Allen Li, the Michael and Mary Sue Shannon Professor and an associate professor of operations and information management at the Wisconsin School of Business, looks at digital gatekeepers and how their influence has impacted the ever-shifting digital economy. In Spring 2022, Li received the National Science Foundation’s prestigious Faculty Early Career Development Award (NSF CAREER Award), a highly competitive award that includes five years of grant funding for the awardee’s project. Li’s research explores how restaurants can leverage food delivery platforms to increase their revenue.
WSB: Congratulations on your NSF CAREER Award. Tell us more about the research this award will support.
Li: I am truly honored to have received the NSF CAREER Award. This research is a five-year interdisciplinary project that addresses one of the biggest questions small businesses have to address: how can they survive and grow their business in the digital economy that is increasingly dominated by tech giants. To answer this question, I draw theories and perspectives from multiple disciplines such as economics, computer science, antitrust, and competition law. I am excited that the NSF review panel recognized that this research is important to a broader community.
My research examines the partnership between a restaurant and a digital food delivery platform like DoorDash or Uber Eats. Delivery platforms are an interesting business because they serve customers who don’t want to visit a store, whether it’s lack of time or to avoid meeting people or any other reason. I started this study several years ago and the pandemic outbreak provided a great setting to empirically test some of my ideas—as we know, delivery platforms have been a huge business because customers wanted to get food delivered to avoid COVID exposure.
WSB: That is an interesting line of research, one that’s highly relevant to today’s restaurant industry. Can you share what specific areas you’re working on right now?
Li: There are two main questions I’m looking at right now in relation to this work.
The first question is whether a restaurant truly benefits from a partnership with a delivery platform. If you think about a typical restaurant, the profit margins are not that large—often in the single digits, $6-$8 profit on a $100 food order, for example. When a delivery platform enters the scene, a restaurant must pay it at least 30% of its revenue as a commission fee for the delivery service, a huge number. So, this leaves many restaurants questioning what to do. Should we form a partnership among ourselves as well? Or should we just avoid these platforms altogether?
The second question I’m looking at is what the government can do from a policy perspective to protect local restaurants. We know that many of these restaurants are small local businesses that are financially vulnerable. Some states have already implemented policies in this area. For example, California, Illinois, Massachusetts, and several other Eastern states have tried to cap the percentage that restaurants can be charged, seeing if a 15% or 20% fee allows them to keep a larger cut of the revenue, increase profitability, and ultimately survive this post-pandemic environment.
I’ve actually found that this kind of cap policy might not work very well. Delivery platforms are very strategic. If a city like Chicago moves to cap the fees that platforms place on restaurants, platforms will try to bypass the regulation by adding more restaurants that are located just outside the city border. In this case, it could be a lose-lose scenario, because restaurants in the city of Chicago cannot receive those cell calls and platforms need to compensate drivers for driving a longer distance to pick up and deliver the orders. So, the platforms will adjust strategically to get around the cap, and the customer might end up with a longer wait given the greater distance.
WSB: So, what’s next for your project?
Li: One of the concerning findings from the research is that chain restaurants benefit more from the partnership with delivery platforms, which suggests that these platforms widen the performance gaps between chain and independent restaurants. The next step of my research is to investigate how to help independent restaurants better leverage the platforms. I have also been discussing the implications of these findings with policy makers to help them figure out the best way to support independent restaurants.
Allen Li is the Michael and Mary Sue Shannon Professor and an associate professor in the Department of Operations and Information Management at the Wisconsin School of Business.