Price controls in a multi-sided market

Abstract

This paper evaluates caps on the commissions that food delivery platforms (e.g., DoorDash) charge to restaurants. Commission caps benefit restaurants that partner with platforms, all else equal. This may entice restaurants to join platforms, thereby benefitting consumers who value variety in platforms’ restaurant listings. A reduction in platform commissions may also lead restaurants to lower their prices, further benefitting consumers. But commission caps may lead platforms to raise their consumer fees, thereby reducing consumer ordering on platforms and consequently platforms’ value to restaurants. The net effects of caps on restaurant and consumer welfare are thus uncertain. To estimate caps’ effects, I assemble data on consumer restaurant orders, restaurants’ platform adoption, and platform fees. An initial analysis of the data suggests that caps raise platforms’ consumer fees, reduce consumer ordering on platforms, and lead restaurants to join platforms. To analyze these effects and their welfare implications, I develop a model of platform pricing, restaurant pricing, platform adoption by restaurants, and consumer ordering. Counterfactual simulations using the estimated model imply that commission caps bolster restaurant profits, but they do so at the expense of consumers and platforms. I estimate a total welfare reduction of caps equal to 6.2% of participant surplus from platforms.