The Economic Standard: Commission caps produce higher prices, reduced choice for food delivery

Even though the COVID-19 pandemic has waned, consumers are still feeling the bruise of inflation. Food delivery customers haven’t been spared. As a result, cost-conscious diners have adjusted their purchasing habits. 

This consumer behavior means less productivity and fewer benefits from a sector of the economy that boomed during the pandemic and provided millions of Americans with food and convenience. Aside from addressing inflation, what can be done to help lower delivery prices? State and local governments should remove commission caps.

Although this shift wouldn’t affect food delivery customers in every region of the country since not all areas have enacted commission cap policies, it would benefit those who live in places that have. Steering clear of and removing these policies would ensure sales and profitability, and stop costs from being passed on to customers in the form of higher prices and extra fees.

Food delivery services that operate through the gig economy have made an enormous economic impact. As the American Consumer Institute (ACI) points out, DoorDash, a delivery service, facilitated $68.9 billion in economic benefits to the U.S. economy and was used by over 500,000 merchants to reach customers in 2021. Demand for these services was particularly pronounced during the pandemic, as companies like DoorDash, Grubhub, Uber Eats and Postmates saw a combined revenue of $5.5 billion within the first six months. That growth is slowing and starting to return to pre-pandemic levels.

Despite the pandemic ending, many local and state legislators seek to enact or maintain caps on the amount food delivery companies can charge restaurants that choose to do business with them as commission on each order. The original concern that led to these policies was driven by delivery companies charging up to 30 percent — which some policymakers regarded as “exploitative” or “predatory” to small restaurants.

As of March 2021, 78 cities, counties and states had introduced commission caps throughout the pandemic. 

This approach has multiple adverse effects. Perhaps the most visible effect is the implementation of additional fees for customers to offset commission caps. DoorDash often calls these surcharges, which can end up costing several extra dollars, a “Regulatory Response Fee” or names them after their respective city (i.e. Oakland Fee). Many diners will reduce the amount they order or forgo placing orders, which means less revenue for restaurants. 

Delivery companies also do less business in areas with aggressive regulation. which ultimately produces fewer orders and lower revenues for small restaurants. By observing 14 cities that imposed commission caps, a study confirmed this observation. Grubhub saw a 10 percent decrease in orders to local restaurants as a result of San Francisco’s commission cap. Demand for local restaurants in regulated cities was 6.8% lower than that for chain restaurants. 

Delivery companies’ desire to engage less with local businesses because of commission caps will have a severe impact on rural areas that have narrower choice than dense cities. In a written testimony, Brett Swanson of Grubhub purported that a 15 percent cap in Rhode Island would “be fraught with unintended and damaging consequences,” including depriving restaurants of the apps’ marketing reach and reducing delivery range in rural areas.

In turn, this outcome means fewer orders for delivery drivers and ultimately fewer opportunities for profit. Women in particular might feel this shock more than other demographics. Writing on commission fees, Liva Palagashvilli, a senior research fellow for the Mercatus Center, points out that as the female labor participation rate continues to lag, a surge of women have begun working with food delivery apps post-pandemic to make ends meet. Gig work has served as a reliable fallback for women and provided flexibility that traditional employment doesn’t offer. 

To describe the effect of commission caps succinctly, Kris Pusok of ACI states, “By limiting how these third-party services work with restaurants, policymakers are forcing them away from the small independent businesses they serve to the advantage of larger national chains.” 

This shift in acquired business negatively impacts delivery companies, drivers and customers simultaneously. To organically allow consumers a wide choice of food options, policymakers across the country should reconsider commission caps on food delivery companies. 

Published in The Economic Standard on January 5, 2023.

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