Insurance policy and pricing decisions in online food delivery market with consumer ratings

Abstract

Recent advances in mobile technology and the rise of aggregator apps have led many consumers to purchase products through online food delivery platforms, and the effects of COVID-19 have accelerated the trend. Consumers often observe other consumers’ ratings before purchasing to reduce the product’s taste and the delivery service uncertainties. However, the information accuracy of the ratings can be affected by the seller’s marketing strategies, such as the pricing and delivery insurance policy. Considering consumers’ ratings, firstly, we develop two-period models to examine how consumer uncertainty and different delivery insurance policies impact the seller and consumers. We then determine the seller’s optimal insurance policy and pricing decision. We find that the probability of delayed delivery has a nonmonotonic effect on the product’s optimal price. Counterintuitively, our analysis shows that a Free Insurance (FI) policy allows the seller to benefit from a greater delayed delivery probability by influencing consumer ratings. We show that FI is not always beneficial for the seller and consumers; it may reduce the seller’s profit and the total consumer surplus simultaneously. Surprisingly, the seller can always charge a lower price yet earn more profit by adopting a Paid Insurance (PI) policy. Furthermore, when the seller strategically chooses its price and insurance policy (e.g., No Insurance, FI, or PI), it can achieve a win-win situation; and the seller should always support insurance, i.e., adopt FI or offer PI, even though neither FI nor PI dominates under all conditions.