Navigating trade-offs in online food delivery: The interplay of buy-online-and-pick-up-in-store and delay insurance

The rise of the online food delivery (OFD) industry has greatly facilitated consumers, but frequent delivery delays have damaged the shopping experience. In order to mitigate the negative effects of delivery delays, many OFD platforms have launched buy-online-and-pick-up-in-store (BOPS) and delay insurance services. In this context, the merchant needs to decide whether to implement BOPS and offer free delay insurance (FI) to consumers. BOPS allows consumers to place orders online and pick up products offline; FI provides platform compensation for consumers who experience delivery delays. Considering delivery delays, we study the impact of BOPS and FI services on consumer purchasing, merchant pricing, and the platform’s FI premium decisions. We then examine the merchant’s joint optimization strategies of these two services. Four scenarios are analyzed regarding whether the merchant adopts these two services. Interestingly, we find that BOPS can always expand or at least maintain the merchant’s market coverage, while FI may cause market coverage to decline. Whether a merchant implements BOPS depends on the fixed costs of implementation and the compensation of FI, and whether to offer FI depends on consumers’ hassle costs and the merchant’s unit operation cost in the online channel. Counter-intuitively, when the merchant’s unit operation cost is relatively high or relatively low, FI will increase the merchant’s motivation to implement BOPS. Finally, we find that none of the four service strategies is dominant for the merchant; the platform’s profits cannot be maximized if no services are provided; consumers can only maximize total surplus when BOPS is implemented.