Most favoured nation (price parity( clauses for hotels

BRIEFING NOTE
Price Parity Clauses (MFNs) for Hotel Rooms

Source:

Ennis, S., Ivaldi, M. and Lagos, V. (2023) “Price-Parity Clauses for Hotel Room Booking: Empirical Evidence from Regulatory Change” The Journal of Law and Economics 66:2, 309-331, https://doi.org/10.1086/723456

Executive Summary

This study examines the impact of price parity clauses (PPCs), which restricted hotels from offering lower rates than online travel agencies (OTAs). These are also a form of Most Favored Nation (MFN) clause. The authors exploit two natural experiments resulting from regulatory changes in vertical contracts between hotels and major digital platforms (online travel agencies - OTAs). First, a European Union (EU)-wide intervention limited the scope of PPC obligations. Second, France and Germany went further by completely banning all PPCs for major OTAs. By examining these regulatory changes in Europe using transaction data from hotel chains, the authors analyze how these interventions affected hotel prices. The study reveals that PPC regulation generally led to more competitive prices in the direct sales channels of midscale and luxury hotels, suggesting that these clauses could hamper competition. The nuanced results by hotel type highlight the complexity of interactions between hotels and online platforms.

Key Words
Price parity clauses
Most favored nation (MFN)
Online travel agencies
Regulatory impact
Hotel distribution channels
Price competition
Hotel Price Parity: Regulatory Impact

Why does this matter?

Growing Importance of OTAs and their Implications

OTAs have become a key distribution channel for hotels, providing consumers with easier research and comparison.

They can potentially increase competition between hotels and help new entrants.

However, OTA commissions (10-20% of the overnight price) can increase hotels' operating costs and potentially prices for consumers.

Regulatory interventions in Europe (mainly via competition law) have been common.

Much of the regulatory and competition law activity was based on weak empirical data.

Businesses should not be restricted in their functioning without a strong justification for doing so.

Price Parity Clauses (PPCs) and Regulatory Concerns

Prior to the interventions, OTAs and hotels used broad PPCs that prevented hotels and other OTAs from offering rates lower than those of a given OTA.

Regulatory concerns focused on these broad CPPs that applied to all of a hotel's transactions.

In 2015, competition authorities in France, Italy, and Sweden accepted commitments from Booking.com (and Expedia followed) to move from broad to narrow CPPs in the EU.

Narrow CPPs allowed hotels to offer lower prices on other OTAs and their own direct channels, provided those discounts were part of a loyalty program and not publicly advertised.

France and Germany have gone further by completely banning all PPCs for major OTAs.

Theoretical Arguments for and against PPCs

Potential benefits (from the OTA perspective): Reduction of free-riding behavior by other distribution channels, thus favoring OTA investments and avoiding an increase in prices of direct channels.

Potential Drawbacks (Antitrust Concerns): * Hotels cannot pass on increased commissions from an OTA by setting higher prices through that OTA compared to other channels, potentially leading to overall higher commissions and prices. * Broad PPCs can act as barriers to entry for new OTAs offering lower commissions. * Narrow PPCs can reduce hotels' incentives to differentiate prices across OTAs, as a direct price lower than the most expensive OTA could cannibalize direct sales.

Ambiguities: Some theoretical work suggests that even broad PPCs can have ambiguous effects depending on seller participation constraints. Narrow PPCs could have ambiguous effects on consumer surplus, especially compared to eliminating PPCs entirely.

Selected prior research: Wide PPCs can reduce free-riding behavior from other distribution channels and, in this way, would promote OTAs' investments and avoid higher direct-channel prices to final users (see Ezrachi 2015; Wang and Wright 2020). * However, undesired anticompetitive effects could emerge from the establishment of such clauses. One theory is based on it being impossible for hotels to respond to an increase in commission fees of a given OTA by setting higher re-tail prices through the OTA than through other channels. This restriction on diverting sales to cheaper channels may create incentives for competing OTAs to simultaneously increase commission fees in equilibrium, which would result in higher distribution costs for hotels and higher retail prices for travellers. * The European Competition Network (2017, para. 3) also suggests concerns about narrow PPCs. The hypothesis is that this type of clause is related to reduced incentives for hotels to offer differentiated prices on different OTAs.

Empirical Methodology

The authors use transaction data from hotel chains for the year 2014 (before the changes) and 2016 (after the changes).

They compare average selling prices across hotel direct channels and two major OTAs.

The analysis includes a before/after comparison for EU hotels and a control group of hotels located outside the EU (differences-in-differences analysis).

