Regulating Powerful Platforms: Evidence from Commission Fee Caps

Abstract

Digital platforms have become increasingly dominant in many industries, bringing the concerns of adverse economic and societal effects (e.g., monopolies and social inequality). Regulators are actively seeking diverse strategies to regulate these powerful platforms. However, the lack of empirical studies hinders the progress toward evidence-based policymaking. This research investigates the regulatory landscape in the context of on-demand delivery, where high commission fees charged by the platforms significantly impact small businesses. Recent regulatory scrutiny has started to cap the commission fees for independent restaurants. We empirically evaluate the effectiveness of platform fee regulation by utilizing regulations across 14 cities and states in the United States. Our analyses unveil an unintended consequence: independent restaurants, the intended beneficiaries of the regulation, experience a decline in orders and revenue, whereas chain restaurants gain an advantage. We show that the platforms’ discriminative responses to the regulation, such as prioritizing chain restaurants in customer recommendations and increasing delivery fees for consumers, may explain the negative effects on independent restaurants. These dynamics underscore the complexity of regulating powerful platforms and the urgency of devising nuanced policies that effectively support small businesses without triggering unintended detrimental effects.