What is rate parity?
Rate parity describes an agreement between hotels and OTAs. The agreement states that the hotel guarantees to use the same rate and terms for a specific room type, regardless of the distribution channel. The price of the room can regularly change – as such the exact rate is flexible – but the price must remain in parity with other distribution channels.
By signing a rate parity agreement you agree not to undercut (either through your own website or other OTAs) the room prices that the OTA charges for your hotel.
Franchisers of hotel chains were the first to insist on online rate parity to prevent third parties from undercutting the chains’ rates. Later, as hoteliers began introducing different pricing per room type, OTAs began demanding rate parity in negotiations to ensure they were getting a fair piece of the pie.
Why was rate parity introduced?
OTAs distribute your hotel to their visitors through high-budget advertising. To justify the spend, they need to avoid being used for just window shopping. Instead they must show travellers that their site has the best price. Rate parity ensures this, and reduces the chances of travellers booking directly through the hotel’s site.
Large hotel chains, working with numerous booking channels, also favour rate parity. It enables them to stay in control of the rates on each of the channels and maintain price integrity. This allows their guests to feel secure in the knowledge that they have received the best rate no matter which channel they booked through.
Why is rate parity creating an unfair marketplace?
Some individual hotels prefer to implement rate parity into their own strategy. However, many hotels run into rate parity as a consequence of working closely with OTAs (who require it as part of their agreements).
There are two main reasons why rate parity is creating an unfair marketplace:
- Limiting choice: individual hoteliers no longer have the possibility to offer their own hotel rooms, on their own websites, at lower rates than the rates they offer to OTAs.
- Restricting the market: hoteliers are bound by signed agreements to obey rate parity even if smaller OTAs offer them lower commissions than the larger OTAs do. This could restrict new players from entering the market as they cannot compete. This, in turn, leaves hoteliers with less choice of new partnerships, creating a stronger OTA.
Latest legal developments
In previous years, OTAs were able to enforce rate parity agreements with little involvement from trade regulators. But recent cases with HRS and Booking.com brought the issue into the limelight.
In Germany, HRS was the first OTA forced to delete rate parity clauses from its contracts last year. In December 2013, Bundeskartellamt’s (the German Federal Cartel Office) experts had doubts that rate parity is actually in the customers’ interest.
The German Federal Cartel Office is now running a similar case against Booking.com and Expedia to create an even playing field. On April 2, 2015, a warning was issued to Booking.com for the continued use of ‘best price’ clauses in its contracts with hotels in Germany. To date, the proceedings against Expedia continue.
Simultaneously, the European Competition Network took initiative to address similar concerns across Europe. They appointed authorities in France, Italy and Sweden to act as National Competition Authorities (NCAs). The three NCAs have been adding pressure to Booking.com. As a result, on June 25, 2015, Booking.com changed its rate parity clause in Europe to “narrow Most Favoured Nation (narrow MFN)” (effective from July 1, 2015). Under the new terms, hotels can offer different booking policies through other OTAs, but the hoteliers must grant Booking.com parity in relation to their own website. This extends to metasearch sites such as trivago, Kayak or Google Hotel Finder, if they offer customers a ‘direct’ booking option to the hotel’s website (see Paragraph 5 of the email from Booking.com to hoteliers here).
Further developments are still occurring. On July 1, 2015, Expedia announced an identical change to that of Booking.com in its general terms and conditions starting from April 1, 2015. And in France, on July 9, the French National Assembly forbade any rate parity clauses from contracts between hoteliers and OTAs, as reported by Hotrec.