The use of actual transaction data means that the authors had access to real sales information as opposed to simple advertised prices on the web. Web prices fail to identify actual prices paid by customers. Harvesting of web prices is particularly weak for direct sales and for prices that changed for the same hotel night over time.

The main dependent variable measures the frequency with which direct channel prices are lower than OTA prices.

Econometric regressions are used to test whether price differentiation across channels increased after the regulatory change.

Empirical Results

Effect of the transition to narrow PCCs (EU): For midscale and luxury hotels, the likelihood of direct channel prices being lower than those of OTAs significantly increased after the transition to narrow PPCs. An opposite result was observed for economy hotels.

Effect of the complete elimination of PPCs (France and Germany): The results suggest that the complete elimination did not necessarily have a greater effect than the switch to narrow PPCs for all hotel categories. In Germany, only a significant positive effect was observed for midscale hotels. For economy hotels in France and Germany, the negative effect observed in the rest of the EU was less pronounced.

Comparison with non-EU countries: The difference-in-differences analysis confirms the relative reduction in direct channel prices for midscale and luxury hotels in the EU compared to non-EU hotels. The likelihood of the direct channel being cheaper decreased for budget hotels in the EU compared to non-EU hotels, though this result may be confounded by the rapid growth of furnished rentals in Europe over 2015.

Conclusions

The regulation of PPCs, mainly the shift to narrow PPCs, has promoted greater price competitiveness in direct channels for midscale and luxury hotels.

The effects on budget hotels are different, suggesting that other economic factors are at play for this segment.

Complete elimination of PPCs did not consistently produce greater effects than switching to narrow PPCs.

The results suggest that broad PPCs could mitigate price competition between OTAs and direct hotel channels.

Policy Implications

Regulatory interventions on PPCs appear to have had a positive impact on price competitiveness for a majority of hotels (mid-scale and luxury), making direct channels more often cheaper than OTAs.

The differentiation of effects by hotel type highlights the complexity of the market and the need for nuanced analysis of regulatory policies. Economy hotels appear to react differently to changes in PPC regulations.

The study suggests that targeting the scope of PPCs (shifting from broad to narrow) may be an effective regulatory strategy to foster greater online price competition in the hotel sector.

The relative effectiveness of completely eliminating PPCs versus limiting their scope deserves continued attention and may require further analysis to understand market-specific dynamics (e.g., France vs. Germany).

Future work would be of value:

The specific reasons for the different behavior of budget hotels in the face of regulatory changes in PPCs deserve further exploration. One possible explanation is the substantial expansion of furnished rentals (eg., Airbnb) in Europe over the relevant time period.

The study acknowledges that external factors (e.g., the 2015 terrorist attacks in France) may have influenced the results for some countries. It would be useful to assess the sensitivity of the findings to such events.

Future research could develop structural models to better understand the underlying mechanisms and buyer and seller reactions to PPCs.


Quotes

"Online travel agencies (OTAs) have gained considerable importance as a distribution channel for independent hotels and hotel chains around the world. These agencies provide many benefits to consumers in facilitating a broad search for and comparison of hotels. In principle, this can translate into fiercer competition across hotels. In addition, OTAs may help independent and new hotels enter the market or operate on a larger scale, which may also be beneficial for consumers. On the other hand, OTAs' commissions are expensive, accounting for 10–20 percent of a night's room rate (Morgan Stanley 2016)."

"Prior to the regulatory intervention, OTAs and hotels instituted wide MFN clauses that ensured that hotels and other OTAs could not set rates for hotel rooms that were below those of a given OTA. In the hotel industry, these are called price-parity clauses (PPCs). The regulatory concern focused especially on wide PPCs that would apply to all of a hotel's transactions."

"Results from the before/after analysis suggest that, following the switch to nar-row PPCs in the EU, average retail prices offered on direct are more likely to be cheaper than average prices posted on OTAs for midlevel and luxury hotels. This result is robust to the comparison with retail prices for non-EU hotels (that is, from a difference-in-differences channels analysis), but only for midlevel and lux-ury hotels. Opposite results are found for budget hotels in both before/after and difference-in-differences specifications..."

"This paper assesses the impact of removing wide PPCs in accordance with commitments adopted by the two largest OTAs in Europe and legislation in France on online booking prices during 2015. Results from before/after specifications and difference-in-differences specifications suggest that the probability of the direct channel being cheaper than OTAs significantly increased, at least for midlevel and luxury hotels. In contrast, the probability decreased for budget hotels. The evidence suggests that the presence of wide PPCs could result in a softening of price competition among OTAs and hotels' direct channels, though perhaps not for all hotel types."


Paper Summary Initial Draft By NotebookLM