Vertical Disintegration and “Platforms for Platforms”: How Modularity Reshapes the Food Delivery Market

In economics, the boundaries of the firm are determined by the question of whether it is more efficient to organize production internally or to buy services externally. It is the traditional make-or-buy issue. In sectors such as food delivery, vertical disintegration has become more and more popular: instead of developing their routing software, payments service, or courier tracking mechanism, new entrants now use dedicated B2B providers who are selling platforms-for-platforms.

This modularity has fundamentally changed the nature of the industry, reducing entry points and allowing numerous competitors in the delivery business to exist. The core of this change is an economic concept well established in the context of industrial organization: specialization and economies of scope in modular industries.

Modularity and Vertical Disintegration.

Vertical disintegration refers to the situation in which companies outsource functions that were previously performed internally. This is the case with food delivery wherein the central logistical elements, such as mapping, dynamic pricing, delivery tracking, payment integration, are no longer proprietary assets. Rather, they are offered as ready-to-use modules by specialized vendors.

It is a continuation of the previous manufacturing trends where car makers outsourced component production to various suppliers such as Bosch or Magna. The distinction in this case is that software can be replicated indefinitely. A company involved in food delivery app development services can sell the routing or dispatch algorithm to hundreds of clients across markets, effectively cutting unit costs down dramatically.

B2B Software Providers Specialization.

These white-label platforms are only interested in providing best-in-class technical modules. An example is a B2B logistics API that offers optimized routing over congested cities in the last mile, and a fintech partner that offers KYC and real-time settlement tools. Specialization can bring about efficiency: providers gain more expertise about their selected areas, and delivery companies focus on winning customers and making restaurant deals.

The reason there are so many delivery startups such that they can be started regionally or even locally is down to the proliferation of such firms. An entrant on the city level no longer needs to employ 50 developers to compete with Uber Eats or DoorDash. Rather, it licenses a platform, brands it, and aims at developing restaurant connections.

Economies of Scope Across Clients.

As far as economics is concerned, the suppliers themselves are enjoying the benefits of economies of scope. A B2B producer that has 100 delivery customers can payback R&D, server costs and compliance investments by spreading the cost across them all. This reduces the average cost and forms a positive feedback loop: the more clients a company has, the more features it can include, which further attract more clients.

Statista reports that the total economy of online food delivery is 770 billion worldwide in 2023 and is expected to exceed 1.4 trillion by 2029. The size of this market is keeping not only consumer-facing apps alive but also an entire layer of upstream B2B providers.

Reshaping Market Structure

The result of modularization is an increasingly fragmented but more sustainable competitive environment. Classic platform theory expects winner-takes-most results, as network effects have a tendency to concentrate users in one platform. But food delivery has not consolidated to the same degree all over the world.

Why? Local challengers are likely to enter more easily as the disintegration is vertical. Local apps in Paris or Milan manage to survive on white-label B2B technical back-end solutions and cultural expertise and restaurant connections. Giants (such as Uber Eats and Deliveroo) compete on scale in the meantime, yet they cannot easily stamp out local players whose entry barriers have been radically lowered by modular B2B infrastructure.

Dynamics that Push the Trend.

Cloud Infrastructure: API services and cloud computing minimize sunk costs. Instead of constructing entire data centers, a startup can pay as they use the platform.

Investor Incentives: Region-specific delivery entrants are frequently financed by venture capital who are betting that modular software will shorten time-to-market.

Consumer Multi-Homing: Customers often have more than one application, which undermines winner takes all dynamics and favor the multiplicity of firms.

Ramifications

There are a few important implications of the emergence of platforms for platforms:

Reduced Barriers to Entry: With outsourcing of technical complexity, entrepreneurs have the ability to concentrate on their branding and operations.

More Competition, More Choice: More apps, designed to serve local tastes, produce a greater range of options that the consumer and restaurants can choose from.

Relying on Upstream Providers: Delivery companies could find themselves locked-in by a B2B supplier with significant change of terms or increased charges.

Value Capture Shifts: More and more profits will be made at the B2B infrastructure layer instead of the very competitive, low-margin consumer-facing apps.

Conclusion

Using the economic concept of vertical disintegration, we can explain why there are so many food delivery platforms in existence. B2B provider specialization, economies of scope among many clients, and modular architectures all come together to redefine the industry. What might have previously taken massive in-house investment to achieve is now available off the shelf, allowing dozens of players to flourish in a global market.

The food delivery industry is therefore an example of a paradox: on the one hand, network effects are better suited to consolidation, on the other hand, fragmentation is permitted by modular platform-platforms. To economic scientists, it serves as a reminder that not technology but the organizational structure of technology determines industry structure, and that capturing the value within the supply chain defines who is the winner and loser.