Diving In | How Food Delivery Killed Competition (And Took Your Budget With It)

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1:01Stripe's network is so vast, it has seen$1.9 trillion in payment volume across millions of global businesses. In fact, when a card is used, there's a 92 % chance the Stripe network has seen it before. All of this means fraudulent patterns across payments, accounts, and customer abuse can be detected, flagged, or blocked easier. Based on the rules you set up, of course. Blocking bad actors, welcoming good customers, keeping more of your revenue, your revenue. Learn more about fighting fraud with Stripe at stripe.com slash radar. Hey, everyone, it's Mary. And it's also July 3rd, which is technically a holiday.

1:43So the folks here are taking a bit of a breather to celebrate America's birthday. But we did not want to leave you high and dry. So we're going to leave you in the hands of one of our favorite guests, Justin Wolfers. Justin is one of my favorite people to talk to about economics. He's pretty hilarious. He's got a great Australian accent. His diving in series makes economics accessible, entertaining, and actually understandable. This episode looks at delivery apps. We've all been there. You add your order and then there's a delivery fee and a service fee and a tax and a tip. Justin asks, why and how much can these apps skim off the top before we just stop using them?

2:26So here's Justin.

2:32The fact that I can open up my phone, just push a couple of buttons, and 30 minutes later have restaurant-quality food show up on my doorstep, it's pretty incredible. Seriously, the magic of our times. but it's also gotten painfully expensive. That$28 burrito isn't just a meme, it's a reality. And so I want to ask, does it really have to be this way? I mean, Amazon can get almost anything in my house cheaply and quickly, but that burrito, it's priced as if they're sending it here in a Rolls Royce. So today I want to ask, why is food delivery so damn expensive?

3:20I mean, sure, it looks like a competitive market. There's lots of businesses competing and they're all selling pretty much the same product. Wouldn't economics tell us that competition drives prices down? But this market, it's not delivering the one thing that I really want, which is low prices. So here's the big idea. The whole point of competition, it's that you should be able to easily compare prices and find the best deal. But when it comes to food delivery, that's weirdly hard to do. First of all, the prices on the app, they're usually a whole lot higher than the price at the restaurant. And they don't even tell you what the markup is.

3:59That's a hidden fee right there. On top of the hidden markup, they add in other fees, which come in different shapes and different sizes. And they vary across platform. And honestly, those fees seem to vary by the time of day, the order size, whether I have a subscription. and whatever strange mood the algorithm woke up in that morning. And perhaps the worst bit, these fees, you can't even see what they are until you get to the very last screen. By that point, you're dreaming of burritos or pizza or sushi. This is a story about what happens when you have plenty of competitors, but not much competition because price comparison is painful.

4:39This is going to be a story in five chapters. first, we'll follow the money and we'll see what it takes to compare one ordinary family dinner, my family's dinner, across three of the biggest food delivery apps. Second, we'll explore why these hassles matter and how these small frictions can add up to very big inefficiencies. Third, I want to make the case that this is not an accident of bad design. It's an intentional strategy used by Uber Eats and DoorDash and Grubhub to boost their bottom line at the expense of your back pocket. Fourth, I always like to talk about solutions. And so I want us to figure out what we can do about all of this, how regulators might be able to finally fix this once they eventually get around to figuring out the scam.

5:26Fifth is the dessert course. You might think, and most of the time we're going to talk as if this is a video about food delivery. But really, it's a metaphor for a much larger story about capitalism, markets, and how economies can go right and wrong. Okay, let's begin. Competition, it's the magical force that leads markets to deliver better outcomes for consumers. One shop charges five bucks for a Coke and a candy bar and another charges seven, you end up going with the cheaper one. You therefore are going to provide a really sharp incentive for the suppliers to keep their prices down and the quality of their goods high.

6:06That is the magic of competition. As suppliers try to win your business, they're going to each try to outdo each other by offering a better deal. Hey, that's how it works in theory. And at least That's how it works in the sort of theory when I teach economics 101. But in reality, I'm still waiting for a food delivery company to offer me even a halfway good deal. What's going on here is competition stumbles over one small problem. The price of that delivered burrito, it's really hard to find. What you can find is the price next to the burrito on the menu, but that's not what you care about. What you care about is the bottom line on actually getting that burrito delivered.

6:48that's the price you care about but to get there you're going to have to log in click all the way through search through different bits of long menus to find your favorites enter your address tell them whether to knock on the door or ring the bell then enter your email and a password and it's definitely a password you've forgotten was it one exclamation point or two at the end and finally you got to do 12 jumping jacks and then they agree to show you the price and deliver your burrito which means if you want to compare prices you've got to do all of that all over again on multiple apps, rebuilding the same cart over and over with the same items that are somehow rearranged on every platform.

