How policies ‘protecting’ small restaurants from delivery apps are backfiring

Whether you’re a policy professional, restaurant owner, delivery driver or just someone who loves 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 U.S. have introduced temporary price controls restricting 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, such as in New York City and Chicago. Last week, San Francisco policymakers voted to amend their permanent fee cap if companies drop their lawsuit against the city.

The policy emerged because Uber Eats, DoorDash, Grubhub and Postmates have charged participating restaurants commission rates as high as 30 percent on orders through their platforms. High fees, some argue, raise concerns of “exploitative and predatory practices” that threaten the viability of small restaurants. These high commission rates are also featured in a class-action antitrust lawsuit filed against the delivery companies in a federal court in Manhattan.

Capping commission fees is popular because it implies that restaurants can keep a larger fraction of their revenues, thereby protecting their profit margins. But several considerations cast doubt on whether these price controls will be successful in helping small businesses, and whether they may unintentionally harm gig workers on delivery platforms.

First, delivery companies can respond by simply doing less business in areas and sectors where the regulation exists. In a study analyzing 14 U.S. cities that have implemented temporary or permanent fee caps, researchers found that small restaurants experienced a decline in orders and revenues after the policies were enacted.

Contrary to the wishes of regulators, 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 the fee caps). The researchers also concluded that delivery companies reduced promotional efforts for restaurants in regulated cities and began promoting nearby restaurants from non-regulated cities instead.

The rapid emergence of “ghost” or “cloud” kitchens – cooking facilities set up for delivery-only meals – also challenges the narrative that commission caps will be successful. Delivery companies may begin to substitute listing local restaurants on their platforms with these ghost kitchens, which would not be subject to fee caps.

Second, it’s a mistake to assume that delivery companies will not find ways to spread out the lost revenue. Several decades of price control history highlight creative loopholes around these regulations. For example, landlords have enacted parking, key and service fees in response to rent control in New York City. Indeed, DoorDash added new flat fees – “regulatory response fees” – in 57 out of the 68 locations where it was subject to commission caps. For example, customers faced a $1.50 “Chicago fee” and $2.00 “Oakland fee.” These fees increase the prices of takeout, which can also lead to fewer orders and lower sales volumes for restaurants.

But what’s often ignored is the impact on gig workers. Delivery workers on the platforms earn per order, and a decrease in orders in response to the cap results in fewer income opportunities.

In this way, commission caps may run contrary to policy goals, which seek to help gig workers. It is not clear whether restricting the amount of fees that companies collect causes companies to also reduce the payments gig workers receive per order. A statement by DoorDash highlighted that their fees do cover “Dasher” pay.

Local governments must carefully analyze whether their commission fee caps are resulting in unintended consequences like these. This is especially important in areas that have witnessed a surge of women on delivery platforms post-pandemic. The female labor force participation rate has continued to lag, and gig work provides an opportunity for women who may otherwise be unable to take on traditional employment, often because of child care obligations.

There may be alternative solutions that minimize harm to restaurants and gig workers, such as the tiered-fee models that San Francisco officials endorsed last week. This idea, which is beginning to be offered by delivery platforms in unregulated areas, allows restaurants to choose among a range of fees: 15 percent involves basic services such as listing and delivery, but 30 percent comes with more extensive promotional efforts, a guaranteed number of orders and low customer fees to attract more business.

While the intention 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 on their own, without the additional harm to local restaurants and gig workers.

Liya Palagashvili is a senior research fellow with the Mercatus Center at George Mason University and an affiliated research fellow at New York University School of Law.