Monday, May 05, 2014

Old friends in new frocks? MFN clauses in the online hotel booking sector/7

(Previous episodes here

Still, the protection of sunk and fixed cost investments, a generally accepted benefit of many vertical restrictions, could potentially apply also to retail MFN clauses. In the hotel online booking decision, the German competition authority discussed at length whether the MFN clause employed by HRS, the investigated OTA, aimed at protecting the investments required for a high-quality online booking offering, such as a fruitful search experience, and the provision of extensive, and reliable, information sources, by that promoting quality competition among OTAs. HRS made the case that it invested heavily in producing a good-quality service in order to attract customers, and that the employed retail-price MFN limited the diversion of consumers from HRS’ platform to the hotels’ own websites and to other OTAs. If consumers discovered that they could find cheaper hotel rates elsewhere, they might still use the hotel search and other facilities developed by HRS but not book the room through the HRS platform, by that undermining HRS’ and other OTAs incentives to invest in quality competition among platforms.

Following detailed analysis, the Bundeskartellamt was unconvinced by HRS' argument about the seriousness of the free-rider problem. First, the German competition authority noted that only a very small amount of HRS’ investments goes into the promotion of single hotels offerings; the largest part of HRS’ investments is devoted to the promotion and the enhancement of the platform itself. In case consumers booked hotel rooms directly via the hotels’ websites, the platform-specific investments would not be significantly discouraged. The prohibition of retail MFN clauses notwithstanding, the OTAs would continue investing in the quality of their services.

Moreover, the so-called billboard effect (i.e. the additional reservations made through the hotel’s website after inclusion in the OTA’s listing) is limited, especially due to the structure of the hotel industry in Germany, where there are many small and medium operators whose websites normally do not offer the same booking functionalities and comfort available to consumers without charge on the HRS' platform (e.g. immediate booking). The billboard effect in favour of the major hotel chains in the German market is also bound to be relatively insignificant, in particular because consumers already tend to seek out brand hotel chains’ websites directly.