Implications of on-time delivery service with compensation for an online food delivery platform and a restaurant

To reduce the negative impact of delivery delay on consumers’ willingness to pay in the online food delivery market, several online food delivery platforms have launched on-time delivery (OTD) services with compensation, in which the platforms will compensate consumers with certain fees when the delivery delay occurs. Therefore, the impact of this new practice on the profitability of platforms and restaurants needs to be understood. This study investigates the strategic decisions on whether an online food delivery platform launches the OTD service with compensation and whether a restaurant offers the service to consumers. The results show that the proportion of the service fee to the food expense (i.e., the service fee proportion), the fee that the platform compensates a consumer (i.e., the compensation fee) and the probability of delivery delay are the key factors affecting the decisions of the platform and the restaurant. Specifically, when the service fee proportion is low, it is beneficial for the platform to launch the OTD service with compensation and for the restaurant to offer the service if the compensation fee and the probability of delivery delay are not concurrently high. When the service fee proportion is high, the platform should launch the service if the compensation fee and the probability of delivery delay are moderate. When the service fee proportion is high, the restaurant does not benefit from offering the service.