(All Episodes here).
Whereas the German investigation specifically focuses on HRS’ contracts with its hotel partners, retail MFNs clauses are employed also by Booking.com and Expedia, the other two significant competitors in the hotel booking platform market. Not only the combined market share of the three platforms is around 90%, but most hotels “multihome”, i.e. make their offers available on more than one platform. The German Competition Authority considers that the broad adoption of similar rate parity policies by the three platforms amplifies the negative effects on competition seen above.
Second,
according to the German competition watchdog, the existence of the retail MFN clause enforced by HRS leads
to foreclosure. Due to the already mentioned indirect network effects, a hotel booking platform entering the market must attract a critical mass of both
hotels and hotel customers (chicken-egg
problem) if it wants to succeed. The retail MFN adopted by HRS makes it
practically impossible for a competing online hotel booking operator to
adopt an aggressive, low-price commercial strategy in order to acquire
customers, because hotels cannot charge lower prices on its platform.
Moreover, the existence
of the MFN clause prevents sellers from rewarding more innovative
platforms by agreeing on a different pricing model, thus reducing the incentives for
incumbents and entrants to innovate. For instance, a specific platform could be
in a position to offer cost-savings or other quality-based innovations to
hotels, and this
would justify a lower price for consumers using that platform than if they used
another platform. This
sort of innovation has the potential to offer customer benefits through lower
hotel prices, with the prospect of generating more sales for the platform. Without
MFN constraints, such innovation would lead to the seller offering lower hotel
prices through that platform, reflecting the cost savings and the other
benefits to the hotel due to the platform’s innovation. However, if the hotels
cannot offer cheaper hotel rooms via innovative platforms because of the
existence of retail MFN obligations with well-established platforms, this would
reduce the incentive for a platform to innovate as the platform could not
receive a greater market share from offering cheaper hotel rooms relative to its
competitors. Hotels could still reward innovative platforms with higher
commission fees in exchange for a better quality, but
this would not lead to increased trade volumes and a higher platform’s market
share. Put differently, the benefits of the platform’s innovation could be passed
to the hotel partners but not to the users on the other side of the market, i.e. the consumers.
Finally,
HRS’ retail MFN clause restricts competition among hotels. As already
mentioned, lower commission fees are not passed through to consumers in the
shape of lower hotel room prices and, more generally, hotels cannot engage in
price differentiation strategies. Not only are hotels constrained by rate
parity with regard to all of their online offerings, with the inclusion of their
own website, but this obligation extends to the offline distribution of hotel
rooms as well.
Interestingly, the
Office of Fair Trading (OFT), one of UK’s Competition Authorities recently absorbed
by the Competition and Markets Authority (CMA), has been investigating the same
pricing policies practiced by online hotel booking platforms since 2010 as
well. A small hotel reservation platform complained to the OFT that hotels prevented her from offering hotel rooms at discounted prices. Instead of assessing the anti- and procompetitive effects of retail MFN
clauses, however, the OFT focused on whether
an online hotel booking platform allowing hotels to set the room prices
sold through that platform was engaging in resale price maintenance. The
parties investigated are the InterContinental Hotels Groups (IHG), the largest international hotel chain measured by room numbers (675, 982 rooms world-wide, 41,340 in the UK), and two online travel agents,
Expedia and Booking.com. According to the OFT, in separate arrangements with
IHG it was stipulated that Expedia and Booking.com were prevented from discounting
hotel rates set by IHG and displayed to customers via the platforms. The OFT provisionally concluded that such
arrangements were potentially in breach of Article 101(1) TFEU. As a result, the parties gave commitments in order to remove the alleged anticompetitive
effects, which the OFT accepted on January 31, 2014.
(To be continued)
