In recent years, several state and local governments have passed or considered new regulations on services providing rapid delivery of items such as restaurant-prepared meals, groceries, and time-sensitive packages like medicine. These regulatory efforts are ostensibly intended to help consumers, workers, and businesses by forcibly lowering prices, raising wages, and eliminating “junk fees.” Perversely, however, they run the risk of disrupting these complicated markets and actually hurting market participants. For example, New York City’s experiment with fee caps led to reduced orders and revenue for small businesses, and the policy was ultimately rolled back.
In this paper, we examine and explain how these complicated “three-sided” markets work, facilitating near-simultaneous transactions between three different groups of economic actors: the merchants, the people doing the delivery, and the ultimate consumers. Such services require near-flawless coordination between the business providing the product and the people doing the delivery because of the time-sensitive nature of the goods being delivered. The result, if done well, is a huge increase in consumer welfare, in the form of time saved; an increase in flexible earning opportunities for individuals doing delivery and other related tasks, such as personal time to spend with loved ones or relaxing; and an increase in demand for restaurant meals and groceries by reaching new consumers who couldn’t access the good or didn’t know about the merchant previously.
The novel structure of these newly created markets has also sparked new questions and the interest of policymakers. For instance, how should compensation for delivery drivers be structured? How should consumers be informed about the costs associated with delivery? These questions — and any potential policy changes — should be considered in parallel with their impacts on the market functions of these platforms.
In this paper, we will first offer a basic explanation of how these marketplaces work, and why they benefit all the participants — the merchants who supply the products, consumers, and the people who handle the actual deliveries. Though some academic and corporate publications have focused on related topics, an easily accessible explanation is unfortunately missing from the public policy discussion.
Then, we will look more closely at the price structure of three-sided delivery markets and show how fees and prices in these markets are structured. The section will directly address the ongoing debate about “junk fees” and the flurry of recent legislation at the state level.6 Junk fees, affecting goods like hotels, concerts, and airplane tickets, have drawn sharp criticism in recent years from consumers and regulators. There is no agreed-upon definition of junk fees, but in one 2023 report, the Biden White House implicitly defined junk fees as “unnecessary, unavoidable, or surprise charges that inflate prices while adding little to no value.” Though regional variation makes definitive generalization challenging, most online food delivery fees do not fit these criteria.