7:23So yes, technically you can compare prices, but only if you're willing to do what feels like hours of unpaid clerical work before dinner. I wanted to make this more concrete. So I took one ordinary family sushi order with five pretty basic rolls, and I tried to figure out what the price was in four different ways. I checked out the restaurant's website. I I went on to Uber Eats, I went on to DoorDash, and then I went over to Grubhub as well. I remembered that what matters here is not the different subtotals that were offered, but the bottom lines. But along the way, I noticed a few things. The differences across these apps, it wasn't just one price that was different.

8:04The differences showed up in lots of different ways, and that made one-to-one comparison really difficult. So, for instance, on the three different apps, the rolls were about 20 % more expensive than they were on the restaurant's website. but there was a couple of exceptions but I couldn't figure out what drove those and I honestly don't know if they're typos. On Grubhub the delivery fee, the service fee and tax are all displayed separately while on Uber Eats and DoorDash service fees and taxes were combined but then you could click them to get more info. For the tip Uber Eats and Grubhub defaulted to a pretty generous 20 % while DoorDash suggested a flat$6.

8:39Now then you got to think about promos and large order discounts and optional subscriptions you might have to each of these services, that muddies the water even further. So when I was trying to find the best price, I ended up getting three different answers, depending on whether I was looking at the subtotal, the advertised delivery fee or the bottom line. And that was only shown on the very last page. And that's a really important point. That might be the crux of the matter. Getting to the point where the prices were genuinely comparable took time, a lot of time. Across these three apps, plus the restaurant site, I lost half an hour of my life.

9:13Hey, if I could earn 30 bucks an hour driving an Uber, then a half hour of my price comparisons cost me$15 in lost earnings. Perhaps I would have saved 10 bucks, but if I spend$15 to save 10, it's just not worth it. So if competition's working properly, the price of that family meal should be a straightforward process. In fact, they've made it so the comparison shopping loses your money. In economics, there's a fancy phrase we use to describe what's going on here. We call it search costs. Search costs are all the time, attention and effort it takes to compare what something really costs and whether there's a better alternative.

9:53And search costs matter because competition is not just magic. It doesn't work merely because different firms exist in a market. It works because consumers like you and I can easily compare offers. And as we do that, we end up punishing the expensive sellers by withholding our business from them. But if comparison shopping becomes annoying or slow or taxing, then fewer people do it. And when the kids are hungry and everyone's knackered, even fewer of us do it. And as a result, the expensive sellers not only persist, but they thrive. When fewer people search for low prices, businesses feel less pressure to compete on the true price and therefore the true price doesn't get pushed down.

10:35It's not quite the absence of competition, but it's a weaker, murkier version of it that ends up explaining that$28 burrito.

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13:01up. See CapitalOne.com for details.

13:07Now, you might think the search costs are just really sloppy app design. You know, there's a few messy interfaces, a few odd pricing choices. But I don't think that's what's going on. I think there's something a bit more structural here. Like, do you really believe it's just a coincidence that Grubhub and Uber Eats managed to get the worst app designers on earth? Obviously not. Think about it. these should be the easiest prices to compare. These prices, they're digital, they're data. You're looking at them on your computer. Computers know how to compare numbers. It ought to be super easy to compare these numbers that are floating out there in the internet ether, but the companies make it hard.

13:47In fact, they're very skilled programmers making it more difficult for you. In fact, you can see it directly. Uber's terms of service say that users may not aggregate Uber's data with its competitors' data or use it in ways that support competitive price comparison. Similarly, the terms for DoorDash and Grubhub, they prohibit the scraping and systematic retrieval of its data. And Grubhub also forbids the creation of databases from its platform content, which is to say its prices, without asking them for authorization. Now, look, you might say, in most businesses, this is fine. We normally allow firms to just write their own terms of service.

14:27But here they're writing their terms of service explicitly to destroy your ability to comparison shop and therefore the forces of competition. The tools that would make price comparison easier for you and I, at one level, they're really simple. Have you ever shopped for airline tickets? You can compare prices really easily. But in this case, the food delivery companies have made them almost impossible to build. Honestly, I tried. I spent an hour or two actually just trying to write some code to scrape the data from the different websites, and it was formatted in such odd ways I couldn't figure it out.

