On August 4th 2017, effective from August 29, a new bill passed in Italy addressing a number of different subject matters related to market and competition, including a specific provision aimed at ruling a fundamental aspect of the online travel agencies (hereinafter, “OTA”) contracts with suppliers of touristic services: the so-called MFN (Most Favorite Nation) clauses.
By virtue of the MFN clauses, it is prohibited to hotels to offer their services through any booking channel - including their own websites - at lower prices or better conditions than those offered on OTAs platforms.
Section 166 of the Law No. 124/2017, provides that it is void any covenant whereby a touristic accommodation company undertakes not to apply to the final client, by any means and any instrument, prices, terms and any other conditions that are more favorable than those applied by the same company through third parties, irrespective of the law governing the agreement.
As it often happens, the enactment of this piece of law follows a principle stated formerly by the Italian Antitrust Authority (hereinafter, “AGCM”), while concluding on 2015 two investigation proceedings vis-à-vis Booking.com (Booking.com B.V and Booking.com S.r.l.) and Expedia (Expedia Italy S.r.l. and Expedia Inc.).
At that time, through the AGCM order of April 21st 2015, No. 25422, the following undertakings became binding firstly vis-à-vis Booking.com and, subsequently, also vis-à-vis Expedia on 2016 (through a different resolution):
a) modification of the MFN clause – from “wide” to “narrow” so that it applies exclusively to the publicly-promoted hotels through online direct sales channels, leaving hotels free to choose the terms of the offer: (i) to other OTAs; (ii) on offline channels and online direct sales channels provided that these are unpublished and not marketed online to the general public ("Parity rate");
b) elimination of the MFN clause also with reference to (i) the terms and conditions related to the hotels’ offers (“Parity conditions”), in the same way as for the clause of Parity Rate and (ii) the number and type of available rooms ("Availability Parity");
c) compliance of their marketing policy with the provisions of the undertakings;
d) prohibition of conditioning the application of lower commissions or other types of incentives (such as ranking on the OTA website) to the respect by the hotels of the MFN "broad" clause;
e) respect of the undertakings even in the case in which the contracts in force with hotels partners will be transferred to a different company of the Priceline group which Booking belong to.
Clearly a difference was identified between the so-called “wide” MFN clauses whereby an OTA has the possibility to obtain the lowest room rates in any channel of communications used by hotels and the “narrow” MFN clauses whereby hotels remain free to offer lower prices to other OTAs both online and offline, but cannot offer more advantageous terms and conditions on their websites.
The above undertakings, as identified by the AGCM, are the result of a main concern of the authority related to the MFN clause considered as an instrument which might significantly affect competition of the OTAs’ market by introducing vertical restrictions, influencing final prices for hotel rooms, and consequently, consumers.
This trend has been followed within all the European Union with the consequence that Booking and Expedia have accepted similar conditions also in other EU countries.
Italy went a bit further with the full prohibition of MFN clauses but is not alone. In France, the loi Macron has introduced an equivalent provision to oblige the OTAs not to apply MFN clauses in contracts entered into force with hotels. And so did Austria.
Finally, it is worth mentioning that the European Competition Network (hereinafter, “ECN”), comprising the national competition authorities of all EU Member States and the European Commission, issued on April 2017 its “Report on the monitoring exercise carried out in the online hotel booking sector by EU competition authorities in 2016” with the cooperation of the national antitrust authorities of Belgium, Czech Republic, France, Germany, Hungary, Ireland, Italy, Netherlands, Sweden and UK (hereinafter, the “Report”).
Among the key findings of the Report, it is worth underlining that the stakeholder awareness of the changes to OTA parity clauses is about the 50% of the hotels which have participated in the electronic survey. Of those hotels that were aware of the changed provisions, the majority of them reported that they had not applied them in any way. However, the ECN has identified an increase in the level of competition in room prices between OTAs after the elimination – or in some cases restriction – of the MFN clause. In the meanwhile, the commissions applied by the OTAs have not increased: 90% of hotels participating in the survey have stated that there had been no change in the basic commission rate charged to them by OTAs in the period from July 2015 to June 2016.
According to the Report, the measures applied to the parity clauses, namely (a) allowing large online travel agents to use narrow parity clauses, and (b) prohibiting online travel agents from using them altogether, have generally improved conditions for competition and led to more choice for consumers. Based on these results, the ECN has agreed to keep the online hotel booking sector under review and to re-assess the competitive situation in due course.
In the future, the effects on market functioning related to the elimination or restriction of MFN clauses in the EU Member States might lead to the full elimination of this practice in the touristic sector. However, it will be necessary to take in account that MFN clauses are not the only factor to play a role in the relationship between hotels and OTAs: on top of prices, other aspects, such as visibility, availability of rooms, commission rates still work as a leverage in the contractual balance. In other terms, both OTA’s and hotels have a major interest in establishing a successful relationship. Accordingly, we should not expect any significant economic impact from such change, a part from the need to revise, where necessary, some contractual language.