗i )V0 . Consider deviation ϕ with ϕ < ψ(δi ). Then, πid,r (ϕ, δi ) = α(1 − ϕ)V0 ≤ α(1 − ϕ0 )V0 =
β(1 − ϕmax (δi ))V0 < β(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ). The first equality holds because bidding less
than ϕ∗i will not give premium display, and bidding less than ψ(δi ) gives high price. The
first inequality is from ϕ ≥ ϕ0 , and the second equality is from Lemma 2. The second
inequality holds because ϕ∗i < ϕmax (δi ). Consider deviation ϕ with ϕ ∈ [ψ(δi ), ϕ∗i ). Then,
πid,r (ϕ, δi ) = (1 − ϕ)V0 ≤ (1 − ψ(δi ))V0 < (1 − ϕα )V0 = α(1 − ϕ0 )V0 = β(1 − ϕmax (δi ))V0 <
β(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ). The first equality holds sine bidding less than ϕ∗i does not give
premium display. The first inequality is from ϕ > ψ(δi ), and the second inequality is from
ψ(δi ) < ϕα for δi > xα . The second equality is from the definition of ϕα , and the third
equality holds from Lemma 2. The third inequality holds since ϕ∗i < ϕmax (δi ). Consider
deviation ϕ > ϕ∗i . Then, πid,r (ϕ, δi ) = β(1 − ϕ)V0 < β(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ).
Case 5) fmin (δi ) + ∆f ∗ ≥ βfmax (δi ): In this case, the restaurant does not qualify for a
premium display slot in equilibrium, and ϕ∗i = ϕmin (δi ) = ϕ0 . Consider deviation ϕ with

40
ϕ ∈ (ϕ0 , ψ(δi )). Then, πid,r (ϕ, δi ) = α(1 − ϕ)V0 < α(1 − ϕ0 )V0 = πid,r (ϕ∗i , δi ). Consider devia-
tion ϕ ≥ ψ(δi ). Then, πid,r (ϕ, δi ) = (1 − ϕ)V0 ≤ (1 − ψ(δi ))V0 < (1 − ϕα )V0 = α(1 − ϕ0 )V0 =
πid,r (ϕ∗i , δi ). The first equality and the first inequality hold since ϕ ≥ ψ(δi ). The second
inequality holds since ψ(δi ) > ϕα for δi > xα . The second equality holds from the definition
of ϕα .
From Case 1) through 5) we have shown that there is no profitable deviation from ϕ∗i
for restaurant-i with δi ∈ (xα , xαβ ].
(4) δi > xαβ : The equilibrium bid ϕ∗i can be characterized as the following.




 ϕ∗i = ϕ0 , if βfmin (δi ) > fmin (δi ) + ∆f ∗ ,



ϕ ∗ = ϕ ,

otherwise.
i 0
Case 1) βfmin (δi ) > fmin (δi ) + ∆f ∗ : In this case, ϕ∗i = ϕmin (δi ) = ϕ0 . Also, i ∈
{1, 2, · · · , K}, and bidding ϕ∗i = ϕ0 will give πid,r (ϕ∗i , δi ) = βα(1 − ϕ0 )V0 . Note that a restau-
rant with δi > xαβ cannot qualify for low delivery price with any bid below ϕmax (δi ). Now
consider deviation ϕ > ϕ∗i . Then πid,r (ϕ, δi ) = βα(1 − ϕ)V0 < βα(1 − ϕ0 )V0 = πid,r (ϕ∗i , δi ).
fmin (δi ) + ∆f ∗ , and such ϕ∗i gives πid,r (ϕ∗i , δi ) = βα(1 − ϕ∗i )V0 . Also, note that in this case,
ϕmax (δi ) > ϕ∗i ≥ ϕmin (δi ). Consider deviation ϕ with ϕ < ϕ∗i . Then, πid,r (ϕ, δi ) = α(1 − ϕ)V0 ≤
α(1 − ϕ0 )V0 = βα(1 − ϕmax (δi ))V0 < βα(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ). The first equality holds
since bidding less than ϕ∗i does not give premium page display. The first inequality holds
from ϕ ≥ ϕ0 , and the second equality holds from Lemma 2. The last inequality holds
since ϕmax (δi ) > ϕ∗i . Consider deviation ϕ with ϕ > ϕ∗i . Then πid,r (ϕ, δi ) = βα(1 − ϕ)V0 <
βα(1 − ϕ∗i )V0 = πid,r (ϕ∗i , δi ).
Case 3) fmin (δi ) + ∆f ∗ ≥ βfmax (δi ). This is when i ≥ K + 1, and the restaurant bids
ϕ∗i = ϕmin (δi ) = ϕ0 , and πid,r (ϕ∗i , δi ) = α(1 − ϕ0 )V0 . Consider deviation ϕ > ϕ0 . Note that
since βfmax (δi ) ≤ fmin (δi ) + ∆f ∗ , the restaurant cannot afford to bid high enough for a
premium display slot. Therefore, for any deviation ϕ > ϕ0 , the restaurant will not gain
premium display. Thus, πid,r (ϕ, δi ) = α(1 − ϕ)V0 < α(1 − ϕ0 )V0 = πid,r (ϕ∗i , δi ).
From Case 1) through 3) we have shown that there is no profitable deviation from ϕ∗i
for restaurant-i with δi > xαβ .

