Update on the OFT investigation into restrictive Pricing practices – Rate Parity

Here’s a summary of the status so far and the commitments offered by the three companies involved in the investigation that they will make in a bid to satisfy the OFT’s concern over restrictive pricing practices in the hotel space.

September 2010 OFT launch formal investigation into suspected breaches of competition law in the hotel online booking sector, related in particular to the arrangements between hotels and OTAs

31 July 2012 The OFT issued their “Statement of Objections” which alleged that both Booking.com and Expedia entered into agreements with IHG which restricted their ability to discount the rate at which room only hotel accommodation bookings are offered to consumers. Here’s the press release here http://bit.ly/17THoCw

The OFT chose to name Booking.com and Expedia Inc as the OTAs, their reason for this was that each OTA represented (at the time) different booking business models (net rate and commission) and they were two of the largest OTAs. IHG was chosen on the basis of it being the largest hotel company worldwide on the basis of number of rooms. The reason for limiting the investigation to cover a small number of major companies was to make the outcome quicker and more effective.

What is the concern? That agreements that each company entered into restricted each OTA’s ability to discount the rate at which room only hotel accommodation bookings are offered to consumers.

Who’s under investigation? IHG, Booking.com and Expedia Inc, but there are broader implications for the whole industry

Commitments made to the OFT August 2013
Commitments made to the OFT August 2013

August 9th 2013 OFT opens a ‘Consultation on Commitments” proposed by Booking.com B.V. (Booking.com), Expedia Inc (Expedia) and InterContinental Hotels Group plc (IHG), designed to address its competition concerns in relation to the online offering of room only hotel accommodation bookings by Online Travel Agents (OTAs).

How does the process of creating commitments with the OFT work? The companies under investigation have to produce commitments (effectively what they are going to do differently) that address the concerns raised in the OFTs Statement of Objections, in this case restrictive pricing practices that can also include the practice of rate parity agreements.  Under the Competition Act 1998, the OFT can accept these commitments from the companies under investigation as long as they appropriately address the OFT’s competition concerns. Once the OFT has formally accepted commitments, it must close its investigation. Therefore the OFT is now asking for feedback on the commitments to allow them to asses whether the commitments appropriately address the issues of restrictive pricing.

What are the commitments made by each company? In a bid to address the OFT’s concern regarding uncompetitive pricing practices in room-only rate distribution, the companies have offered commitments that they would relax current restrictions so that OTAs can offer discounts on room-only accommodation … specifically:

They can offer discounts on hotel room-only accommodation at properties within the EU to UK residents who are part of a Closed Group, and who have made at least one booking with that OTA before.

Price reductions can be offered through any business model, e.g. net rate or commissionable, irrespective of whether payment is made pre or post stay and irrespective of which party the payment is made.

What’s a Closed Group? The Closed Group is defined as “a group where membership is not automatic and where: (i) consumers actively opt in to become a member; (ii) any online or mobile interface used by Closed Group Members is password protected; and (iii) Closed Group Members have completed a Customer Profile.”

In other words to be eligible for a discount a customer needs to be part of some form of membership group that they have opted into, they’ve created a profile and made a previous booking that is non refundable.

Hotel Online Booking Principles : There are “Hotel Online Booking Principles” outlined in the commitments which create a framework for the price reductions that the OTA can offer – remember these all relate to EU located properties, and cover UK residents only. To be eligible for a discount the customer has to be a member of a Closed Group (an Opt in, password protected group where the member of the group has a created a customer profile ) and has to have made a prior booking with that OTA before benefitting as a member of the group.

What does a Prior booking mean? Prior Booking means a booking of room-only hotel accommodation with an OTA as a Closed Group Member, after the Effective Date, that is or has become non- refundable.

How does this differ from being part of a member’s-only hotel site today? Today a customer could join a member’s only site and take advantage of any member benefits without having previously purchased a room. Under this agreement, to benefit from a new members-only site created by an OTA, it would appear that you would need to have made a prior booking on that site previously to be eligible for future price reductions.

The Hotel Online booking principles – 1 What rate discounts can an OTA offer? According to the commitment, OTAs can offer reductions in rates that are no greater than the level of commission earned for that specific booking transaction, (margin or commission) or no greater than the aggregate commission earned by the OTA over a period determined by the OTA but not exceeding one year, starting from the Effective Date or such later date as the OTA chooses.

The Hotel Online booking principles -2 Can the OTA publicise the discounted rate? The OTA can publicise information regarding the availability of price reductions in a clear and transparent manner, including to price comparison websites and meta-search sites, but they can’t publically show the level or extent of the rate reduction or any additional information that would allow someone to work out the discounted retail rate.  That can only be done through the closed user group.

Binding commitments
Are the commitments binding? And for how long?

The Hotel Online booking principles -3 What if an OTA publicises a reduced price outside of a members only group? The commitments state that if the OTA and hotel have a contract that states that the hotel can match a reduction displayed to consumers who are non-members, the commitments shall not restrict the enforceability of that right i.e an OTA cannot restrict a hotel from matching an OTA rate, but it has to be in the OTA/hotel contract.

Are these commitments time limited? The commitments will last for 3 years. Following this the companies have agreed to consider the extending the commitments but have no obligation to do so.

Does this cover all OTA relationships? This applies to the relationship between IHG and Expedia and Booking.com, and the contracts between these companies will be amended to reflect the above commitments. The commitments from all three state that they will make best endeavours to change the contractual conditions with their respective Hotels/OTAs that they have agreements with.

What does this mean in practice? It means that OTAs can use their commission, or net rate margin to offer a reduced rate to their customers, but this has to be done through a Closed Group.

What does this mean for Rate Parity agreements? This isn’t specifically stated since the investigation refers to restrictive pricing, and didn’t cover rate parity specifically but the commitment does say that if a contract exists, a hotel can match a reduced rate offered by the OTA outside of a members only group, however getting that clause into a contract outside of being a large group may prove a challenge.

Are there any hotel programmes that sit outside of these commitments? Yes – Hotel corporate booking programmes and Opaque business models. Opaque booking models are those provided by companies such as Hotwire’s Secret Hot Rate  where the hotel supplier remains hidden to the consumer until after they have completed the booking transaction.

What’s in the consultation? Here is a quote from Ann Pope, Senior Director in the OFT’s Services, Infrastructure and Public Markets group.

“The OFT is consulting on whether these commitments offer an immediate and effective means of injecting some meaningful price competition into the online offering of room only hotel accommodation bookings where, in our provisional view, none may exist. Under the proposed commitments, OTAs would be able to offer discounts off hotel room bookings to qualifying consumers. The OFT would now like to hear the views of all interested parties before it makes its decision on whether to accept the commitments.”

When does the consultation end? 13th September 2013

Fancy sending a response? Here’s the OFT address Any person wishing to comment on the commitments should submit their views to the OFT by 13 September 2013 to:

Hotel Online Booking Team
Office of Fair Trading
Fleetbank House
2-6 Salisbury Square
London EC4Y 8JX.

Note that this piece represents the summary and interpretation of the author and in no way should be construed as legal advice. Readers reliant on the substance of the OFTs agreement should refer directly to the OFT documentation available here.

Check out the Tnooz commentary here

Sealed with a loving kiss?
Sealed with a loving kiss?

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