Over the last decade, online travel agencies, such as Expedia, Travelocity and Booking.com, have gained enormous market power. The OTAs have advertising budgets that dwarf those of most hotels, and they benefit from the increasing consumer preference for online booking, particularly among tech-savvy millennials. Up to 50% of bookings in the United States originate from customers who find hotels through OTAs or aggregator search engines, and in Europe that number can be as great as 70%.

Accompanying the rise of OTAs is the practice of rate-parity agreements—contracts between hotels and OTAs that establish acceptable rates for room listings. Now the industry standard, these agreements have been embraced by some hoteliers and despised by others. Recently, rate-parity agreements have come under attack through both legal challenges and erosion, as hoteliers exploit loopholes to offer lower rates without breaching the agreement terms.

The pros and cons of rate-parity agreements

The standard rate-parity agreement between a hotel and an OTA contains two essential terms: (1) a “rate parity” clause providing that the hotel will maintain parity with the minimum rates set by the hotel; and (2) a “most favored nation” clause, providing that the lowest rate offered to the public via the hotel’s own website, or via competing OTAs, must also be made available to the OTA entering into the agreement.

On the one hand, these rate-parity agreements benefit hoteliers because they allow them to maintain control over pricing by setting a minimum rate for bookings, which prevents brand devaluation. These agreements also allow hoteliers to take advantage of the large advertising budgets of the OTAs, ensuring that the huge group of consumers who research bookings through OTAs will see their properties.

On the other hand, rate-parity agreements can hurt hoteliers because OTAs typically receive a 15% to 20% commission on bookings, so hoteliers generate less profit than if guests had booked directly through the hotel websites. Additionally, the most favored nation clause prevents hoteliers from offering lower prices on their own hotel websites, and it prevents them from freely negotiating other rates and terms with competing OTAs.

Legal challenges to rate parity in the US

In the United States, rate-parity agreements came under heavy scrutiny last year. Approximately 30 lawsuits were filed in multiple states against major hoteliers (including Choice Hotels International; InterContinental Hotels Group.; Marriott International; and Starwood Hotels & Resorts Worldwide) and many of the biggest OTAs (including Booking.com; Expedia, Inc.; Priceline.com; and Travelocity.com).

The lawsuits, which were consolidated in federal court, alleged that rate-parity agreements between OTAs and hotels violated antitrust laws as well as state consumer protection statutes. The plaintiffs brought the lawsuit as a putative class action on behalf of all consumers in the United States who made online bookings with the defendant OTAs from 2003 through 2013, with certain limited exclusions.

Read full article at: Hotel News Now