Regulating Powerful Platforms: Evidence from Commission Fee Caps in On-Demand Services

Abstract

Owners of multi-sided platforms typically possess strong power over complementors. Such power asymmetry gives platform owners the edge on setting high platform fees to capture most of the surplus created on their platforms. While there is a heated debate on regulating these powerful platforms, the lack of empirical studies hinders the progress towards evidence-based policymaking. This research empirically investigates this regulatory issue in the context of on-demand delivery. Delivery platforms (e.g., DoorDash, Grubhub, and Uber Eats) charge restaurants a commission fee, which can be as high as 30% of the order amount. To support small businesses, recent regulatory scrutiny has attempted to cap the commission fees for independent restaurants. This research empirically evaluates the effects of platform fee regulations on restaurants, by investigating recent regulations across 14 cities and states in the United States. Our analyses show that independent restaurants in regulated cities (i.e., those paying reduced commission fees) experience a decline in orders and revenue, whereas chain restaurants (i.e., those paying the original fees) see an increase in orders and revenue. This intriguing finding suggests that chain restaurants, not independent restaurants, benefit from the regulations that were intended to support independent restaurants. We find that platforms’ responses to the regulations may explain the negative effects on independent restaurants. That is, after cities enact policies to cap platforms’ commission fees, delivery platforms become less likely to recommend independent restaurants to consumers, and instead turn to promote chain restaurants or nearby restaurants from non-regulated cities. Moreover, delivery platforms increase their delivery fees for consumers in regulated cities, suggesting that these platforms attempt to cover the loss of commission revenue by charging customers more. These findings provide empirical evidence for policymakers to evaluate the effectiveness of platform fee regulations.