41
From (1) to (4), there is no incentive for any of the restaurants to deviate from ϕ∗i and
ϕ∗i is the unique subgame perfect equilibrium.
Proof of Proposition 3 (i): The centralized firm’s pricing decision is to choose the
delivery price pFi B (δi ) that maximizes f (δi ), where




 V0 + VL − cδi , if pi = VL ,

f (δi ) = α(V0 + VH − cδi ), if pi = VH ,



if pi = ∞.

0,
(1) The optimal price for the platform is pFi B (δi ) = VL when (V0 + VL − cδi ) ≥ α(V0 +
L −αVH
VH − cδi ) and (V0 + VL − cδi ) ≥ 0. The first condition holds when δi ≤ Vc0 + V(1−α)c , and the
V0 +VL VL −αVH VL
second condition holds when δi ≤ c
. Since (1−α)c
< c
, it is optimal for the platform
L −αVH
to charge VL when δi ≤ Vc0 + V(1−α)c , that is, when δi ≤ xF B .
(2) The optimal price for the platform is VH when α(V0 + VH − cδi ) > (V0 + VL − cδi )
L −αVH
and α(V0 + VH − cδi ) ≥ 0. The first condition holds when δi > i Vc0 + V(1−α)c , and the second
condition holds when δi ≤ Vc0 + VcH . Therefore, VH is the optimal price when δi ∈ (xF B , y F B ].
(3) The optimal price for the platform is ∞ when 0 > (V0 + VL − cδi ) and 0 >
V0 VL
α(V0 + VH − cδi ). The first condition holds when δi > c
+ c
, and the second condition
V0 VH
holds when δi > c
+ c
. The second condition is the one that is binding. Therefore, ∞
becomes the optimal price when δi > Vc0 + VcH , that is, when δi > y F B .
Proof of Proposition 3 (ii): Let κ denote the set of restaurants that are featured. Given
the first-best delivery prices shown in Proposition 3 (i), the centralized firm’s profit π c (κ)
is given as
N
X X
c
π (κ) = f F B (δi ) + (βf F B (δi ) − f F B (δi ))
i=1 j∈κ
N
X X
= f F B (δi ) + (β − 1)f F B (δi ).
i=1 j∈κ
Therefore, the profit maximizing decision for the centralized firm is to feature K restau-
rants that have the highest f F B (δi ) values. Recall that f F B (δi ) is monotone decreasing in
the delivery distance δi . Therefore, the first-best display policy is to feature the K closest

42
restaurants.
Proof of Proposition 4: We first show that under the coordinating contract, given any
ϕi , the platform chooses the delivery prices that are the same as in Proposition 3 (i). Given
the contract, the platform’s delivery price pc∗ i should maximize its profit

ϕi (V0 + VL − cδi ),

if pi = VL ,
c,p
πi (pi , ϕi , δi ) =
ϕi α(V0 + VH − cδi ), if pi = VH .

