Your wallet may take an extra hit the next time you order dinner via the popular food delivery app DoorDash, courtesy of your helpful local government officials. That is, if you live in St. Louis, Chicago, Seattle, or one of the other 57 localities where DoorDash customers just got hit with a $1 to $2.50 “regulatory response fee” on every order.
How did this stomach ache come to pass?
A New Food Delivery Business Model
Well, at the beginning of the pandemic, food delivery apps like DoorDash, UberEats, and Postmates saw an explosion in customers. But the burgeoning digital services were growing before the outbreak of COVID-19 by offering a new business model connecting restaurants with third-party delivery drivers and customers who want food delivered. Of course, restaurants didn’t—and don’t—have to participate. They can hire their own delivery drivers and operate under the traditional delivery business model, as many small shops still do.
However, restaurants that participated saved money because they didn’t have to hire full-time drivers on their staff. And they also reached tons of new customers who found them through DoorDash and the other digital portals.
To make its share of the money for the service it provides, DoorDash charged the restaurants fees on orders. Of course, these fees are necessarily less expensive than hiring drivers yourselves—or no restaurants would choose to participate.
Still, restaurant owners weren’t happy to suddenly have the majority of their business funneled through a fee-based system. So, instead of negotiating with DoorDash or coming up with a different model, they lobbied local governments to impose legal caps below the market rate on the fees the food delivery companies could charge.
Government Regulators Get Involved
Busybody politicians quickly complied.
“With the rising dependence on food delivery through the pandemic, several dozen cities, counties and even states have pushed back by capping commissions at 15 percent of the total cost of orders — what DoorDash can charge restaurants for generating a sale and delivering food,” NBC News reports.
NBC reporter Cyrus Farivar found “68 localities that have passed such caps.”
Perhaps politicians expected DoorDash to simply eat the losses, but this was never likely to happen. Per NBC, the company is billions in debt and did not turn a profit in the third and fourth quarters of 2020. So, DoorDash responded to the restrictions on what they can charge restaurants by slapping customers with new fees.
Congratulations! The government helped so much that ordering your dinner now costs 10 percent more.
The Problem With the Government Picking Winners and Losers
This dysfunctional unintended result of regulating DoorDash is just one example of a much broader phenomenon.
When government bureaucrats meddle in the market to pick winners and losers, the real loser is usually you: the consumer. In a competitive free market, businesses can only earn more profits by better serving more customers’ needs. When crony regulations are passed, though, benefitting businesses can get arbitrary windfalls at their competitors’ and customers’ expense.
As economist Per Bylund has explained, regulation “creates winners” by “propping up incumbents.” However, he points out that it “creates losers” by “redistributing value and economic capabilities to those favored politically” rather than through merit-based market competition.
“Needless to say, this inequality is not beneficial for society overall, but only for those who are favored,” Bylund writes. “It is the creation of winners by creating losers.”
When it comes to crony local regulations helping restaurants at delivery apps’ expense, the losers are average Americans who just want to order an affordable meal.