Food Delivery Apps Should Be Celebrated, Not Regulated

Enjoying massive popularity since the Covid-19 pandemic, food delivery apps will likely remain a customer favorite and part of the restaurant market for the foreseeable future. But like many other gig-economy apps, these food delivery services have recently come under scrutiny. This has led cities to propose new regulations such as delivery service fee caps which are designed to protect small restaurants but have been shown to hurt consumers.

Since its inception, the business landscape for the food delivery sector has grown tremendously, especially in urban and suburban areas. There has also been a revolution in how restaurants engage with food delivery, expanding access to a wide variety of cuisines. While there have been growing pains, such as grumbles over delivery fees eating into the profit margins of restaurants and questions about how gig workers should be classified, delivery apps have unlocked new benefits for consumers such as time saved, loyalty programs, and more services to choose from.

But as food delivery apps have grown in popularity, they have drawn criticism for the fees that they charge restaurants. Critics argue that delivery apps reduce the number of dine-in customers and consequently lead to lower profit margins for restaurants. This, on top of a commission rate that ranges anywhere from 15 to 30 percent, poses new challenges to restaurants.

City governments across the country tried to combat this during the pandemic by capping the maximum rates delivery apps could charge restaurants. While most are set to expire, New York City made its cap permanent.

These caps were intended to protect local restaurants, but they have not produced the desired result, as is so often the case with price controls. A study on the impact of these laws found that artificially decreasing the revenue of food delivery apps did not lead to increased revenue for local restaurants; instead, it encouraged delivery companies to refer customers to chain restaurants in nearby cities without the same regulations.

In addition, the study found that the apps were forced to raise delivery fees for customers in the cities with such laws. While the study noted that there is not yet enough empirical evidence to determine the best way to regulate the emerging food delivery app sector, the impact of existing delivery fee caps on local restaurants and consumers has been a disaster. Apps increase delivery fees to replace the lost commission, which results in higher prices for consumers.

Food delivery app services have revolutionized the restaurant industry and how people choose to dine. While the industry is still adapting to the rapid change, the convenience and value these services have brought to consumers is undeniable, and no regulation should undermine that. Delivery service fee caps miss the mark on this point and have been shown to increase costs for consumers without helping independent restaurants.

Editor’s note: This piece originally was published by the Foundation for Economic Education.