A location and capacity-allocation game model for two competing online delivery platforms seeking new customers

Abstract

Online delivery platforms (ODPs) deliver products from restaurants, retailers, etc. to end customers. As an essential resource, ODPs must pay attention to the efficiency of delivery couriers. One such decision is their location and capacity allocation. This article discusses a competitive capacity and location decision problem in a market served by two ODPs. Both ODPs are trying to attract new customers to their platforms. For customers, timely delivery is the critical choice determinant. ODPs service existing demand orders on time by appropriately locating their couriers. Concurrently, they wish to capture potential demand by location and capacity allocation decisions. The competition propagates with both platforms acting strategically to stop the other from capturing new demand. The problem is formulated as a simultaneous two-person game and shown to be a Nash equilibrium problem. A mixed-integer linear programming model is proposed to find the Nash equilibrium location and capacity decisions of the players. This article contributes in two ways. First, it defines a new decision problem for an emerging area. Second, it finds important operational insights with managerial implications. The arguments for solution concepts, Nash equilibrium, and the efficiency of the proposed solution method are demonstrated through numerical experiments. It comes out that increasing the capacity budget is not always productive for ODPs. Also, for a weaker player, improving location decisions for servicing existing customers can be more beneficial than exclusively pursuing new customers. For the stronger player, competition may lead to underutilization of capacity.