Platform economy faces regulatory heat on price parity agreements

online price parity

By Ketki Agrawal and Raagini Agarwal

The evolving landscape of antitrust scrutiny of price parity clauses in the online travel agency (OTA) sector is poised to impact Indian businesses significantly. The recent ruling by the European Court of Justice (ECJ) in September 2024, which investigated Booking.com's use of narrow price parity clauses, alongside similar ongoing cases in India, brings to centerstage the need to re-examine such practices in the Indian market.

The Competition Commission of India (CCI) is increasingly looking into price parity clauses to determine whether they could potentially hurt competition, push prices up, and negatively affect both consumers and new market players. This shift could have far-reaching effects on Indian businesses, especially in the hospitality and e-commerce sectors.

What is a price parity clause and who is impacted?

Price parity clause (PPC), a staple clause in the agreements between OTAs and hotel partners, are essentially clauses that limit or restrict the ability of hoteliers to offer lower prices or better discounts on their own websites or on other competing platforms.

PPCs are typically split into two types: wide and narrow clauses. With a wide parity clause, hotel partners are prohibited from offering a lower price anywhere else (say, on third-party platforms), including on their own websites. A narrow parity clause only stops hotels from offering a lower price on their own sales channels. Generally, OTAs defend these clauses on the ground that PPCs are needed to prevent “free-riding”—where while hotel partners take advantage of the visibility that OTAs provide them for which they are not adequately compensated in return. On the other hand, PPCs have been criticized on the ground that they have the potential to and in fact do limit competition.

The recent ECJ's judgment in the Booking.com case provides crucial insights into regulatory thinking on anticompetitive effects of PPCs. In Booking.com, the ECJ court delved into the question of whether PPCs can be viewed as “ancillary restraints”[1] or not. The court ruled that PPCs, while potentially beneficial to the OTAs’ business model, are not necessarily justified as “ancillary restraints” under EU competition law. The ruling suggests that such clauses can restrict competition, especially when they limit smaller OTAs’ ability to negotiate favorable terms with hotels, or even prevent new entrants from breaking into the market. While OTAs, like Booking.com, argue that these clauses are essential for the efficiency of their platform, the judgment highlights the need to evaluate the real necessity of such restrictions and their proportionality.

What is happening in India?

In India, the CCI’s role in regulating anti-competitive practices has become more pronounced, especially with the rise of the digital economy. This has also been reinforced by the recent amendments to Indian competition law and the upcoming Digital Competition Bill, both of which target the fundamental aspects of online business models. In addition to the online travel sector, the CCI also has ongoing investigations into PPCs in the food delivery sector, notably against Zomato and Swiggy. These platforms, it is alleged, impose broad parity clauses on restaurant partners, preventing them from offering lower prices or better discounts on their own websites or on competing platforms. The CCI has, prima facie, expressed concerns that such practices harm competition by limiting price flexibility, creating barriers for new entrants, and raising costs for consumers.

Similarly, in the online travel sector, OTAs like MMT-Go have been under the CCI’s scanner for imposing wide price parity obligations on hotel partners. In the MMT-Go case, the platform restricted hotels from offering rooms at lower prices on competing OTAs or their own websites. The CCI’s findings suggest that these practices could lead to an adverse effect on competition (AAEC) in the market, potentially raising prices and discouraging price competition.

Given these precedents, Indian businesses, particularly those in the hospitality and e-commerce sectors, need to be prepared for greater regulatory scrutiny of their pricing and contractual practices. The Indian consumer, a notably price-sensitive consumer, could benefit from more flexible pricing strategies, particularly as they are given the ability to shop around for the best deals, either through OTAs or directly with service providers. However, this will require OTAs and platforms to adjust their business models.

What are the implications for stakeholders involved?

Increased Pricing Flexibility for Hotels and Restaurants: Relaxing price parity obligations could benefit hotels and restaurants, especially smaller and independent players. With more freedom to offer lower prices or better discounts on their own websites, these businesses could drive more direct bookings and improve profit margins. This is crucial in India’s price-sensitive market, where consumers seek the best deals.

Potential for Increased Direct Bookings: Hotels could gain from more direct bookings by offering exclusive discounts on their websites, attracting customers without sharing revenue with OTAs. This is relevant for large hotel chains or independent properties prioritising direct customer relationships. However, this shift may require additional investments in marketing and technology to compete effectively with OTAs.

Pressure on OTAs to Innovate: OTAs like Booking.com and MakeMyTrip will need to rethink their business strategies. With reduced price parity clauses, OTAs must focus on delivering superior value to hotels through increased visibility, better customer service, or innovative features. They may also need to invest more in advertising to develop new pricing models to protect their market share.

Potential Regulatory Challenges: Indian platforms may face challenges adapting to changing competition laws. The CCI’s active monitoring of price parity practices indicates that businesses may need to amend their contracts with hotel and restaurant partners. As digital markets become more integral to the Indian economy, the CCI is likely to continue scrutinising practices that inhibit competition, including those related to price parity.

What is the way forward for Indian businesses?

Indian businesses should reassess their contracts to ensure compliance with competition laws, making necessary changes to eliminate any potential anti-competitive clauses. While OTAs justify such clauses as a safeguard against free-riding which is a valid concern, businesses must carefully balance these provisions to align with regulatory requirements.

With India’s digital economy evolving rapidly, businesses must adjust to a new and empowered regulatory regime. The increasing focus on price parity and greater scrutiny from the CCI indicate a clear shift towards creating an environment characterised by a more competitive and consumer-friendly market. By embracing these changes, Indian businesses can continue to grow while also contributing to a fair and dynamic marketplace.

(Ketki Agrawal is Senior Associate, Economic Laws Practice and Raagini Agarwal is Associate, Economic Laws Practice.)

Views are personal and do not represent the stand of this publication.