Old friends in new frocks? MFN clauses in the online hotel booking sector/2

(All Episodes here).

Hotel booking services such as the one operated by HRS, and investigated in Germany, provide a web-based platform enabling customers to book hotel rooms directly with the hotels. In this respect, HRS serves as an intermediary between two different groups of “users”, the sellers and the purchasers, allowing them to find each other and to transact. HRS offers its own services to both groups of users (or market sides), and indirect network effects exist between  the two groups. This means that the value of the services offered to one group of users increases with the number of members of the other group. In the case of a hotel booking platform such as HRS, the indirect network effects are likely to be reciprocal: a consumer that wants to make a reservation at a hotel benefits when that hotel makes itself available on a reservation platform and the probability of a successful match rises with an increase in the number of hotels and customers using a platform. While services are provided by the platform to both groups of users, in the case of HRS and other similar online hotel booking services, it is only the group of hotels that pays a commission fee to the platform if a contract is concluded with the customer.

Following a three-year long investigation, the German Competition Authority concluded that the retail MFN clause practiced by HRS in its contracts with hotels was a vertical agreement restricting competition in the sense of Article 101(1) TFEU, and that neither the Vertical Block Exemption Regulation applied, nor there were reasons to justify an individual exemption. The theory of harm put forth in the German decision is fourfold. First, in the absence of MFN clauses, hotel booking platforms are likely to compete with one another on the commission fees they charge to hotels. A hotel booking platform could thus decide to offer lower commission fees to its hotel partners, in the hope that hotels will be offering lower hotel room prices to consumers, and, as a consequence, the platform will grow its trade volume. Moreover, a platform is likely to be constrained in the commission fee it charges to hotels by the fear that a higher fee would lead to higher hotel room prices on that platform and therefore to a loss of market share. A retail MFN clause, however, lifts the competitive constraints on the inflation of commission fees paid by hotels. In fact, a platform wishing to gain sales has hardly any incentive to do so by lowering the commission fee charged to hotels, because the hotels are not in a position to lower hotel rooms prices offered to consumers (i.e. to "invest back" the commission saved into lower prices charged on that platform). Moreover, a platform with a retail MFN which is considering a rise in the commission fee will not have to worry that such a rise will make its offering less attractive to consumers, since any pass-through of the rise in commission fees will need to be applied to all other distribution channels covered by the retail MFN clause. In other words, the platform’s fear of the negative consequences of higher hotel room prices in terms of market shares and revenue is substantially reduced, since the platform knows that it will always be at least as competitive as any distribution channel included in the scope of the MFN (other web based platforms, hotel own-website, direct sale to customers at the hotel’s physical desk). Overall, competition among platforms is softened: there is less incentive to reduce commission fees, as there is less incentive  not to raise them. The likely result are higher commission fees and, if these higher fees are passed through by hotels, higher hotel room prices available to customers.

(To be continued).