14:59The only conclusion I came to is their bad design is their buy design. They're trying to stop us comparison shopping. So what can we do about it? Well, let me sound optimistic for a moment. Regulators are starting to notice. I mean, And I noticed the$28 burrito years ago, so I don't know what took them so long. But back in December of 24, the Federal Trade Commission settled a case with Grubhub over allegations that Grubhub hid the true cost of delivery and used what the FTC described as a pricing shell game. That's pretty harsh. Grubhub was ultimately forced to pay$25 million and to make several changes to the way it does business.

15:38And this past April, the FTC opened a broader inquiry into unfair and deceptive fee practices for online food and grocery delivery. Basically, the regulators are asking, do consumers actually know what they're paying and why? Which seems like a pretty fair set of questions. So the point here is this is not just a story of one grumpy economist getting annoyed with ordering his family's sushi dinner. It's increasingly a policy story about whether a market counts as competitive if consumers can't easily see what the real price is. So how might we fix this? Look, here's just a few ideas about where to start.

16:15First, show the full mandatory price earlier, up front, as soon as possible. Not halfway through the checkout, not after I've emotionally committed to the spicy tuna. That's not price comparison, that's manipulation. Second, if the app price is higher than the restaurant's own price, tell me clearly right there on the item. Third, standardize the fees. If there are service and delivery fees, explain what they are, whether they're mandatory and who gets it. Here's the frustrating thing. Every time I go, it appears that the fees on Grubhub have changed since last time. And so have the fees on Uber Eats.

16:51And as a result, I have no indication of which is most likely to be cheaper this time. These fees should follow clear and simple rules that are consistent across orders and customers in order to facilitate comparison shopping. Fourth, and this is the bigger institutional point, don't make it impossible for independent comparison tools to exist. It shouldn't be legal to suppress competition and price comparison. Your price should be something that you're proud of. Look, it's easy for some bright spark to write an app that brings up the menu for your favorite sushi restaurant and to show you the prices on each of the main delivery sites.

17:28Well, it should be easy. But at the moment, the businesses involved are actively discouraging this. And that's the tell. You see, if these businesses actually believe they're offering the best deal, they should welcome easy comparison, not fear it. A genuinely competitive market should not require detective work from the customer. Look, I get it. Food delivery is a real service. Delivery does cost money. Convenience is worth something. Heck, I'm prepared to pay for it. I'm not saying that my dinner should just arrive on the wings of fairies. But if you're offering convenience and you're charging for convenience, I'm saying you should at least be honest about the price of that convenience.

18:07Okay, on to dessert. it. I promised her actually talking about bigger themes here. And here's the big takeaway. Competition. It's not just about whether there's lots of businesses in a market or whether there's lots of colorful apps on your phone. And it's not about whether they're all selling a similar or different product and whether they're advertising. It's about whether the market is structured in a way so that ordinary people can make sensible choices. That means offering clear enough prices that a busy family can actually tell who's offering the better deal. And here's the point I really want to broaden to.

18:36There's a much broader story here that goes well beyond the$28 burrito. From your perspective as a consumer, from your perspective, competition, competition is beautiful. Competition is what forces firms to compete and to each try to offer a better deal than the other. But from the side of businesses, their side, competition destroys their pricing power. They might have to start selling burritos at reasonable prices. Their profit margins might fall. And so even though competition is what makes markets work for you, businesses fight to reduce or eliminate competition. In the food delivery industry, they do this by making it hard to compare prices.

19:14In other industries, they use other tricks, but they're always looking to reduce the competition that benefits you. And that's the inherent tension at the heart of capitalism. It's a system that delivers extraordinary outcomes. It delivers extraordinary outcomes because of competition, but the competitors are actually always trying to destroy competition. And so capitalism can only work if there are clear rules to keep competition truly competitive. Step back and you'll see that there's a lot of people who use the rhetoric of economics to say that our policies ought to be pro-business, that we should get the government off the back of businesses.

19:52But if we let businesses do what they want, they'll work to destroy competition. The point here is that there's a much stronger case for being pro-market or pro-competition than being pro-business. So next time you tuck into a burrito, I want you to realize that you're holding a foot-long lesson in economics. That lesson, competition, is your best chance at getting a good deal.

20:44We'll see you next time. to help build the company's retail presence. Capital One, what's in your wallet? Find out more at CapitalOne.com slash SparkCash Plus. Terms apply. 500 orders a month was manageable. 5 ,000 is madness. Embrace intelligent order fulfillment with ShipStation, the only platform combining order management, warehouse workflows, inventory, returns, and analytics in one place. What used to take five separate tools, ShipStation does in one. automate fulfillment and rate shopping to ship up to 15 times more with up to 90 savings go to shipstation.com and use code audio to try shipstation free for 60 days