The last few years has seen increasing popularity of food delivery services across the country. It is not just the metro cities but even small towns are not immune from the growth of the food delivery services sector. Platforms like Zomato or Swiggy have changed the way one consumes food from restaurants. The ubiquitous rise of the internet and the accompanying smart phone devices has made possible for people to order from the comforts of their rooms. To the restaurants, it is something to delivered to the doorsteps. All the platforms have managed to do is weave a link between the two. In other words, it is essentially supply meeting the demand. There exists a demand for food and there exists a supply. It is something true for all price points. It however requires a platform that would connect the two. Earlier, it has to be through the phone orders or more popular take-away, something better known as parcel service in India.
The platforms like Zomato or Swiggy are essentially rooted in matching theory. Matching function is rooted in mathematical formulations. It seeks to develop matches out of unmatched agents. For instance, there is somebody who needs to purchase food items. Another economic agent, let us say a restaurant has produced food and is in need of customers. There exists unmatched relationships. At this moment it is necessary that a relationship be formed of these unmatched pairs. The matching theory seeks to build a relationship out of this. Out of this matching theory arises firms like Zomato or Swiggy who purposefully does the matching between the two. This is something replicated in the context of app based cab services like Uber or Ola or for that matter even the marriage services. In the normal context, the matching theory seeks to take the shape of the standard Cobb-Douglas function. In the current context, it is an outcome of minimizing search costs.
The matching theory is something of relevance when one seeks to bring together the forces of demand and supply but the transaction costs in otherwise scenario prevents them from interaction. The whole lot of business models have evolved out of these intended interactions. Yet, when one examines the forces of demand and supply and the application of matching theory, it begs to be discussed on the probable winners and losers in the game. To be fair it is not a zero sum game nor a game that is straight forward between the demand and supply. It must be remembered that the matching theory can provide matches to pairs otherwise separated by transaction costs. For instance, there is an urge to have breakfast or lunch at a well-known restaurant but the fact one has to drive down a significant distance might deter the consumers from doing so. As an alternative, they might have to settle down with the local restaurant. This entails certain trade-offs. Trade-offs are to be resolved and the online food delivery platforms seek to resolve the trade-offs through the ingenious application of the matching theory.
This might lead to a question of whether the local restaurant would lose business to the established names. In a situation wherein, the choice expands, there is more than a chance that the forces of demand would seek to satiate through known brands an outcome of product differentiation either through quality or costs or combination of both. The local supply that was created to satiate the local demand might be left with less options given the distant supply too could satiate the local demand. In other words, Keynesian formulation of demand creating supply would not be a strict function of geography but encompasses distant geography, relatively speaking, as well. Therefore one needs to examine what can be termed as trade creation and trade diversion effects.
Trade creation and diversion were first discussed in the context of international trade by Viner. He modelled the success or otherwise of international trade arrangements in terms of trade creation and trade diversion. If there exists a net trade creation, the arrangement would work out. Analogous to the same one might build around a business creation and business diversion effect. The business creation effect would be something wherein the demand shifts from a low cost but perhaps low differentiated, low quality producer to highly differentiated, high quality producer. This takes the business away from the relatively smaller restaurants to bigger restaurants who are well known and differentiated. This leads to possibility of the smaller restaurants getting crowded out and further possibility of few big restaurant chains opening up their kitchens to many places. There of course exists a possibility of delivery only kitchens gaining traction thus a shift in the market structures from relatively perfectly competitive to monopolistically competitive. The business diversion would be a little different as discussed in the trade diversion context. The diversion would be from a low cost low quality producer. Yet there are scenarios wherein the transaction costs make it a lock-in for those seeking low cost food goods into a high-cost food outlet. To them, the new platforms would be a tool to seek for low prices. The bargain hunters would be in every pursuit of those low costs. Their price elasticity of demand being elastic would create business for many of those outlets likely to lose to differentiated outlets. It is essentially a clash between those working on cost leaders and those moving towards product differentiation and those who are catering to the segmentation model.
Either way, there does exist a break of the lock-in from the restaurant towards the platform which are likely to be duopolistic or in the best scenario oligopolistic. There would be shifts in loyalty from one Porterian strategy to another as the markets continue to build up. Prospectively, the notion of supply creating the demand would bring new customers into the market thus expanded business. There might be losers in the whole gambit, yet it is likely there would be expanded business creation rather than an outcome of business diversion. The platforms and their success would not merely through the customer footprints they manage to get or through the revenue per customer or even in terms of costs of acquisition of customers but through the prism of wider spillovers. The spillovers are an outcome as discussed of the matching theory in practice clubbed with the business creation, diversion and destruction through creation of such virtual food geographies.
Thoughts on Theory and Practice 