The Pickle Restaurants Are In
This post was originally published for Komeeda.
There is an extremely popular concept in social science known as the prisoner’s dilemma, which falls under the umbrella of game theory, and has implications spanning across multiple fields of study and facets of life, including politics, business, economics. It serves as a basis of understanding for why people make certain decisions under very particular circumstances, and its application has spread into the food industry, where restaurants and customers are currently locked in a non-zero-sum game, with the winner being neither party.
Don’t worry if this sounds like frilly mumbo-jumbo. We are going to peel back the nerdy terminology here and take a look at what this all means and who actually ends up coming out on top in this scenario.
Let’s Break it Down
What is the prisoner’s dilemma?
Simply put, the prisoner’s dilemma is a framework for understanding how and why people will make decisions given a very particular set of options. In this thought experiment, there are two people who have been taken into custody with no means to communicate with one another, and need to take an action based on these options given to each of them simultaneously by the police:
Both confess: each party serves 5 years
Person A confesses, and B remains silent: Person A serves 0 years, person B serves 20 years
Person B confesses, and A remains silent: Person A serves 20 years, person B serves 0 years
Both remain silent: each party serves 1 year
Think for a moment on what you would do in this situation.
Your instinct might be to confess - after all, 0 years sounds great, right? But what if your accomplice doesn’t say anything? That’s a huge 20 years for you. You realize they’re most-likely having the same thoughts as you. If you both confess, that’s 5 years for both of you. “Okay, not so bad as 20 years, but definitely not as great as 0 years,” you might be telling yourself. Temporarily ignoring the last available option, the best possible outcome in this scenario is for both of you to confess.
Except, your decision isn’t so clear-cut when we add the last option back into the mix: both of you stay silent. If you both refuse to confess, you both get just 1 year - a better deal than 5 years. On paper, staying silent is the best option, but it requires both of you to make the same decision without being able to coordinate with one another. You’re in a tricky spot: if you stay silent, and your accomplice confesses, you’re slapped with 20 years - the maximum punishment in this scenario. The absolute best outcome for you is for you to confess and your accomplice to stay silent, but you know your accomplice is following the same logic and the likelihood of you getting 0 years is slim to none.
The prisoner’s dilemma tells us that acting out of self-interest, people will be inclined to confess (5 years if both people confess), but the better option is actually to take the risk of cooperating by staying silent (1 year).
So, who wins here?
Neither of you, in reality.
It’s actually the police, who are watching the beads of sweat roll down your face as you run through the permutations of your choices, and what you think your accomplice is going to do. You are likely to go to prison. Or, if you don’t, your accomplice is. Regardless of the decisions you and your accomplice make, at least one person is serving at least some time - that’s a win for the police.
Photo by Jonathan Ybema
Okay, but what does this have to do with the food industry?
The answer: everything.
The rise of third-party food delivery services, such as GrubHub, UberEats, and DoorDash, have locked restaurants and individual customers in a prisoner’s dilemma. Customers enjoy the convenience and ease of using these services, and restaurants have been able to reach new customers through these services. The problem is the expectation each party has for the other to use these services (we’ll call them “apps” from here on out).
Let’s rewrite the options in the prisoner’s dilemma, keeping the sentencing times as a guideline:
Both restaurants and customers continue to use apps: each party serves 5 years
Restaurants stop using apps, but customers continue to: Restaurants serve 0 years, customers serve 20 years
Restaurants continue using apps, but customers stop: Restaurants serve 20 years, customers serve 0 years
Both restaurants and customers stop using apps: each party serves 1 year
Restaurant owners might ask themselves, “My customers expect me to continue using these apps because they are convenient, but using these apps is coming at a cost to my business - what am I supposed to do?”
Customers might be asking, “I feel more comfortable ordering lunch online than calling the restaurant directly, but I know doing so puts strain on the restaurant - what am I supposed to do?”
The prisoner’s dilemma points us in the right direction. If both parties stop using apps (1 year), they fare better off than if one continues and the other stops (0 or 20 years, depending on the situation), or if they both continue to use apps (5 years). Restaurants are further stuck in a bit of a catch 22: if they stop using these apps, they won’t lose as much money to service fees, but they also risk losing swaths of customers who expect restaurants to use them. If customers stop using these apps, they will no longer be confined to ordering from the restaurants which do, and can order from any restaurant. This is bad for the restaurants using the apps, because they may begin to lose customers to other businesses.
Up until recently, restaurants and customers have stayed in a spot where they both use these apps. The dilemma has come to a head as a result of COVID, getting to a point where restaurants are begging customers to directly call their businesses, rather than order through these apps, as delivery is now the only lifeline for these businesses. Some are even going so far as to offer special promotions to people who order from the business directly. Restaurants have taken massive revenue hits for a number of reasons independent of third-party apps, such as incredibly diminished demand for outside food as a result of legislation and safety concerns, and are feeling the weight of exorbitant service fees (often upwards of 30%) even more so than before.
What is the solution?
Without any outside intervention, the prisoner’s dilemma tells us the best possible solution is for restaurants and customers to coordinate with one another by refusing to use these apps. Without the demand for their services, third-party food delivery platforms will need to adjust their business models. In an ideal world, the decision to stop using these apps would happen at the same time to circumvent issues that will arise otherwise. Unfortunately, life does not operate this way, and the period of dis-coordination between the two parties will create a rocky road both sides will need to navigate before reaching the ultimate goal of independence from these apps.
Third-party food delivery services have manufactured this prisoner’s dilemma, and are actively benefiting from it. This is nothing new for business and economics. Any price war is a prisoner’s dilemma (though this situation is not quite a price war), and there is nothing inherently wrong with the tactics they are employing; these apps are businesses, after all, and they are doing what they set out to: make money. The issue restaurants are facing is not that there are service fees, but that the severity of these fees is hurting their business. In cities like New York, there is a recognition of the impact these apps are having on restaurants, which has created active pushes within the political/legal sphere to curb the rates charged to restaurants.
We may see a decline in demand for the apps which currently dominate the market, shifting instead to new, lower-cost options. This dilemma can be broken out of, but it will take a bit of creative thinking to do so.
Further engagement:
For more information regarding the prisoner’s dilemma, The Library of Economics and Liberty has a short, but thorough overview of the concept. They also have a longer overview of the general idea of game theory.
