Whether you’re a policy professional, restaurant owner, delivery person, or just someone who enjoys takeout, you may 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 US have introduced temporary price controls that restrict delivery companies from charging high commissions to local restaurants. Many of these once temporary measures are now becoming permanent, leading to legal battles between corporations and governments, such as in New York City and Chicago. Last week, policymakers in San Francisco voted to change their permanent tariff cap if companies drop their lawsuit against the city.
The policy came about because Uber Eats, DoorDash, Grubhub and Postmates have charged participating restaurants with commission rates of up to 30 percent for orders placed through their platforms. According to some, high fees raise concerns about “exploitative and robbery practices” that threaten the viability of small restaurants. These high commission rates also feature in a class-action antitrust lawsuit filed against the delivery companies in a Manhattan federal court.
Restricting commission fees is popular because it implies that restaurants can retain a larger portion of their revenues, protecting their profit margins. But several considerations cast doubt on whether these price controls will be successful in helping small businesses, and whether they could inadvertently harm gig workers on delivery platforms.
First, delivery companies can respond by simply reducing business in regulatory areas and sectors. In a study that analyzed 14 U.S. cities that have implemented temporary or permanent fare caps, researchers found that small restaurants experienced a drop in orders and revenue after the policy was introduced.
Contrary to regulators’ wishes, the study also found that demand for local restaurants in regulated cities was 6.8 percent lower compared to chain restaurants (which were not subject to rate caps). The researchers also concluded that delivery companies reduced promotion efforts for restaurants in regulated cities and instead started promoting nearby restaurants from unregulated cities.
The meteoric rise of “ghost” or “cloud” kitchens — cooking facilities set up for delivery-only meals — also challenges the story that commission caps will be successful. Delivery companies could start replacing the listing of local restaurants on their platforms with these haunted kitchens, which would not be subject to rate caps.
Second, it is a mistake to assume that delivery companies will not find ways to spread the lost revenue. Several decades of price control history reveal creative loopholes in these regulations. For example, landlords have introduced parking, key and service fees in response to rent control in New York City. DoorDash has indeed added new fixed fees – “regulatory response fees” – in 57 of the 68 locations where it was subject to commission caps. For example, customers were faced with a $1.50 “Chicago fee” and a $2.00 “Oakland fee.” These fees increase takeout prices, which can also lead to fewer orders and lower sales volumes for restaurants.
But what is often ignored is the impact on gig workers. Deliverers on the platforms earn per order, and a decrease in orders in response to the cap results in fewer revenue opportunities.
In this way, commission caps can conflict with policy goals that gig workers want to help. It’s not clear whether limiting the fees companies collect will also cause companies to lower the payments gig workers receive per order. A statement from DoorDash emphasized that their fees cover the “Dasher” payment.
Local governments should carefully analyze whether their commission caps lead to such unintended consequences. This is especially important in areas that have seen a surge in women on delivery platforms after the pandemic. Women’s employment rates are lagging, and odd jobs provide an opportunity for women who might otherwise be unable to take up traditional work, often due to childcare obligations.
There may be alternative solutions that minimize harm to restaurants and gig workers, such as the tiered compensation models San Francisco officials approved last week. Offered by delivery platforms in non-regulated areas, this idea allows restaurants to choose from a range of rates: 15 percent include basic services such as listing and delivery, but 30 percent come with more extensive promotional efforts, a guaranteed number of orders and low cost for customers to attract more customers.
While the intent to support local restaurants is noteworthy, price controls are notoriously ineffective. Differentiated compensation models that allow restaurants to choose their rates and services may be able to do what policymakers can’t do alone, without the added damage to local restaurants and gig workers.
Liya Palagashvilic is a senior research fellow at the Mercatus Center at George Mason University and an affiliate research fellow at the New York University School of Law.