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How Not to Help Restaurants During the Pandemic

The Editors

(Bloomberg Opinion) -- Alarmed at high fees, restaurant owners are demanding that delivery services such as Grubhub Inc. cut them a break during the pandemic. Unfortunately, politicians are listening.

New York City imposed price controls on the apps this week, prohibiting them from charging delivery fees of more than 15%. San Francisco, Seattle and Washington have made similar interventions. Many other cities will be tempted to follow suit. They shouldn’t.

Higher prices for delivery reflect rising demand in a period when most of the country is stuck at home. If restaurants find these fees too burdensome, they can hire their own delivery workers or switch to another app — and in New York City, there are at least a dozen, so there’s no lack of competition. It’s true that Grubhub and Uber Eats, two of the biggest delivery apps, are contemplating a merger. But it’s hard to argue that either has engaged in predatory pricing when neither makes any money. Uber Eats, in fact, is losing about $300 million a quarter.

Which suggests a bigger problem with price caps. Although delivery apps have proved quite popular, no one has devised a decent business model for them. At the moment, they’re kept afloat thanks to lavish subsidies from investors. That means consumers get deliveries for much less than they’d otherwise have to pay, and restaurants, far from being scammed, are in fact paying significantly below what the market would demand absent such support.

This may or may not be a good bet by investors, but in the meantime the arrangement creates substantial benefits. Restaurants can connect with a much larger customer base, offload the hassles of delivery and market themselves efficiently without having to add staff. Apps can compete for market share with attractive prices. And customers can choose from an astonishing variety of cuisines while having their orders dropped off for a relative pittance.

Price controls won’t improve this model. To the contrary, they’ll induce apps to pass along the added costs to customers, thereby reducing demand for the very restaurants they’re intended to help, or to narrow their coverage areas to only the most profitable addresses. More customers will order food for pickup to avoid the fees, increasing the risk to public health. And investors may tire all the sooner of subsidizing loss-making services whose potential revenue is artificially capped.

Rather than attempting to re-engineer the delivery economy, city governments should be laying the groundwork so that restaurants and other small businesses can safely reopen, while Congress should focus on getting direct aid to these companies, in particular by fixing some of the perverse incentives created by previous relief measures.

The unfortunate fact is that restaurants are in for an extended period of turmoil. Policy makers should do all they can to help them out — and avoid adding to the damage along the way.

Editorials are written by the Bloomberg Opinion editorial board.

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