September 28, 2022

How policies ‘protecting’ small restaurants from delivery apps backfire

Whether you’re a policy professional, restaurant owner, delivery driver, or just someone who loves takeout, you might want to turn your attention to a few legal battles across the country.

During the pandemic, at least 78 cities, counties and states in the United States have introduced temporary price controls preventing delivery companies from charging high commission fees to local restaurants. Many of these once temporary measures are now becoming permanent, leading to legal battles between companies and governments, as in New York City and Chicago. Last week, San Francisco policymakers voted to edit their permanent fee cap if the companies drop their lawsuit against the city.

The policy came about because Uber Eats, DoorDash, Grubhub and Postmates charged participating restaurants commission rates of up to 30% on orders through their platforms. High fees, some say, raise concerns of “exploitation and predatory practicesthat threaten the viability of small restaurants. These high commission rates are also featured in a class action lawsuit antitrust lawsuit filed against the delivery companies in federal court in Manhattan.

Capping commission fees is popular because it means restaurants can keep more of their revenue, thereby protecting their profit margins. But several considerations cast doubt on whether these price controls will succeed in helping small businesses, and whether they may unintentionally hurt gig workers on delivery platforms.

First, delivery companies may respond by simply doing less business in areas and sectors where regulation exists. In a study Analyzing 14 U.S. cities that implemented temporary or permanent fee caps, the researchers found that smaller restaurants experienced declines in orders and revenue after the policies were enacted.

Contrary to regulators’ wishes, the study also found that demand for local restaurants in regulated cities was 6.8% lower than for chain restaurants (which were not subject to fee caps). The researchers also found that delivery companies reduced their promotional efforts for restaurants in regulated cities and instead began promoting restaurants near unregulated cities.

The fast emergence “ghost” or “cloud” kitchens – cooking facilities set up for meals only delivered – also challenges the narrative that commission caps will be successful. Delivery companies can start replacing the listing of local restaurants on their platforms with these shadow kitchens, which would not be subject to fee caps.

Second, it’s a mistake to assume that delivery companies won’t find ways to distribute lost revenue. Several decades of price control history point to creative gaps around these regulations. For example, landlords implemented parking, key, and service fees in response to rent control in New York. Indeed, DoorDash has added a new flat fee – “regulatory response fee” – in 57 of 68 pitches where he was subject to commission caps. For example, customers were faced with a $1.50 “Chicago Fresh” and $2.00 “Oakland Fresh.” These fees increase takeout prices, which can also lead to fewer orders and lower sales volumes for restaurants.

But what is often overlooked is the impact on gig workers. Deliverers on platforms earn per order, and fewer orders in response to the cap translates to fewer revenue opportunities.

In this way, commission caps can run counter to policy goals, which are intended to help gig workers. It is unclear whether restricting the amount of fees companies collect causes companies to also reduce the payments workers receive per order. A statement by DoorDash pointed out that their fee covers “Dasher’s” salary.

Local governments should carefully analyze whether their commission fee caps lead to unintended consequences like these. This is particularly important in areas that have experienced a surge of women on delivery platforms post-pandemic. Women’s participation rate in the labor market continued to gapand gig work provides an opportunity for women who might otherwise not be able to accept traditional employment, often due to childcare obligations.

There may be alternative solutions that minimize damage to restaurants and concert workers, such as the tiered fee models that San Francisco officials approved last week. This idea, which is beginning to be offered by delivery platforms in unregulated areas, allows restaurants to choose from a range of fees: 15% is for basic services such as registration and delivery, but 30% s come with greater promotional efforts, guaranteed number of orders and low customer fees to attract more business.

While the intent to support local restaurants is notable, price controls are notoriously ineffective. Tiered fee models that allow restaurants to choose their fees and services may be able to do what policymakers cannot do alone, without further harming local restaurants and gig workers.

Liya Palagashvili is a Senior Fellow at the Mercatus Center at George Mason University and an Affiliate Fellow at New York University School of Law.