Delivery Price Caps Threaten New Restaurant Lifeline
Tomorrow, the Washington, D.C. City Council votes on a bill that seeks to impose a price cap on the commission a third-party delivery platform can charge restaurants for bringing them custom. Seattle and other cities are doing something similar. This is a classic case of an action that seems reasonable but would in fact be disastrous.
Platforms like GrubHub, DoorDash, Postmates, and UberEats have proven extremely popular during the crisis as people have been unable to go to their favorite restaurants. They have turned to delivery, but have often used these platforms instead of dealing with the restaurants individually. Instead of dealing with a host of phone numbers or websites and having to give their payment card numbers out each time, the platforms make one-click ordering extremely simple.
Furthermore, the platforms provide the delivery service, meaning the restaurant doesn’t have to. Rather than having potentially dozens of drivers on stand-by, the restaurants know that they don’t have to deal with that—and that any complaint about the driver goes to the platform rather than themselves.
Because they are specializing in delivery, the platforms have been able to develop protocols for contactless delivery that restaurants themselves might have been haphazard in creating if it was left to them individually.
Having these aspects handled by a third party is a reduction in costs to the restaurant. Yet, a delivery platform has costs of its own, not least the payments to drivers, many of whom need the work having been laid off from other jobs in this crisis.
Currently, delivery companies are free to set their commissions. Restaurants are free to accept them or not. My favorite local restaurant relies on its own resources, for instance, having converted its wait staff to drivers and offering curbside pickup. By forgoing the delivery platform, however, it has made a conscious choice to forego the increased marketing and reduced transaction costs built into the delivery app.
Capping commissions distorts this process. The delivery platforms will need to make up their reduced income by increasing prices to their users. The laws of supply and demand being what they are, higher prices will mean fewer orders (GrubHub suggested the San Francisco order will raise order prices by $5 to $10.) Alternatively, platforms may reduce their delivery radius, effectively cutting off certain areas (which will usually be poorer areas). Some platforms, like UberEats, will have to cut back on programs they are cross-subsidizing like free rides and deliveries for health care workers.
That means that many restaurants will see reduced demand as a result of the price cap. As my grandfather used to say, “What you gain on the swings, you lose on the roundabouts.” They may gain in reduced commission, but lose in overall sales volume. The platforms will see fewer orders, which means they will need fewer drivers, putting more people out of work.
Something similar happened when America introduced a statutory cap on what are called “interchange fees” on debit card transactions. Merchants stopped having to pay larger fees when people used cards to buy items, but the banks recouped their reduced revenue by raising fees on products like checking accounts. The effect here will likely be more direct on the users of the platforms.
Markets work by conveying information through the price system. Commissions are part of that. They help determine how many jobs can be maintained at restaurants and how many among drivers. Interfering with this market process through price controls will reduce that flow of information and the result will almost certainly be more people out of work than there should be—and far fewer options for people who would like food delivered.
As I said in my post on Friday, good economists take into account all the likely ramifications of a policy decision. In this case, bad economists simply see a fee charged to restaurants and want to reduce it. Good economists will see that such a course of action may do more harm than good. If only economic knowledge could be delivered through an app.