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“Top Management”

Price parity: The biggest shot in the foot in the history of the hotel industry

 

Over the past decade, price parity has emerged as one of the most contentious issues in the relationship between hoteliers and OTAs across Europe. The regulatory landscape is shifting, favoring the freedom of hotels to set prices. This trend has resulted in the complete elimination of such contractual clauses in France, Austria, and Italy, and a partial removal in Germany (specifically for some OTAs). Switzerland and Belgium have also announced plans to follow suit.

The concept of “narrow rate parity” has evolved, providing hotels the liberty to set lower prices in their direct channels or other OTAs through non-public means, such as newsletters, telephone reservation centers, and loyalty programs.

International associations like HOTREC and Portugal’s AHP have publicly opposed parity, applauding its elimination in certain countries. The underlying concern is the lack of mechanisms promoting the use of hotels’ direct channels, leading to a growing reliance on OTAs, especially Booking.

However, based on on what I see in highly competitive industries, and the principles of the so-called “imperfect market theory”, I have my doubts on whether altering the status quo will truly benefit the sector.

My first argument is that the mechanisms provided for in “narrow rate parity” are, to a large extent, those that make sense for optimized management of the price variable, based on positive discrimination of higher value customers – for example, through CRM and loyalty programs – as opposed to a one-price policy that treats all customers equally.

Two counterarguments I acknowledge are: the hotel’s right to define its commercial policy and the practical challenges faced by most Portuguese hotels in implementing complex pricing strategies, that require quite sophisticated skills and tools.

This brings me to my second argument. Would it not be the dream of many highly competitive industries to have a market where price competition is limited by decree? Looking at our industry: do we prefer the same business dynamics that we have with traditional tour operators, in which each one wants to outperform their competitor through prices, discounts and campaigns that give them an advantage in the market?

What really determines Booking ‘s negotiating power is, above all, its enormous distribution capacity and weight in the hotel companies’ business. Contrary to what is commonly argued, the elimination of parity will not reduce their bargaining power, but rather loosen the ties, giving them the freedom to leverage their position to have lower prices than their competitors. When you put the 30 or 50% weight of Booking in your business on one scale and the 5 or 10% of your website on the other, who do you think will win? When lowering the rate, keep the following in mind: if the commission is, hypothetically, 15%, it means that, for every euro of reduction, 85 cents will be borne by you.

Finally, the third argument. Let’s take the game (we’re really talking about “game theory” in the language of economists) a little further and try to anticipate the reaction of the other OTAs, like Expedia, which will have to follow the price reduction of Booking to remain competitive. And now, imagine if they can’t, and they keep losing more market share to Booking… In the end, the industry will not only have lower rates, but, in all likelihood, also be more dependent on Booking than in the nostalgic times of parity.

There is, of course, a superior argument to all of these, and it is the one that prevails in the regulator’s mind: more competition means lower prices and gains for the consumer. I understand perfectly.

What I don’t understand is this sudden altruistic impulse from my fellow hoteliers.

 

A CONTRIBUTION FROM…

Louise Lijmbach | Country Manager for Booking.com in Portugal

What is Booking.com’s stance on price parity?

We believe that the restrictive price parity strategy, accepted by 27 competition authorities around the world, guarantees a transparent and consistent price comparison for customers. It is no longer necessary for customers to check hundreds of accommodation websites individually or download multiple apps to compare prices. Customers can continue to consult a single platform to make simple decisions, thus saving their time and money. Restrictive price parity also ensures that Booking.com continues to offer a platform where a small, independent hotel or family-run guest house in rural Portugal has the same opportunities to attract customers as large hotel chains, regardless of your marketing and advertising budget. This is especially important in today’s international world of online travel, which rapid growth also encompasses mobile devices.

To cite research done by third parties, we can also share that, according to a recent study by Oxford Economics on the economic impact of online travel agencies (“OTA”) in the European Union (“The Economic Impact of OTAs in the EU: impacts on trip, night , spend and employment”, Oxford Economics , 2016), in 2015 online travel agencies generated around 81 million additional nights, which is equivalent to 2.1% of all nights booked for tourism; contributed more than €7.7 billion to GDP; and generated around 155 thousand jobs.

Written by Filipe Santiago

January, 2018

This article was published in Publituris Hotelaria as part of the “Top Management” series. You can access the printed version here.

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