Expedia and Booking.com, which also includes Wotif.com, have agreed to amend price and availability parity clauses in their contracts with Australian hotels and accommodation providers, following an investigation by the ACCC. The ACCC's view is that this will increase competition between major online travel sites for hotel bookings in Australia. While this is useful guidance for suppliers currently using parity clauses, the ACCC also has flagged that this could change, if the Government's current plans to amend the Competition and Consumer Act to prohibit concerted practices succeed.
What are parity clauses?
Parity clauses, also known as Most Favoured Nation clauses, have traditionally been considered to increase competition in vertical relationships, as they assure downstream platforms that the terms on which they've received goods or services from the supplier are at least as favourable as those offered to other buyers. In this way, parity clauses remove the risk of downstream platforms making significant investments in promoting the supplier's products and services, on which suppliers could then free-ride.
For example, consumers may often search accommodation via an online travel agent (OTA) website and then go direct to the hotel's own site to make the booking, hoping the direct booking will be cheaper if it avoids the commission charge which the hotel would have to pay to the OTA if booked through its site.
It is for these reasons that parity clauses have played an increasingly significant role, over recent years, in agreements between online price comparison websites such as Expedia and Booking.com, and their suppliers, such as Australian hotels.
However, recently there have been concerns from regulators around the globe that competition may actually be reduced when parity clauses are widely used so as to ensure that the price and terms quoted through the downstream platform will not be higher than the price available directly on the upstream supplier’s website, or on any other platform.
ACCC's investigations into Expedia's and Booking.com's parity clauses
It was this concern, about the parity clauses used by Expedia and Booking.com that spurred the ACCC to begin a lengthy investigation in September 2015.
The ACCC conducted a range of targeted market inquiries, including an online questionnaire to over 500 Australian hotels seeking specific information about their dealings with various OTAs, including Expedia and Booking.com. After reviewing these responses and consulting with competitors and interested parties through online submissions, the ACCC identified the use of broad price parity and room availability clauses by online travel sites as the key issues.
Broad parity clauses to go, but narrow parity clauses can stay
From 1 September 2016, Expedia, (which includes Wotif.com), and Booking.com have undertaken to remove contractual requirements for Australian hotels to:
- offer room rates via Expedia or Booking.com that are equal to or lower than those offered on any other online travel agent
- offer room rates via Expedia or Booking.com that are equal to or lower than those offered on an accommodation provider’s offline channels
- make all remaining room inventory available
- offer the same number and same type of rooms offered to any other online travel agent.
However, the undertakings will not prevent Expedia or Booking.com from continuing to insist that hotels not offer rates on their own websites below those they've offered to the OTAs. Although both Expedia and Booking.com believe the retention of these narrow parity clauses allow for competition because Australian hotels have the freedom to charge different prices across different channels, the Australian hotels believe that the changes do not go far enough.
Increase in competition and reconciling with Flight Centre case?
Mr Sims said the undertakings agreed to by Expedia and Booking.com "will increase the incentive for them to compete with each other and allow consumers to shop around to get the best deal”. The ACCC believes the undertakings will allow Australian hotels to better tailor their offers to the needs of consumers and their own businesses, across a broader range of platforms including telephone bookings and loyalty groups, as well as online price comparison sites such as Expedia and Booking.com.
However, what is not clear is how the ACCC reconciles the outcome with Expedia and Booking.com with its apparent stance in the Flight Centre case, where it has argued (all the way to the High Court) that a travel agent seeking to agree on price parity with airlines who offer flights directly to consumers from their own website amounts to price fixing. Judgment in Flight Centre is expected to be handed down later this year or early next year.
International perspective: parity clauses reduce competition
Similar concerns have been raised in Europe where regulators have also argued that parity clauses reduce competition in the market by effectively making room rates the same across all online platforms. This, in turn, means the OTAs have little incentives to compete on the commission rates they charge hotels ‒ if they increase commission rates, they know the hotels pas this on to consumers because the hotel has to offer the same room rate regardless of commission rate it must pay to the OTA.
This is an example of where the effect of parity clauses may be said to facilitate prices being equalised across a market, which in turn, reduces competition between OTA's.
However, the undertakings given by Expedia or Booking.com do not go as far as the decisions in parts of Europe where there has been a total ban on parity clauses.
Concerted practices and the future of parity clauses in Australia
Australia still allows for these types of narrow parity clauses, but price parity clauses are sure to attract further attention, especially if Australia moves to outlaw "concerted practices" in industries.
Concerted practices are non-binding arrangements or practices which do not amount to agreements between competitors (as is required under the cartel provisions in the Competition and Consumer Act) but nonetheless have similar anticompetitive impacts on a market. They are unlawful in the UK and Europe but to date have not been addressed by Australian competition laws, although the Government is planning to do so.
In its consultation materials on the Harper Bill changes, the ACCC has highlighted that the range of conduct encompassed by concerted practices may include the adoption of parity clauses by competitors. Businesses which use parity clauses should therefore be considering the future of these arrangements if and when concerted practices are banned under the Competition and Consumer Act.