Will Uber and Doordash follow the suit of Meituan?
China’s online food-delivery market is growing fast. The market has gained from 21.68 billion yuan to 205.27 billion yuan from 2011 to 2017. Meituan is one of the food-delivery giants in the market. It has 310 million users and delivering 11 million meals daily last year.
As China’s app-for-everything, Meituan doesn’t have an exact parallel elsewhere because its business ranges from food delivery to travel booking. Although two-third of revenue comes from its food-delivery business, the domestic hotel room booked through Meituan has increased to 205 million. And more than 80% of those hotel bookers ordered their food-delivery business.
However, Meituan is still not a profitable company. Though its business crosses many industries, Meituan is facing strong competition from Alibaba’s Ele.me in food delivery, and significant challenge from firms such as Crtip.com in the travel booking business.
Meituan is an oligopoly company in China’s food-delivery market and travel booking market, where there are relatively few large firms in the industries. China’s food-delivery market is a Bertrand Oligopoly. In this model, consumers have perfect information, and zero transaction costs and since the products are identical, all consumers will purchase from the firm charging the lowest price.
Bertrand oligopoly leads to zero economic profits even if there are only two firms in the market. This could be perfectly applied to the situations in China. When the food-delivery business first appeared several years ago, there were many firms in the market including Meituan, Ele.me, Dada, Baidu-delivery, and etc. Since service is the same, it’s easy for consumers to switch to the lowest price company, only Meituan and Ele.me survive in today’s food-delivery market in China.
China’s travel booking market can be seen as a Sweezy oligopoly model, in which firms have an incentive only to match price decrease and not to match price increase. In this market, Meituan is competing with Ctrip.com, Qunar.com, Lvmama.com and Mafenwo.cn. They produce differentiated products (e.g. Meituan focuses on hotel booking just as Hotels.com, whereas Qunar.com specializes in flight booking just as Momondo).
The price increase may lead to customers choose the competitors to do the business and therefore Meituan will cut their prices in response to a price reduction but will not raise their prices in response to a price increase.
Admittedly, Meituan has the advantage to exploit their business in different markets, especially by grouping their service with the same customers. However, in the environment of Bertrand Oligopoly and Sweezy Oligopoly, it is hard to gain sizeable profitability for Meituan and therefore its IPO could be tricky for investors to swallow.