Two-Sided Platform Competition in the Presence of Tip Baiting

When ordering food from online platforms, consumers often specify a tip that they will give to delivery workers, in hopes of receiving a fast delivery. Upon completion of the delivery, consumers may be able to reduce their tip if the platform implements an adjustable tipping policy (e.g., Uber Eats). In this case, some consumers may trick workers by promising a large tip before delivery but deliberately reducing the tip to zero once the delivery is completed; a practice termed "tip baiting." By contrast, consumers are not allowed to ex post reduce the tip in the presence of a non-adjustable tipping policy (e.g., DoorDash). In this paper, we develop a multi-stage duopoly model to examine the impacts of different tipping policies (adjustable or not) on platforms’ profits, consumers’ tipping behavior, and workers’ delivery performance. There are two types of consumers: selfish consumers, who engage in tip baiting, and fair consumers, who do not. We find that regardless of the fraction of selfish consumers, both platforms prefer the adjustable tipping policy over the non-adjustable one. This result has managerial implications that platforms with the non-adjustable policy can further enhance their profits by switching to the adjustable policy. Further, we show that platforms only have incentives to keep the fraction of selfish consumers sufficiently low, but not lower. However, the existence of selfish consumers always hurts those honest fair consumers and workers. Hence, we advocate that third-party regulators need to intervene to safeguard fair consumers’ and workers’ rights, as platforms may lack the incentive to do so beyond a certain point. Interestingly, we also find that platforms' price and wage can be negative under certain conditions.