Restaurants’ Optimal Pricing Decisions Under Heterogeneous Network Effects in Omnichannel Service Systems

Restaurants are increasingly providing both dine-in and delivery services through online delivery platforms, yet how this prevalent strategy is affected by heterogeneous network externalities under competition remains understudied. This paper examines when a restaurant should introduce meal delivery service in this context by developing game-theoretic models with geographically distributed consumers and competing restaurants. We distinguish the intra-channel externality among dine-in consumers from the inter-channel externality generated by shared service resources. We first find that providing delivery service can increase a monopolistic restaurant’s profit through market expansion and coordinated pricing. When two offline restaurants compete in a duopoly, one restaurant’s adoption of delivery service transforms the market landscape and intensifies inter-firm competition, and the omnichannel restaurant’s prices and profit may become U-shaped in the intra-channel externality. Numerical comparisons suggest that the focal restaurant’s incremental profit can be larger when the intra-channel externality is relatively low or high, or when more potential consumers are informed of the restaurant’s presence. These benefits can spill over to the competing rival and consumers, creating all-win outcomes. When one offline restaurant competes with an online-only rival, the two restaurants’ profits are affected asymmetrically by the externalities under cross-channel competition, but they vary in the same direction after the focal restaurant adopts delivery service. It is more often observed that the focal restaurant’s profit improvement under the omnichannel strategy then depends on the strength of the inter-channel externality and reaches its highest level at an intermediate level of this externality. These findings reveal the distinct roles of heterogeneous network externalities in shaping firms’ pricing strategies, payoffs, and channel configurations in omnichannel restaurant service systems.