Removing barriers for grocery stores: O2O platform and self-scheduling delivery capacity

•How an O2O platform can attract physical grocery retailers is investigated.•Two pricing schemes, revenue sharing and fixed fee, are equivalent.•The decentralized system may yield higher profit than the centralized system.•Subsidy contracts for the O2O platform are proposed. An O2O (Online-to-Offline) channel has advantages over brick-and-mortar retailing and traditional e-commerce in the local market as it facilitates grocery retailers to offer online retailing and offline home delivery. This paper studies how an O2O platform can attract physical (offline) grocery retailers through pricing and market expansion, and customers by providing shopping convenience and home-delivery. We analyze both when the O2O platform has self-scheduling delivery capacity and when it does not. We find that two widely used pricing schemes—revenue sharing and fixed fee—are equivalent. If the O2O platform does not itself have any self-scheduling delivery capacity, it outsources home-delivery service to a delivery platform, which may result in incentive misalignment. We find that it is not always necessary for the O2O platform to coordinate the decentralized system. Under some conditions, the decentralized system will yield higher profit than the centralized system due to the risk protection effect. If coordination is needed, we propose subsidy contracts for the O2O platform to align its and the delivery platform’s objectives.