If you have read the news in the past 24 hours, you might already know – but there are talks of Uber trying to acquire the food delivery company Deliveroo (Ram, 2018). From a two-sided market perspective, this seems like a very interesting move. However, it looks like bad news to other food delivery companies; Just Eat’s share price is aready down 7% since the news got out (Cocco, 2018). The acquisition motive from Uber and Just Eat’s drop in share price can be explained from two principles on two-sided markets: network effects and cross-sided externalities.
Like in most two-sided markets (e.g. Uber, Airbnb, Seedrs), companies are strongly dependent on network effects. Network effects are defined as: the positive effect described in economics and business that an additional user of a good or service has on the value of that product to others. In other words, the value of the platform increases as the number of members of this platform increase. With an increased user base on Uber Eats because of the acquisition, the value of the platform increased as well.
Another characteristic of two-sided markets is that the effects of ‘cross-sided externalities’ are highly important, this comes down to that an increase of people on one side of the market has a positive/negative effect on the other group. In the case of food delivery, there are positive cross-sided externalities present:
• An increase in the amount of users (the ones who order food), makes it more attractive to the restaurants to be on this platform (larger target pool)
• An increase in the amount of restaurants has a positive effect on users, as they can find better matches in terms of their food preferences
All in all, both network effects and externalities are two of the concepts through which natural monopolies often emerge; e.g. Airbnb. While the food delivery industry is still dispersed with Deliveroo, Uber Eats, Foodora and Thuisbezorgd in the Netherlands, this move from Uber will definitely shake up the competitive landscape.
References:
Ram, A. (2018). Uber looks to Deliveroo to expand food delivery in Europe. Retrieved from: https://www.ft.com/content/9bcfcbaa-bd8f-11e8-8274-55b72926558f
Cocco, F. (2018). Just Eat shares fall 7% after reports Uber looking at Deliveroo.
Retrieved from: https://www.ft.com/content/600e8d40-bd6c-11e8-8274-55b72926558f
