Game theory decides where your Saturday night takeaway comes from
Over the past three years, Inspire has been approached by a number of takeaway businesses in the Perth area looking to change how they receive their orders to make more profit.
They all had the same problem: Just Eat et al, the online food order platform (OFOP) that allows customers to search for, order and pay for takeaway meals, had moved into the area.
And like most disruptive tech entities, these OFOP have an inherent competitive advantage in the Perth marketplace – one not based on higher cost effectiveness or better programming, but on human nature.
Their advantage was based on the tendency for otherwise rational humans not to cooperate, even when it might be in their best interest to do so.
This quirk was studied by scholars in the 1950s, and has come to be known in ethics and game theory as ‘The Prisoner’s Dilemma’, below is an amended version:
10 prisoners are serving a 10-year sentence.
They are told by their jailers that if they all raise their hands, each of their sentences will be reduced to two months.
They are also told by their jailers that if one of them chooses not to raise their hand, he can go free.
But there’s a catch.
The prisoners are also warned that if two or more of them chooses not to raise their hands, then all their sentences will be doubled to 20 years.
The sensible thing for a prisoner to do would be to raise his hand – to benefit the group.
But as long as an opportunity for personal benefit is offered, the temptation remains for every prisoner to leave his hand down.
As all the prisoners have this temptation, human nature suggests they are all likely to put their own personal benefit first.
Thus, each prisoner leaves his hand down, and all the sentences are extended.
In short, the chance for personal gain is more appealing than the certainly of gain for the group.
And here’s where the takeaways – the ‘prisoners’ in this analogy – come back in.
Each of the Perth takeaways currently pay between £18,000 and £20,000 a year in commission to their preferred online order provider – who, incidentally, are starting to squeeze the market by increasing their charges, from around 14% and 18% of the value of a single order sent to a takeaway. In areas where a customer chooses delivery by the online order provider, this can rise to a staggering 42% commission.
With costs like these, it’s no surprise that Perth’s takeaways wanted a way to cut these online order providers out of the loop.
We could simply have created a strong online presence for our takeaways. But seeing the bigger picture, we recognised that there were issues within the marketplace which meant that ultimately – even with a strong online presence – each takeaway was still going to need to market itself heavily online.
For a start, it’s not easy for a small business to go up against the likes of these tech behemoths. To reach the same audience would not only be very difficult, but also expensive and time-consuming, even with the advantages provided by a “democratized” organic Google, paid Facebook, Google search ads and display/remarketing.
The other issue was that most of the other takeaways in the area were already using OFOP.
If all the takeaways were to leave these OFOP and create their own online presence, they would all benefit.
With no takeaways to send orders to, the OFOP would no longer be able to service the area.
With no commissions to collect, they’d lose interest in Perth. It would likely stop advertising in the locale, and focus its energies elsewhere.
But that only stands if all the takeaways leave all other online order providers.
If only one – or even a few – continued to use them, those that remained would effectively do a land grab on the available takeaway orders for that day.
In that case, the OFOP marketing in the area would not stop, and the lure of being involved for individual takeaways – whatever the cost – would not subside.
The OFOP would continue to have an interest in the area, and would out-price and out-value whatever an individual takeaway could do, leaving them back where they all started.
We’ve already seen something similar happen.
When all the takeaways agreed to turn off their chosen OFOP every Sunday and use their own marketing mediums, the result was pure Prisoner’s Dilemma.
Seeing the opportunity to benefit themselves, rather than stick together for the benefit of the group, one or two went rogue in order to snaffle up all the day’s orders for themselves.
So what to do? Axelrod’s theory of the evolution of cooperation tells us that learned behaviour – like that of the prisoners deciding whether or not to raise their hands –evolves.
It also tells us, crucially, that the evolution of that learned behaviour can be influenced through either a sufficient deterrent, or a sufficient incentive.
The learned behaviour of the takeaways that turned off Just Eat was that playing fair is pointless.
What they all should have done – rather than staying in OFOP or going it alone – is created a guild, which would collect a contribution of, say, £5000 from each member.
Paying the guild and avoiding the OFOP much higher commission would be a strong incentive; losing the sum would be a strong deterrent to flouting the rules.
The money collected from guild members would be pooled and used to gather online takeaway orders for everyone through a strong online presence. It would also fund local online advertising.
If all our ‘prisoners’ agreed to stick to the rules, they would all benefit.
But because deep down they all want to make their own deals to benefit themselves, game theory (sub-optimal Nash Equilibrium) – and human nature – suggests that in going it alone against disruptive tech OFOP, our local takeaways will just go from the frying pan to the fryer.