(1) Given any commission ϕi , platform’s best pricing strategy is to choose pc∗
i = VL if
ϕi (V0 + VL − cδi ) ≥ ϕi α(V0 + VH − cδi ) and ϕi (V0 + VL − cδi ) ≥ 0. The first condition holds
L −αVH VL −αVH
when δi ≤ Vc0 + V(1−α)c , and the second condition holds when δi ≤ V0 +V
c
L
. Since (1−α)c
< VcL ,
L −αVH
it is optimal for the platform to charge VL when δi ≤ Vc0 + V(1−α)c , that is, when δi ≤ xF B .
(2) Given any ϕi , the optimal price for the platform is VH when ϕi α(V0 + VH − cδi ) >
ϕi (V0 + VL − cδi ) and ϕi α(V0 + VH − cδi ) ≥ 0. The first condition holds when δi > i Vc0 +
VL −αVH
(1−α)c
, and the second condition holds when δi ≤ V0
c
+ VcH . Therefore, VH is the optimal
price when δi ∈ (xF B , y F B ].
(3) Given any ϕi , the optimal price for the platform is ∞ when 0 > ϕi (V0 + VL − cδi ) and
0 > ϕi α(V0 +VH −cδi ). The first condition holds when δi > Vc0 + VcL , and the second condition
V0 VH
holds when δi > c
+ c
. The second condition is the one that is binding. Therefore, ∞
becomes the optimal price when δi > Vc0 + VcH , that is, when δi > y F B .
From (1), (2), and (3), we can conclude that the platform’s pricing strategy under the
coordinating contract coincides with the optimal pricing strategy of the centralized firm
shown in Proposition 3 (i). Note also that the platform’s pricing strategy is independent
of the commission rate ϕi each restaurant chooses.
We now show that under the coordinating contract, the platform features the K closest
restaurants in equilibrium. We show this by backward induction.
(1) Claim 1: Without the consideration of featured display, each restaurant optimally
chooses ϕFmin
B
(δi ) = ϕ0 , and the platform’s corresponding profit associated with that restau-
rant is 
ϕ0 (V0 + VL − cδi ), if δi ≤ xF B ,

FB
fmin (δi ) =
αϕ0 (V0 + VH − cδi ), if δi > xF B .


43
Proof: As shown in Proposition 4 (1), platform’s pricing decision now does not depend on
the commission with xF B being independent of ϕ. Also, when there is no consideration of
the premium display upgrade the restaurants have no incentive to bid higher commission
than the base bid ϕ0 .
(2) Claim 2: When there are featured display slots, restaurant-i chooses a commission
rate that does not exceed ϕFmax
B
(δi ) = ϕβ = 1 − β1 (1 − ϕ0 ). If the firm chooses ϕFmax
B
(δi ), the
platform’s profit associated with that firm is

ϕβ (V0 + VL − cδi ), if δi ≤ xF B ,

FB
fmax (δi ) =
αϕβ (V0 + VH − cδi ), if δi > xF B .

Proof: Since the restaurants bid ϕ0 without the consideration of premium display slots,
restaurant-i’s willingness to pay for a premium display slot should not exceed ϕi with
(1 − ϕ0 )(V0 + VL − cδi ) = β(1 − ϕi )(V0 + VL − cδi ) when δi ≤ xF B , and α(1 − ϕ0 )(V0 + VH −
cδi ) = βα(1 − ϕi )(V0 + VH − cδi ) when δi > xF B . Therefore, the maximum willingness to bid
ϕFmax
B
(δ) satisfies β(1 − ϕFmax
B
(δ)) = 1 − ϕ0 , and ϕFmax
B
(δ) = Φ(β, ϕ0 ) = 1 − β1 (1 − ϕ0 ) = ϕβ .
(3) Claim 3: Given any ϕi , platform’s best response strategy is to feature K restaurants
that bring the largest profit increase when featured.
Proof: For the remainder of the proof recall that f F B (δi ) is defined in the manuscript as

(V0 + VL − cδi ), if δi ≤ xF B ,

FB
f (δi ) =
α(V0 + VH − cδi ), if δi > xF B .

Given the set κ of restaurants that are featured, the platform’s profit π c,p (ϕ, κ) is given as
N
X X
c FB
π (ϕ, κ) = fmin (δi ) + (βϕj f F B (δj ) − fmin
FB
(δj )).
i=1 j∈κ
Therefore, the platform’s best strategy is to feature the restaurants with the highest
βϕi f F B (δi ) − fmin
FB
(δi ) values.
(4) Claim 4: Given that the platform allocates the premium display slots to the K
restaurants with the highest βϕi f F B (δi ) − fmin
FB
(δi ) values, in equilibrium, K restaurants
with largest ∆fiF B = βfmax
FB FB
(δi ) − fmin (δi ) value are featured.
Proof: For the rest of the proof, restaurants are ordered so that ∆f1F B > ∆f2F B > · · · >
∆fNF B . Note that ∆fiF B decreases in δi since ∆fiF B = βfmax
FB FB
(δi ) − fmin (δi ) = βϕβ f F B (δi ) −

