Price parity clauses (“PPCs”), especially in the online hotel booking sector have been the focus of several anti-trust investigations around the world. These contractual clauses prevent a seller from offering a better price for their product on other platforms or on their own as it may undermine the competition in the market and affect consumer welfare.
The present article aims at explaining and classifying PPCs providing a crucial insight into the Booking.com judgment in Germany and the rippling effects it had on the European Union (“EU”). The subsequent segment presents the Indian perspective and an analysis of the price parity allegations faced by MakeMyTrip (“MMT”)-Go Ibibo (“GO”) their ongoing case against Federation of Hotels and Restaurants Association of India (“FHRAI”) and Treebo Hotels (“Treebo”). Finally, the authors present their views on the implications of these clauses and the effect the EU and the MMT-Go judgments may have on hotels and online platforms in India and abroad.
While the retailers in ‘brick and mortar’ stores follow a wholesaler model in which the supplier buys the goods in sizeable quantities from the wholesaler at a discount and offers the same to the consumer at a fixed price, the online retail businesses have adopted the ‘agency’ model. Therein, the suppliers are principals to the platform websites which act as agents and offer their goods or services in return for a fixed commission-per-transaction. Such contracts between online retailers and platform websites have a common feature – the price parity clause, often referred to as the ‘best price clause’.
The PPC is an agreement between two vertical parties. The upward online business supplies its goods or services to the downward platform website at the best available price. This commitment prohibits the supplier from offering better benefits or discounts on any competing platform. In return, the platform employing its own resources markets the goods or services such that the consumer base expands while simultaneously promoting itself as an attractive sales channel. For instance, hotels pay a fixed percentage of revenue generated from the booking through the platform website as a commission fee when the customer books from that particular channel. A huge risk for this platform is ‘free-rider’ situation wherein, although the customer learns about the hotel room while browsing the platform, he books it through the hotel’s own website which advertises a lower tariff.
Categories of price parity clauses
PPC must be divided into two distinct categories to appreciate the various judicial decisions taken by the competition authorities in the past regarding the anti-competitiveness of the same. The two types are – narrow and wide. A narrow PPC is an agreement providing protection to the platform website by ensuring the prices promoted on its channel are not more than the prices publicized on the supplier’s website. Whereas, a wide PPC, restricts the supplier from advertising lower rates on any other sales channel including its own, thereby widening the protection coverage for the platform website. However, there are several anti-competitive effects related to a wide PPC, such as –
1. barriers to entry for emerging platforms wishing to adopt a low-cost model who are then unable to do so since the supplier is already engaged in a PPC contract with an existing platform;
2. reduced incentive for competing platforms in the horizontal market to innovate since any investment leading to reduction in costs will have zero effect on the supplier’s price equation;
3. prices across platforms would be identical thus reducing the supplier’s incentive to reduce price.
Importantly, a narrow PPC establishes a singular price parity relationship between an online platform and a supplier having a balancing effect, as competition in the horizontal market rises thus benefiting consumers and sellers alike. The platforms are incentivized to offer lower commissions and better terms while still being protected from the risks of a ‘free-rider’ situation.
The European Union debate
The PPC debate in the EU has gained traction in the last few years, with Germany, France, Italy and Sweden initially allowing narrow PPCs in the online hotel booking sector. However, the debate truly arose after the recent Booking.com judgment in Germany [OLG Düsseldorf, 4 June 2019, VI-Kart 2/16 (V)]. Post the judgment, Booking.com applied their narrow PPCs to all hotel contracts in Germany. On the other hand, France, Austria, Italy and Belgium imposed a blanket ban on all parity clauses through similar legislative actions. The impact of such decisions on hotel booking platforms remains to be seen as, surprisingly, EU has been unable to adopt a unified approach despite there being a broad consensus that narrow PPCs do not have anti-competitive effects.
Competition Commission of India’s (“CCI”) approach vis-a-vis the MMT-Oyo debacle
The CCI’s report on the e-commerce market in India identifies PPCs as distortive in nature. The report suggests a case by case approach as a complete prohibition on PPCs in general would disregard the pro-competitive effects of narrow PPCs. The recent CCI order dated 24.02.2020 against MMT and OYO, the second order in four months against the parties, reflects a new approach to anti-trust investigations relating to price parity in India. Its outcome will set the tone for future treatment of parity clauses in the country.
