Don't listen to the naysayers, Uber's acquisition of Postmates should be welcomed
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In the midst of a pandemic that has wreaked havoc on the restaurant sector, an Uber/Postmates merger should be greeted as good news for anyone who hopes to see their favorite eatery survive.

Still, in a world in which competition regulation has become as much about political preferences as about protecting the welfare of consumers, the news that Uber is planning to acquire Postmates has kicked-up controversy.

Regulators would do well to ignore the naysayers. From a legal perspective, this deal presents few, if any, competition issues.

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Despite what you may have heard about the “dominance” of the largest food delivery apps in the U.S., there is no national competition for these services; only local competition. And on the local level, Uber and Postmates are more complements than substitutes.

Competition for food delivery is actually hyper-local. The majority of deliveries are made within a small radius, and even within the same city delivery services often end up predominating in different neighborhoods. At the same time, Uber Eats and Postmates largely cater to different restaurants and customers. While Uber Eats tends to deliver lower-priced orders from national franchises, Postmates focuses on higher-priced orders and local-favorite eateries.

Nevertheless, some have speculated that this merger is really about Uber buying out the competition—an effort to escape the price competition, heavy spending on advertising, and unending promotions that, it is often claimed, have so far ensured that none of these delivery apps are profitable.

The problem with this argument, however, is that buying Postmates will do little to alleviate the competitive pressures on Uber Eats. With or without Postmates it will still face the boundless threat of new entry, the ongoing risk of losing business to existing competitors (including restaurants themselves), and the inherent constraints of the platform.

First, entry into this market is extremely easy and not particularly capital intensive: couriers are independent contractors; most restaurants are independent; and app development and marketing costs are simply a basic cost of doing business today.

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New competitors can enter at very small scale and still be viable. Scale is important for the large companies vying for business from national chains and huge investment dollars, but the hyper-local nature of most deliveries means a new entrant can readily serve a sufficient number of consumers from relatively few restaurants and with relatively few couriers. In fact, just about any individual restaurant is a source of potential competition, as anyone who’s ever ordered delivery from their local pizzeria knows.

Second, any app’s existing relationships with restaurants and customers are no impediment to competitors capturing that business. It is for this reason that GrubHub’s CEO last year colorfully referred to “promiscuous customers” as one of the industry’s biggest challenges.

Buying Postmates would help Uber economize on the costs of signing up those users in the first place, but it won’t stop them from defecting to competing services. The same goes for restaurants, none of which (except for a declining handful of national chains) enter into exclusive contracts with any one service.

Finally, delivery apps must contend with the conflicting incentives of three different constituencies: restaurants, consumers and couriers. Any effort to extract even a little more revenue from one will be checked by the predictable responses of the others. 

Charge restaurants too much and they will flee the platform, which in turn risks losing customers (from lack of selection) and couriers (because fewer restaurants means fewer deliveries and less compensation). Underpay couriers and risk losing customers and restaurants because of long delivery times or delivery unavailability. Charge customers too much and they’ll opt for home cooking, takeout, meal-kit delivery, or—if anyone still remembers it—dining out.

None of this has stopped some restaurants from decrying the fees they pay to delivery services, which has already led to temporary fee caps in several cities. No doubt pushback against this deal will echo those complaints by arguing that the merger would give Uber Eats the power to extract even higher fees.

But commercial disputes are a terrible indicator of actual competition problems. Of course restaurants would prefer to pay less for the delivery-app lifeline to which they’ve gravitated during the pandemic. But that doesn’t mean that price controls and antitrust intervention are a good idea—least of all when any eatery unhappy with the charges can compete by offering its own delivery service or by foregoing delivery entirely.

At the same time, the deal should offer some clear efficiencies, ranging from customer and restaurant acquisition cost savings to wider implementation of Postmates’ more advanced delivery logistics. Achieving these types of efficiencies will be critical for food delivery services (and thus for many restaurants…), which, despite their growing importance and manifest value, have yet to figure out how to thrive.

Now is not the time to block a nascent, dynamic, and increasingly crucial industry’s efforts to find its footing.

Geoffrey A. Manne is the president and founder of the International Center for Law and Economics (ICLE), a nonprofit, nonpartisan research center that studies technology and competition policy.