44
ϕ0 f F B (δi ) = (βϕβ − ϕ0 )f F B (δi ), where f F B (δi ) decreases in δi . Therefore, we can now

assume that the restaurants are ordered in the way that δ1 < δ2 < · · · < δN . Below, we show
that if restaurant-i and restaurant-j with i < j choose ϕi and ϕj under which restaurant-
j is featured but restaurant-i is not, then ϕi and ϕj cannot form an equilibrium. If
restaurant-j is featured, then from Claim 3 it means that restaurant-j found a commission
rate ϕj that satisfies ϕj ≤ ϕFmax
B
(δj ) where βϕj f F B (δj ) − fmin
FB
(δj ) is among the K highest.
Then, consider deviation ϕ̂i = ϕj − ϵ with small ϵ > 0 for restaurant-i. With such devi-
ation, restaurant-i can win a featured display slot. This is because for small enough ϵ,
β ϕ̂i f F B (δi )−fmin
FB
(δi ) = (β ϕ̂i −ϕ0 )f F B (δi ) > (βϕj −ϕ0 )f F B (δj ) = βϕj f F B (δj )−fmin
FB
(δj ). The
inequality holds because f F B (δ) decreases in δ and δi < δj . Note also that deviating to ϕ̂
is profitable for restaurant-i since πic,r (ϕ̂i , δi ) = β(1 − ϕ̂i )f F B (δi ) > β(1 − ϕFmax
B
(δi ))f F B (δi ) =
(1 − ϕFmin
B
(δi ))f F B (δi ) = (1 − ϕ0 )f F B (δi ) ≥ (1 − ϕi )f F B (δi ) = πic,r (ϕi , δi ). The first equality
holds because the restaurant is featured when it deviates to ϕ̂; the next inequality holds
because ϕ̂i < ϕj ≤ ϕβ = ϕFmax
B
(δi ); the next equality is from the relationship between ϕFmax
B
(δi )
and ϕFmin
B
(δi ); the next equality is from ϕFmin
B
(δi ) = ϕ0 ; the next inequality is because ϕi ≥
ϕ0 . Therefore, ϕ̂i is a profitable deviation for restaurant-i, and ϕi cannot be an equilib-
rium strategy for restaurant-i. Therefore, if restaurants’ equilibrium best response strategy
exists, it has to be unique in the way that K restaurants with shortest distance are featured.
(5) Claim 5: The equilibrium exists. We show the existence of the equilibrium by con-
structing the restaurants’ equilibrium commission rates and showing that there is no incen-
tive for the restaurants to deviate from the commission rates. For simplicity, let us define
∆f F B as ∆f F B = βfmax
FB FB
(δK+1 ) − fmin (δK+1 ), which is the maximum profit increase the
K +1-th marginal restaurant can give to the platform when featured. Then, the equilibrium
bid ϕFi B under the coordinating contract can be characterized as the following.




 ϕFi B = ϕ0 , FB
if βfmin FB
(δi ) ≥ fmin (δi ) + ∆f F B ,

 βϕFi B f F B (δi ) = fmin
FB
(δi ) + ∆f F B , FB
if βfmax FB
(δi ) ≥ fmin (δi ) + ∆f F B > βfmin
FB
(δi ),


ϕ F B = ϕ ,

otherwise.
i 0
FB FB
Case 1) βfmin (δi ) ≥ fmin (δi ) + ∆f F B : In this case, the restaurant is much closer to the
FB FB FB
customers than the marginal (K + 1)-th restaurant with βfmax (δi ) > βfmin (δi ) ≥ fmin (δi ) +
∆f F B , and the restaurant still gets featured while paying ϕ0 . Thus, bidding ϕFi B = ϕ0
will give the restaurant πic,r (ϕFi B , δi ) = β(1 − ϕ0 )f F B (δi ). Now consider deviation ϕ > ϕ0 .