Treebo filed an information under section 19(1)(a) of the Competition Act, 2002 (“the Act”) against MMT and OYO (Case No. 1 of 2020) alleging contraventions of Section 3 and 4 of the Act. The CCI, based on similarity of allegations by the FHRAI against MMT-GO and OYO in Case No. 14 of 2019, clubbed them together and ordered the DG to submit an investigation Report covering the following issues:
1. Treebo’s denial of market access, its exclusion from MMT’s listing and MMT unilaterally terminating their contract as a response to the exclusivity agreement entered into between MMT and OYO;
2. In direct contravention of Section 4(2)(a)(ii) of the Act, the imposition of a price parity restriction on Treebo hotel partners by MMT (a dominant player) by ‘Chain Agreements’ restricting Treebo from supplying its inventory to MMT’s competitors, namely Booking.com and Paytm, at better rates;
3. The imposition of an Exclusivity Condition in contravention of Section 4(2)(a)(i) of the Act which restricted it from listing its properties on Booking.com and Paytm (MMT’s competitors) for a period of 72 hours and 30 days prior to check-in for hotels in Category A and Category B cities, respectively
Analysis of the price parity allegation
In addition to the price parity allegation against MMT-Go, the existence of a room parity agreement restricting the hotels from making their inventories available on other Online Travel Agencies (“OTAs”)was contested to be in violation of Section 4(2)(a)(ii) of the Act. Clause 1.3 of the contract, stating the aforesaid terms is reiterated as follows; “[t] he Hotel shall maintain the rate parity, and room availability parity between Facilitators and other travel agents, other sales channels of third parties and the Hotel itself”.
While analyzing the issue, the CCI observed that the room and price parity restrictions imposed by MMT-Go were wide in nature as the hotel partners would not only be obligated to keep room and price parity between MMT- Go and their own online portal, but also between third-party sales channels and other OTA’s.
Further, the CCI examined that “APPAs may result in removal of the incentive for platforms to compete on the commission they charge to hoteliers, may inflate the commissions and the final prices paid by consumers and may also prevent entry from new low cost platforms.”. Though the effect of such agreements depend on the dominance of the platform in the market, owing to the prima facie dominance of MMT-Go, there existed a need for investigation of the parity restrictions in this case. The Commission, therefore, found that a prima facie case existed against MMT for abusing its dominant position to cause an Appreciable Adverse Effect on Competition (“AAEC”) in the market and directed an investigation to be made under Section 26(1) of the Act on account of all the three issues enumerated above.
Across Platform Parity Agreements (“APPAs”) are tricky in nature. In India’s case, they are also unprecedented as far as the CCI is concerned. Deciding on an issue may be difficult if the restrictions, price or non-price, end up creating barriers for new entrants in the market. Generally, APPAs lead to unfair pricing when the accused platform is dominant. In this case, MMT-Go is a powerful player in the market holding 63 per cent of the market share. Therefore, it is obvious that if a hotel is not listed on MMT-Go’s website, it will suffer significant losses. MMT-Go’s prima facie dominance puts them in a difficult situation in the present case. APPAs have been dealt with differently in different jurisdictions. While there are no precedents, and approaches are still being defined worldwide, a general inclination towards narrow PPCs suggest the direction of the CCI’s judgment.
The effects of a price parity clause depend hugely on competition in the horizontal market. When platforms compete fiercely, they are less likely to raise their commissions benefitting suppliers, consumers and platform websites alike. Thus, the Booking.com judgment is a step in the right direction as it indicates the EU authorities have assessed the relevance of intra-brand competition before allowing narrow PPCs to operate. Moreover, the investigations against MMT and OYO ordered by the CCI in the past months have for the first time, thrust the issue of wide PPCs leading to an AAEC in the market. Interestingly, the use of wide or narrow PPCs in contracts in the online hotel booking sector has never before been debated in India and so, it will be interesting to observe whether the CCI’s stand on the present case acts as a precedent for the future, or the authorities continue to look up to foreign competition authorities for guidance.
This article has been authored by Khushi Bhardwaj and Apurva Vats, second year students at National Law University, Odisha.