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Hotel rate parity - what are the issues?

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Summary: It is a long established practice in the hotel industry, but rate parity has come under greater scrutiny recently. In September 2010 the Office of Fair Trading (“OFT”) launched an investigation into whether the pricing of hotel room rates online breaches UK competition rules. The OFT is expected to publish its initial findings imminently; there could be far-reaching implications for the European and global online markets for hotel rooms.

The practice involves hotels allegedly enforcing rate consistency across all booking channels, frequently to try to ensure that an agent cannot beat a hotel’s own ‘best price guarantee’, with some agents also accused of colluding on the practice to avoid a price war between websites.  With fewer overheads to support than the hotels themselves or traditional travel agents, online booking engines have increasingly been looking to offer heavily discounted rates to incentivise reservations.  It is reported that certain hotel chains have subsequently threatened to withdraw their rooms or impose other sanctions on any websites undercutting the chain’s own rates, which has led to many industry insiders questioning whether the practice amounts to a fair pricing structure or anti-competitive price fixing.  The concern is that rate parity leads to inflated prices for consumers and offers no ability to shop around because the same rates tend to be displayed on all websites.

The OFT investigation appears to have been triggered by a complaint from the founder of booking engine Skoosh, who reported that the website had been subject to pressure to maintain rate parity despite feeling able to offer lower rates as a result of its business model.

From a legal perspective the key to the issue lies in whether the relationship between the hotel and booking engine is a true agency relationship.  If the booking engine is selling as agent on behalf of the hotel, rather than selling on rooms that it has purchased, then price controls would be permissible. The key factor to be considered is therefore whether the ‘agent’ accepts any risk for unsold rooms.  In order for the hotel to set a minimum resale price for rooms, this risk should lie with the hotel business itself and not anyone selling rooms on the hotel’s behalf.  In some cases the position is further complicated by the presence of a wholesaler who makes block bookings for rooms and sits between the hotel and the booking engine.  However, fundamentally the crucial point is likely to remain whether the hotel retains risk on whether room inventory sells or not.

The OFT has announced it is not yet in a position to say whether the law has been infringed but that a further update will be provided in July 2012.  If the OFT decides to issue a ‘Statement of Objections’ it would more than likely identify particular hotel chains or other parties who are the focus of the investigation and could require those identified either to pay a fine or challenge any allegations of abuses of competition.  At this stage any individual entities being investigated have not been disclosed publicly.

Depending on what the OFT decides, this could force anyone involved in the sale of hotel rooms (in particular hotels and hotel chains) to revisit the relationships they have with agents or distributors in order to evaluate whether the practices in place would stand up to the current scrutiny.  Price fixing can lead to fines of up to 10% of turnover so the risk of falling foul of competition regulations is too great to be ignored.

Watch this space.

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