45
Then πic,r (ϕ, δi ) = β(1 − ϕ)f F B (δi ) < β(1 − ϕ0 )f F B (δi ) = πic,r (ϕFi B , δi ). The inequality is from
ϕ > ϕ0 . Therefore, ϕ0 uniquely maximizes the restaurant’s profit, and there is no profitable
deviation.
FB FB
Case 2) βfmax (δi ) ≥ fmin (δi ) + ∆f F B > βfmin
FB
(δi ): In this case, bidding ϕFi B with
βϕFi B f F B (δi ) = fmin
FB
(δi ) + ∆f F B guarantees restaurant-i being featured since such commis-
sion rate keeps the (K +1)-th marginal restaurant and other farther away restaurants out of
the bidding game for featured display slots. Thus, πic,r (ϕFi B , δi ) = β(1 − ϕFi B )f F B (δi ). Con-
sider deviation ϕ with ϕ0 ≤ ϕ < ϕFi B . Then πic,r (ϕ, δi ) = (1 − ϕ)f F B (δi ) ≤ (1 − ϕ0 )f F B (δi ) =
β(1 − ϕmax (δi ))f F B (δi ) < β(1 − ϕFi B )f F B (δi ) = πic,r (ϕFi B , δi ). The first equality holds because
bidding less than ϕFi B will not give premium slot allocation. The first inequality holds
because ϕ ≥ ϕ0 . The second equality is from the definition of ϕFmax
B
(δi ). The second inequal-
ity is from ϕFi B < ϕFmax
B
(δi ). Now consider deviation ϕ > ϕFi B . Then πic,r (ϕ, δi ) = β(1 −
ϕ)f F B (δi ) < β(1 − ϕFi B )f F B (δi ) = πic,r (ϕFi B , δi ). Therefore, ϕFi B uniquely maximizes the
restaurant’s profit, and there is no profitable deviation.
FB
Case 3) fmin (δi ) + ∆f F B > βfmax
FB FB
(δi ). This is when i ≥ K + 1. Note that since fmax (δi ) <
FB
fmin (δi ) + ∆f F B , the firm cannot afford to bid high enough to win a premium display slot.
Consider deviation ϕ ∈ (ϕ0 , ϕFmax
B
(δi )]. Then, πic,r (ϕ, δi ) = (1 − ϕ)f F B (δi ) < (1 − ϕ0 )f F B (δi ) =
πic,r (ϕFi B , δi ). Therefore, there is no profitable deviation, and ϕFi B uniquely maximizes
restaurant-i’s profit.
From Case 1) through 3) we have shown that there is no profitable deviation from ϕFi B
for restaurant-i, and ϕFi B forms an equilibrium.
From Claims 1 through 5, we have shown that in the unique equilibrium, K closest
restaurants to the customers are featured.
Therefore, under the coordinating contract, the equilibrium delivery pricing and featured
display strategies coincide with those under the centralized system, and the system is
coordinated.

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Food Ordering and Delivery: How Platforms and

Restaurants Should Split the Pie

Chloe Kim Glaeser

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an issue. More importantly, we consider multiple restaurants. We study contracts between

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Restaurant-i chooses ϕi πid,p and πid,r realize

and the profit of restaurant-i is given as

where the superscripts d, p and d, r represent “decentralized platform” and “decentralized

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4.1. Platform Pricing and Display Policies

Proposition 1 (Second Stage Equilibrium) Given the commission rates ϕi ,

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Lemma 2. In order to secure a premium display slot, each restaurant at distance δi

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Figure 2 Comparison between ϕmax and ϕmin

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fmin (δi ) = πid,p (p∗i (ϕmin (δi ), δi ), ϕmin (δi ), δi ),

Proposition 2 (First Stage Equilibrium) In equilibrium,

βπid,p (p∗i (ϕ̂i , δi ), ϕ̂i , δi ) − fmin (δi ) = ∆f (δK+1 ).

(ii) all other restaurants choose commission rate ϕmin (δi ).

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Proposition 3 (First Best) For a centralized platform,

Let us compare the first-best policies in Proposition 3 to the equilibrium outcomes in

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6. Food Revenue Sharing and Delivery Cost Splitting

to restaurant-i where the superscript c, r represents “coordinated restaurant.” We also

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Figure 3 Transfer t(δi ) as a function of the delivery distance δi

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Market (Block Group Population)

Figure 4 Map of Restaurants and Markets.

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Bids - Benchmark Bids - Coordinating

(a) Benchmark contract. (b) Coordinating contract.

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Delivery Fee - Benchmark Delivery Fee - Coordinating

(a) Benchmark contract. (b) Coordinating contract.

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Relative Change in Restaurant Share Relative Change in Platform Share

(a) Restaurant profit ratio. (b) Platform profit ratio.

Relative Change in Restaurant Share Relative Change in Platform Share

(a) Restaurant profit ratio. (b) Platform profit ratio.

coordinating contract as their shares increase by 8 to 45%. However, platform profitability

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Profit Per Order

Food Revenue Food Commission

(a) Restaurant profit components. (b) Platform profit components.

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Aggregated Social Welfare Comparison Aggregated Platform Compare

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