Regulating Powerful Platforms: Evidence from Commission Fee Caps

Platform giants typically possess strong power over other participants on the platforms. Such power asymmetry gives platform owners the edge on setting platform fees to capture the surplus created on their platforms. Although there is a heated debate on regulating these powerful platforms, the lack of empirical studies hinders the progress toward evidence-based policymaking. This research empirically investigates this regulatory issue in the context of on-demand delivery. Delivery platforms (e.g., DoorDash) charge restaurants a commission fee, which can be as high as 30% per order. To support small businesses, recent regulatory scrutiny has started to cap the commission fees for independent restaurants. This research empirically evaluates the effectiveness of platform fee regulation, 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’ discriminative responses to the regulation may explain the negative effects on independent restaurants. That is, after cities enact commission fee caps, delivery platforms become less likely to recommend independent restaurants to consumers, and instead turn to promoting chain restaurants. 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.