COVID-19 and the resulting public health ban on dining out have plunged American restaurants into a crisis that many won’t survive. Those that remain open have become dependent on third-party delivery services. But the dominance of a few delivery companies creates its own dire financial threat to the survival of the very restaurants they serve.
Economic theory holds that competition in a market economy works to hold prices down while keeping production up. But when only a few producers dominate the market, often by virtue of barriers to entry, those companies become price setters. The market no longer determines price.
There are only a few electric companies, for example, because the massive cost of building a power plant, and the resulting economies of scale, produces barriers to entry. Without public sector mechanisms for regulating the price of electricity, oligopolistic power companies could charge higher (unfair) prices and consumers would have to pay those higher, unfair prices because they have no alternative ways to get power.
In the United States, four restaurant delivery companies — DoorDash, GrubHub, UberEats, and Postmates — control 99 percent of the restaurant delivery market, a classic oligopoly. They have become an oligopoly because the technology they use to manage their delivery operations is expensive and proprietary. Once that technology is created, it can be used anywhere, so there are large economies of scale that make bigger national restaurant delivery companies more efficient than smaller regional or local ones. As a result, they, like all unregulated oligopolies, can set prices at an unfairly high level. The restaurants that purchase their delivery services have no choice about the price they pay for that service because all delivery companies charge the same price. In this case, it is between 25 and 30 percent of the total price of the food being delivered to the end-user, the individual customers ordering from their homes.
Some suggest that “if restaurants don’t like the price the delivery companies are charging, they can do their own delivery.” This fails to acknowledge that the barriers to entry into this market are prohibitively high and that members of the delivery company oligopoly enjoy significant economies of scale resulting in costs much lower than small, restaurant-specific delivery options can manage. Even the smaller national delivery companies like Seamless, Foodler, and Caviar could not compete with the four big delivery companies and were bought up by them.
When a few firms, like UberEats and GrubHub, dominate the market and use their position to set prices at such a high level, it becomes not only desirable but necessary for public sector entities to intervene. The only way to protect restaurants and consumers from this unfair price setting is to regulate the prices those delivery companies are allowed to charge. The free market doesn’t work in this instance, just like it doesn’t work with electric companies, and regulated prices are therefore necessary if independent restaurants are to survive and prosper.
The need to regulate delivery companies is urgent at any time, but in the current COVID-19 environment the restaurant consumer is doubly and triply damaged. When restaurants are not allowed to have dine-in customers and can provide food for their customers only via take-out and delivery, they can no longer compete with the delivery companies regarding where their customers can consume their food. By public decree, diners can’t consume it in the restaurants; they must retreat to their homes. Forced to rely solely on delivery for 70-80 percent of their sales, restaurants have experienced a meal revenue drop from 100 percent to 75 percent on those delivery sales.
As take-out dining increases, delivery companies amass even more power vis-a-vis their restaurant clients. Restaurants that weren’t doing delivery or had delivery as only 5 to 15 percent of their sales are now doing 70 to 80 percent of their sales through the delivery companies. Rather than paying delivery companies 2 to 3 percent of their total revenue, they are now paying 15 to 20 percent. For restaurants which, even in good times average only 10 percent profit, this is unsustainable. If delivery company fees are not regulated now, even the restaurants that have managed to survive the COVID-19 shutdown may not survive the delivery company dominance over local restaurants. That will be a loss to the millions who depend on the industry for a paycheck and the millions more eagerly awaiting the chance to return to the experience of dining in at their favorite neighborhood restaurant. The Cambridge City Council unanimously passed a council order Monday night that caps delivery company fees at 10 percent. This is a good first step. Hopefully other cities — and more importantly the state Legislature — will take up this fight.
John Schall is owner of El Jefe’s Taqueria and a former instructor in the UMass/Boston economics department.