The German Federal Cartel Office (FCO) recently published the findings of its extensive study of the effects of most favoured nation clauses used in online distribution by platforms such as Booking.com. The FCO had prohibited a most favoured nation clause used by Booking.com in 2015 (case B9-121/13) but its decision was repealed by the Higher Regional Court of Düsseldorf in June 2019. The court argued inter alia that the FCO had not sufficiently investigated the effects of most favoured nation clauses on booking platforms, hotels and consumers. The FCO therefore conducted an extensive investigation into these topics and published its findings now. An appeal against the decision of the Higher Regional Court of Düsseldorf is still pending in front of the Federal Court of Justice. The findings of the FCO give some interesting insights into how most favoured nation clauses work which probably are also true for other geographies.
The FCO distinguishes between narrow and broad most favoured nation clauses. A narrow most favoured nation clause prohibits the hotel to offer better conditions on its own website than through the reservation portal. In contrast to this, a broad most favoured nation clause prohibits the hotel from offering better conditions through any other distribution channel than the relevant portal. The FCO investigated only the effects of narrow most favoured nation clauses as the Higher Regional Court held that this type of clause is an ancillary restraint without which the goals of the distribution contract between the hotel and the reservation platform could not be reached. In particular, the court held that a narrow most favoured nation clause is necessary to avoid a free rider problem. A consumer could become aware through a popular platform such as Booking.com of a certain hotel and then could make a reservation through the hotel’s own reservation tool if it offers better conditions. The court considered this a disloyal exploitation of the services of the reservation platform.
To counter these conceptual arguments of the court the FCO conducted an empirical study of the effects of this type of restriction in distribution contracts with reservation platforms. To this end, the FCO sent requests for information to all relevant hotel reservation platforms active in Germany, including Booking.com, HRS and Expedia. In addition, the FCO contacted a randomly chosen set of 300 hotels listed in at least one of the three big reservation platforms and asked them to complete an online survey. Finally, the FCO instructed a market research institute to conduct a consumer survey to find out to which extent consumers who found a hotel room on Booking.com ultimately make a reservation for that room through the hotel’s own reservation tool if it offers better conditions than Booking.com.
The study revealed that Booking.com was able to expand its business in Germany despite the prohibition of narrow most favoured nation clauses by the FCO. During a period of two years where narrow most favoured nation clauses where prohibited, Booking.com was able to increase its market share and to become the leading reservation platform in Germany. Apparently, the use of most favoured nation clauses is not a requirement for the success of a reservation platform.
In relation to the second question, the Federal Cartel Office established that reservation platforms in general and Booking.com in particular are the most important online distribution channels for hotels. Although hotels typically have their own online reservation tools, approx. 75% of all reservations are made through booking platforms. Almost two-thirds of all hotels listed on Booking.com declared that Booking.com is economically indispensable for them. The FCO considers these responses to prove that hotels have no incentive to lower their sales through reservation platforms also in absence of most favoured nation clauses. The ranking on booking platforms is decisive for the number of guests as typically only hotels on the first five ranks of the standard list of results are chosen by guests. To improve their position in the ranking, customer evaluations and booking volumes as well as the commission rate are decisive. Most hotels listed on Booking.com take measures to improve their ranking there which underlines the great importance of the platform as a distribution channel for them.
At the same time, the majority of the hotels who are listed on Booking.com offer better rates on their own websites. This development did not reduce the turnover of the hotel reservation platforms. Direct online sales of hotels are growing at the same rate as online distribution in total. From this finding, the FCO deducts that there is no necessity for most favoured nation clauses for booking platforms. The FCO established that price differentiation of hotels between the various reservation platforms increased after the abolition of most favoured nation clauses by Booking.com. The authority established a clear positive correlation between the differentiation of the conditions of hotels on the various booking platforms and better conditions for direct sales. All in all, the FCO concluded that hotels have a strong incentive to channel sales through booking platforms and to use direct sales only in a way which does not lower their sales through the platforms. In any event, free rider effects could not be found by the FCO.
The consumer survey revealed that consumers who found a hotel on Booking.com typically make a reservation there and not through the hotel’s own website or other channels. Only about one third of all consumers compare prices of the same hotel in the internet at all. 70% of all reservations are made for hotels ranked one to five in the standard search results, which shows that even a comparison of different hotels on the same platform is considered to burdensome by consumers. Comparing the prices for the same hotel on different platforms is perceived as even more burdensome and typically does not take place.
Consumers who make reservations directly through the own websites of hotels typically know these hotels before and therefore directly make their reservation there. Booking platforms are typically used by consumers which did not know the hotel before the reservation (80% of this customer group uses booking platforms). Out of this group, approximately two-thirds find their hotel on Booking.com. 99% of these customers make their reservation through Booking.com and only 1% directly through the hotel’s own website. Accordingly, the FCO concludes, any free rider effects are negligible.
The Higher Regional Court of Düsseldorf had reached different conclusions on the basis of conceptual considerations. The case illustrates that empirical surveys may lead to a completely different result.
Online platforms have been in the focus of the FCO’s enforcement activity in recent years. In 2019, a procedure against Amazon ended with commitments regarding Amazon’s terms and conditions for Amazon Market Place. The FCO also acted against Facebook and was confirmed by the Federal Court of Justice in the last instance earlier this year.
Prof. Dr. Moritz Lorenz, Partner, Arnecke Sibeth Dabelstein