Regulating Online Food Delivery Platforms

Economists project that the online food delivery business, which includes apps such as GrubHub and Uber Eats, will grow into a $60 billion industry by 2025. Some policymakers argue that capping and reducing the commission fees driving this growth—some as high as 30 percent—is needed to increase revenue for small businesses and lower prices for consumers.

But two scholars disagree. In a recent research paper, Zhuoxin Li from the University of Wisconsin and Gang Wang from the University of Delaware report the results of their study on the impact of commission fee caps on online food delivery platforms. Even though policymakers intended for these regulatory fee caps to help small businesses, Li and Wang found that the caps reduced both orders and revenue for small businesses.

These results suggest that policy makers should act with caution to avoid unintended consequences when regulating online platform services, conclude Li and Wang.

Online platform services facilitate transactions between consumers and businesses in a centralized, internet-based system. For example, online travel platforms such as Booking.com and Expedia scan the internet for the best deals on travel accommodations and allow consumers to compare prices in one location.

Online platforms such as Grubhub, Uber Eats, and DoorDash connect consumers and restaurants by facilitating takeout and delivery orders in exchange for commission fees.

In response commission fees on some delivery platforms reaching as high as 30 percent, San Francisco capped commission fees for online food delivery platforms at 15 percent for independent and small businesses in April 2020. San Francisco policymakers argued that high commission fees disproportionately affected small and independent businesses. A cap on commission fees only for small businesses would improve their profitability while sustaining profitability for online delivery platforms, they claim.

New Jersey became the first state to issue a state-wide commission fee cap in June 2020, and by March 2021, 68 cities and states had instituted fee caps for services involving small businesses.

Li and Wang studied the impact of these fee caps on small businesses, chain restaurants, and online platforms. They tracked the change in revenue and takeout orders over time in each city and state that enacted fee caps between 2020 and 2021. They also compared the behavior of online platforms and consumers from 2020 to 2021 between cities that instituted fee caps and similar cities that did not institute fee caps.

Li and Wang argue that the commission fee caps did not benefit small businesses as many policymakers assumed, but rather these caps shifted consumer demand and orders to chain restaurants.

Overall takeout orders to independent restaurants decreased by an average of 2.5 percent after a locality implemented a fee cap for orders to small businesses, according to Li and Wang’s study. Independent restaurant owners saw a 3.9 percent reduction in total sales during the same period. Takeout orders and net sales for chain restaurants, on the other hand, both increased by 4.5 percent after the implementation of the fee cap in their sample.

Even though the modest reduction in demand for small businesses remained consistent throughout the study, the demand for chain restaurants grew steadily over time after the implementation of a fee cap.

Differential fee caps hurt both consumers and platforms in their sample as well. Average delivery time increased after the implementation of a fee cap and total revenue for food delivery platforms decreased, according to their study.

Li and Wang argue that the reduction in demand and revenue for small businesses resulted from an intentional response by delivery platforms to the fee caps.

After the implementation of commission fee caps for small businesses, delivery platforms pushed consumers toward unregulated restaurants, claim Li and Wang. Their study found that after the implementation of a fee cap, online delivery platforms became less likely to recommend an independent restaurant compared to a chain restaurant. Furthermore, online platforms became more likely to recommend a restaurant from a surrounding city not subject to a fee cap after the implementation of a cap in their study.

Online delivery platforms also attempted to pass off the costs of the fee caps to consumers, according to Li and Wang. After the implementation of a fee cap for small businesses, online platforms increased the average delivery fee for affected orders by roughly $.04 in their sample.

When implementing these fee caps, policymakers failed to consider how delivery platforms may respond to the regulation, according to Li and Wang. They propose instead a series of alternatives to the current fee cap regimes designed to ameliorate the impact on small businesses and improve the consumer experience.

Acknowledging that ensuring continued profitability for small businesses using delivery platforms may require fee caps, Li and Wang argue that localities should impose the same fee cap on all restaurants. Eliminating the differential treatment between chain restaurants and independent businesses would reduce the incentive for platforms to recommend chain restaurants over independent businesses, according to Li and Wang.

Furthermore, Li and Wang claim that localities can reduce the number of orders flowing to restaurants outside of their jurisdiction by coordinating with surrounding cities and implementing uniform fee regimes across jurisdictions. In addition to reducing the flow of orders to restaurants in surrounding cities, this policy would also likely reduce average delivery time, they argue.

Li and Wang also argue that all levels of government could audit delivery platforms to ensure they do not engage in anti-competitive or discriminatory behavior.

Ultimately, the impact of fee commissions on small businesses demonstrates the need for policymakers to consider the downstream and unintended effects of regulations, according to Li and Wang. They argue that policymakers should consider the potential perverse incentives of regulations and address them prior to implementation.