There are only a few power companies, for example, because the huge cost of building a power plant and the resulting economies of scale create barriers to entry. Without public sector mechanisms to regulate the price of electricity, oligopolistic electricity companies could charge higher (unfair) prices and consumers would have to pay these higher and unfair prices because they have no other way to get electricity.
In the United States, four restaurant delivery companies – DoorDash, GrubHub, UberEats and Postmates – control 99% of the restaurant delivery market, a classic oligopoly. They have become an oligopoly because the technology they use to run their delivery operations is expensive and proprietary. Once this technology is created, it can be used anywhere. So there are great economies of scale that make large national restaurant delivery companies more efficient than smaller regional or local ones. As a result, they can, like all unregulated oligopolies, set prices unfairly high. Restaurants that purchase their delivery services have no choice in what price they pay for that service because all delivery companies charge the same price. In this case, this represents between 25 and 30% of the total price of food delivered to the end user, with individual customers ordering from their homes.
Some suggest that “if restaurants don’t like the price charged by delivery companies, they can do their own delivery.” This ignores the fact that the barriers to entry into this market are prohibitive and that members of the delivery company oligopoly enjoy significant economies of scale, resulting in far lower costs than those that smaller restaurant-specific delivery options can handle. Even smaller national delivery companies like Seamless, Foodler and Caviar couldn’t compete with the big four delivery companies and were bought out by them.
When a few companies, like UberEats and GrubHub, dominate the market and use their position to set prices so high, it becomes not only desirable but necessary for public sector entities to step in. The only way to protect restaurants and consumers from this unfair pricing is to regulate the prices these delivery companies are allowed to charge. The free market does not work in this case, just as it does not work with electric companies, and therefore regulated prices are necessary for independent restaurants to survive and thrive.
The need to regulate delivery businesses is urgent at all times, but in today’s COVID-19 environment, the restaurant consumer is doubly and triply damaged. When restaurants are not allowed to have customers on-site and can only provide food to their customers through takeout and delivery, they can no longer compete with delivery companies when it comes to service. place where their customers can consume their food. By public decree, diners cannot consume it in restaurants; they must retire to their homes. Forced to rely solely on delivery for 70-80% of their sales, restaurants have seen a drop in meal revenue of 100%-75% on those delivery sales.
As take-out meals increase, delivery companies gain even more power over their restaurant customers. Restaurants that didn’t deliver or didn’t deliver because only 5-15% of their sales are now making 70-80% of their sales through delivery companies. Rather than paying delivery companies 2-3% of their total turnover, they now pay 15-20%. For restaurants that, even in good times, only average 10% profit, this is unsustainable. If delivery company fees aren’t regulated now, even restaurants that managed to survive the COVID-19 shutdown may not survive delivery companies’ domination of local restaurants. It will be a loss for the millions who depend on the industry for a paycheck and the millions who eagerly await the chance to return to the experience of dining at their favorite neighborhood restaurant. Cambridge City Council unanimously passed a council ordinance on Monday night that caps delivery company charges at 10%. It’s a good first step. Hopefully other cities — and more importantly the state legislature — will take up this fight.
John Schall is the owner of El Jefe’s Taqueria and a former instructor in the Department of Economics at UMass/Boston.