The UK's antitrust authority, the Office of Fair Trading ("OFT"), has accepted commitments from hotel company InterContinental and from online travel agents that will remove restrictions on their offering discounts on rates for hotel rooms. The OFT investigation reflects the interest that antitrust agencies have taken in restrictions on pricing and on most-favored-nations agreements.
Discount restrictions in the spotlight
Following a two-year investigation under the UK Competition Act, in July 2012 the OFT issued a statement of objections alleging that Intercontinental and the online travel agents had entered into anticompetitive agreements that restricted the online travel agents from discounting the rate at which "room only" (not part of a package with another travel product such as flights or car rental) hotel accommodation bookings are offered to consumers. A statement of objections is a formal stage in an OFT investigation at which the OFT sets out its provisional view that behavior it is investigating infringes UK and/or EU competition law. The OFT was concerned that the restrictions on discounting limited competition on room rates between different online travel agents and between online travel agents and the hotels' direct online sales channel. The OFT was also concerned that those restrictions increased barriers to entry, preventing online travel agents from entering the market, and that similar discount restrictions replicated in the wider market exacerbated the distortion of competition.
On January 31, 2014, the OFT accepted commitments offered by the parties under investigation that will change their agreements to enable hotels and online travel agents to offer discounts on hotel room rates. Commitments can be an attractive solution to companies under investigation and to the OFT. For the companies, they bring an investigation to a close without the OFT concluding that they have infringed competition law. For the OFT, they shorten an investigation, freeing up resources for other matters, and bring to an end the behavior the OFT believed may infringe competition law.
In this case, the commitments mean that online travel agents that deal with InterContinental will from now on be able to offer discounts to residents throughout the European Economic Area off room-only rates for hotels located in the UK. Similarly, the online travel agents may not restrict hotels from offering discounts on their own room rates.
The online travel agents will be free to publicize information regarding the availability of discounts so long as they do not provide non-members with specific information about the extent of discounts. In limiting the scope of the commitments and not allowing for unrestricted discounting, the OFT recognizes that there might be some efficiencies and consumer benefits that justify hotels having the ability to set and control the rate of their hotel room – particularly in relation to yield management. This is also reflected in the short duration of the commitments, which last for two years. The OFT considered that this would suffice for the full benefits of increased retail rate competition to be realized, while avoiding "excessive regulatory intervention in a dynamic innovative sector." After two years, the Competition and Markets Authority ("CMA"), the body set to replace the OFT and Competition Commission in April 2014, will be able to reassess the position and decide whether further action in this sector is appropriate.
Background on MFN clauses
The OFT's investigation centered on restrictions on online travel agents' discounts. This is an area under scrutiny in several EU countries. It is notable that, unlike the competition authorities in Germany and France, which have also been investigating hotel online bookings, the OFT did not directly address so-called most favored nation provisions or "MFN" clauses covering the retail rate. In particular, the OFT did not assess whether such clauses, under which hotels agree to offer online travel agents room reservations at a rate that is no higher than the lowest rate displayed by another online distributor, may breach UK or EU competition law.
MFN clauses have come under recent scrutiny from antitrust authorities, in particular in the U.S. and in the EU – notably the e-books case, involving book publishers and Apple, and even more recently with the Amazon price parity investigations in Germany and the UK. However, the lack of focus on MFNs in this online travel agency hotel booking case does not mean that MFNs are out of the scope of the OFT's investigation. MFN clauses are also caught by the commitments to the extent that such restrictions could prevent hotels or online travel agents from offering discounts on room-only rates. The parties have committed to amend, remove or not include any provisions that could undermine the new discounting freedom provided in the commitments. Thus, under the commitments, online travel agents shall not enter into or enforce any MFN in respect of discounts on room rates offered by hotels to their closed group members.
The OFT's investigation focused on a small number of major companies – the largest online travel agents in the UK and the world's largest hotel company. However, the OFT notes in its final decision that:
although the OFT has not investigated the extent to which similar discounting restrictions are replicated in the market, the OFT understands that the alleged practices are potentially widespread in vertical distribution arrangements in the industry.
This is a clear signal to the travel industry that restrictions on discounting imposed by online travel agents are at risk of being considered anticompetitive by the OFT. This case is intended as a shot across the bows of other companies with similar restrictions on discounting. The OFT has gone so far as to state that "as far as deterrence is concerned, the OFT expects that this decision […] will promote competition law compliance in vertical distribution arrangements in the hotel online booking sector, and potentially beyond." Such companies should review their arrangements with suppliers and distributors to assess the impact of this case on their business.