New Academic Research Suggests Caps on Food Delivery Fees Harm Consumers

At the beginning of the pandemic, cities started capping restaurant commission fees paid to third party delivery services like Doordash and Grubhub, in order to help support struggling restaurants. Now restaurants are mostly back to normal yet commission caps remain in place in some cities.

In 2021, New York and San Francisco opted to make their commission caps permanent. San Francisco later adopted a compromise allowing tier-based pricing with commission caps ranging from 15% to 30%. The debate around similar policies in other localities and states is still ongoing, despite concerns that consumers would bear the cost of commission cap regulation in the form of higher prices.

How do commission caps affect consumers?

Amidst that debate, one question hasn’t been explored: how do these commission caps affect the price that consumers pay for food delivery?

Available data suggest that the imposition of commission caps results in an increase in prices for consumers. NBC News reported in March 2021 found that regulatory costs associated with commission caps were passed onto consumers in most cases. For example, two weeks after Chicago passed a delivery cap in late 2020, DoorDash added a ‘Chicago fee’ on orders placed to city restaurants. The cap legislation resulted in higher fees on food platforms, raising prices for consumers, and in turn lowering order volume for restaurants and drivers.

Academics have also begun to weigh in with empirical analyses of commission cap policies.

Capped markets saw revenue drops for independent restaurants

A co-authored study published in 2021 by Professor Zhuoxin Li, Ph.D. from the University of Wisconsin Madison and Associate Professor Gang Wang, Ph.D. from the University of Delaware, examined how the implementation of commission caps in 14 areas affected orders and revenue for restaurants. They found that independent, non-chain restaurants in cities where commission caps were in place experienced a decline in orders and revenue. However, this finding does not hold when they consider chain restaurants, which saw an increase in orders and revenue as a result of commission caps. They concluded:

New analysis finds net negative impact from caps

Along the same lines, a recent working paper published in November 2022 by Michael Sullivan, a Ph.D. Candidate in the Department of Economics at Yale, builds on this research and estimates the net effect of commission cap legislation on consumers, restaurants, and platforms.

Sullivan’s work expands on Li and Wang’s analysis, focusing on estimating the net effect of commission caps on restaurants and consumers. To do this, he developed a model of, “platform pricing, restaurant pricing, platform adoption by restaurants, and consumer ordering.” In his analysis, he examines consumers, restaurants, and platforms separately to identify what is driving the decline in orders and revenue. Additionally, he adds to the literature by examining how consumers are impacted by commission cap legislation.

In order to empirically evaluate his model, Sullivan collected data related to the food delivery industry including data on transactions, platform adoption, platform pricing, and fees added by the platform to address regulatory changes.

The transaction data include the ZIP code of the consumer ordering on the platform as well as other demographic variables. This data is then complemented by Census data tied to the ZIP codes in the food delivery order data. Demographic data allowed Sullivan to address differences across individuals that may affect ordering behavior.

For example, Sullivan’s data suggested that younger consumers are more likely to use food delivery platforms than older consumers. Sullivan’s modeling approach is able to separate the effect of age from the effect of commission caps on ordering behavior.

Using data on monthly listings of restaurants on food delivery platforms, Sullivan observed which platforms restaurants choose to use. He measured this variation in platform adoption over time, including when commission caps are implemented, and across platforms including DoorDash, GrubHub, Postmates, and Uber Eats.

His data on platform fees include delivery, service, and regulatory response fees. In order to develop the platform fee dataset he used reverse geocoding, as described below:

The delivery fee data also accounts for expected delivery time. Service fees are generally proportional to the cost of the delivery order, and Sullivan calculates median service fees in each ZIP code. Regulatory response fees apply to the entire geographic area where the regulation is in place and are calculated by platform in each ZIP code.

He also constructed a dataset of commission cap implementation by jurisdiction using news articles as described below:

Sullivan uses a difference-in-differences approach to examine the impacts of commission caps on consumers, restaurants, and platforms. To summarize, his approach compares outcomes in places with and without commission caps, before and after the commission caps were enacted. The goal of this type of analysis is to isolate the effect of the commission cap on affected communities after implementation, while controlling for time-specific and city-specific trends that may otherwise affect order volume and revenue.

The results of Sullivan’s research suggest that restaurants benefit at the expense of consumers:

Note: blue outline added for emphasis.

Furthermore, Sullivan found that when considering the total effect of commission caps, the net effect results in higher fees for consumers. This effect remains persistent after Sullivan accounts for (1) larger platform fees and (2) restaurant markup on platforms in areas where commission caps are in place. In other words, consumers face a price increase even after accounting for platform fee increases and restaurant markups in response to the commission caps.

Consumers see higher markups when commission caps are in place

Interestingly, his results also suggest that in the presence of commission caps, restaurants markup their prices on platforms at a higher rate than when commission caps are absent. I’ve taken Sullivan’s reported estimates and shown the relative magnitudes in the chart below.

As shown above, Sullivan finds that restaurants markup prices on food delivery platforms more in areas where commission caps in effect.

Overall, Sullivan’s research shows that a 15% commission cap results in a net increase in prices for consumers, even after accounting for the degree to which restaurants markup prices — see below:

Note: blue outline added for emphasis.

Conclusion for policymakers: commission caps are a flawed aid for restaurants

Sullivan’s recent research presents a complex theoretical framework and empirical estimation process for analyzing multi-sided markets, like those seen with food delivery platforms. This research is directly relevant to policymakers considering commission caps, especially given the rising consumer costs the economy has seen recently via inflation.

The main takeaway from his research is that commission caps are an inefficient way of helping local restaurants. This is an important finding for policymakers to consider while thinking of the future of these policies.

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