Wednesday, April 09, 2014

Old friends in new frocks? MFN clauses in the online hotel booking sector/3

(All Episodes here).

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.

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.

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)