Virtual Competition התפתחויות בשווקים האלקטרוניים והשפעתם על בתי המלון 1 התפתחויות בשווקים האלקטרוניים והשפעתם על בתי המלון 26 December 2017 Ariel Ezrachi Slaughter and May Professor of Competition Law, The University of Oxford Director, Oxford Centre for Competition Law and Policy

The Dynamics of Competition The Promise of the Algorithm-Driven Economy Transparency and flow of information Lower Search Costs Dynamic competition Entry and Expansion Dynamic pricing Disruption and Efficiencies The Rise of Big Data and Big Analytics

The Perils of the Algorithm-Driven Economy Competition, as we knew it -- the invisible hand of competition -- is being displaced in many industries with a digitalized hand. Collusion – Algorithms as cartel facilitators. Discrimination Market power Contractual arrangements – OTAs & Parity

Digitalised Collusion ‘Classic’ collusion Airline Tariff Publishing Topkins Trod Hub and Spoke Intentional and unintentional alignment of price. Eturas and Others Dynamic personalised pricing - example: Gas stations in the Rotterdam area using the same a2i Systems pricing software...

Tacit Collusion on Steroids Relevant for transparent concentrated markets with entry barriers, `, no brand recognition or loyalty. ‘Simple’ algorithm-stabilising-mechanism Transparency | Stability | Speed | Wider participation. Consider increased use of algorithm and increased market concentration.

Behavioural Discrimination Controlled Ecosystems: The Truman Show Friction and outside options. Minimize the Perceived Unfairness through Framing Effects Daniel Graf, Uber’s head of product – “The company applies machine-learning techniques to estimate how much groups of customers are willing to shell out for a ride.” (2017 Bloomberg) Facebook & emotional bias. …”moments when young people need a confidence boost.”…" "insecure," "defeated," "anxious," "silly," "useless," "stupid," "overwhelmed," "stressed," and "a failure."

This would lead to the partitioning of the Single Market. Commission opens investigations into suspected anticompetitive practices in e-commerce, 2 February 2017 The Commission is investigating agreements regarding hotel accommodation concluded between the largest European tour operators on the one hand (Kuoni, REWE, Thomas Cook, TUI) and hotels on the other hand (Meliá Hotels). Hotels and tour operators cannot discriminate customers on the basis of their location. The agreements in question may contain clauses that discriminate between customers, based on their nationality or country of residence – as a result customers would not be able to see the full hotel availability or book hotel rooms at the best prices. This may breach EU competition rules by preventing consumers from booking hotel accommodation at better conditions offered by tour operators in other Member States simply because of the consumer's nationality or place of residence. This would lead to the partitioning of the Single Market. Ariel Ezrachi, Oxford CCLP

Market power Data-Opolies benefit from access to information. The Gatekeepers – The rise of super platforms. How competitive is the online market? Multi-home? EU Google decision Facebook investigation Shift in power to the platforms as key junctions. But what about disruptive innovation ?

Google Search (Shopping) 27 June 2017 Leveraging market power from search engine to its comparison shopping service. Prominent placement to its own service and demoted others. Commission analysed click behaviour, and simulated change positioning: ‘even the most highly ranked rival appears only on page 4’ Demotion results in immediate drop of 90% of clicks. 95% of users click on first page. Simulation - Moving first result to third rank, results in reduction of clicks by 50%. Same result receives significant more traffic when ranked up’ This tendency even higher on mobile devices. Ariel Ezrachi, Oxford CCLP

The Digital Butler

Vertical restraints E-commerce sector inquiry (May 15- May 17) More transparency and price competition + more monitoring Increased presence of manufacturers at retail level. Greater emphasis on selective distribution. Attempts to control quality and price in distribution. Free riding between high street and online (both ways). Vertical restraints – Online market place bans Wide / Narrow parity Geo blocking Resale price maintenance Ariel Ezrachi, Oxford CCLP

Online Travel Agents Demand-enhancing features - marketing, advertising, after-sales support, advice and guarantees. Reduction in search costs - Improves information flows by collating and aggregating quantitative and qualitative data about suppliers, price and product characteristics. Such data is often provided in multiple languages, supporting access to retailers and distributors worldwide. Allocation efficiencies Channel for upstream entry and expansion. Higher conversion rate – valuable for small and medium size hotels. Support a reduction in the market power (which results from high information costs) Reduction in price premiums. Changes the distribution of profits in the industry. Ariel Ezrachi, Oxford CCLP

Parity Clauses Minimise externalities / free riding /hold-up problem Facilitate investment by OTAs. Risk sharing. Remove uncertainty as to better bargains. Wide parity Risk of Excessive intermediation; … Apple’s use of wide parity – iBooks Restricts low cost entry; … Amazon’s use of wide MFNs Results in price uniformity; … Blue Cross Blue Shield of Michigan Limits on innovation and investment. … Hotel portal - HRS Narrow Parity Horizontal Network effects and Competition on commissions; Possible reduction in vertical competition Ariel Ezrachi, Oxford CCLP

Antitrust enforcement trends – Booking.com Absolute illegality Narrow allowed Bundeskartellamt & Düsseldorf Higher Regional Court – Illegality of both narrow and wide MFNs. French, Swedish and Italian competition agencies – Narrow MFN accepted + hotels retain the freedom to determine the price offline and to offer discounts to select groups of customers. (endorsed throughput EU) Ariel Ezrachi, Oxford CCLP

Non competition intervention July 2015 - The French National Assembly approved a ban on all rate parity clauses in contracts between PCWs and hotels. The legislation secures the freedom of hotels to set lower prices both online and offline (altered the position endorsed by the French Competition Agency) President of HOTREC’s : ‘The European hotel industry sees this decision as a key milestone to restore complete entrepreneurial freedom for hoteliers all across Europe. After Germany which banned parity clauses in a competition case, followed by a Court judgment, France is opening a potential new way forward through the legislative process.’ Ariel Ezrachi, Oxford CCLP

Joint report on the Online Hotel Booking Sector 47% - did not know that Booking.com and Expedia had recently changed or removed their parity clauses. 79% - had not price differentiated between OTAs in the period since Booking.com and Expedia switched from wide to narrow parity clauses. For the 21% of respondents that did price differentiate between OTAs, the most frequent reason given was to increase the hotel's visibility on a particular OTA (for example, its display ranking).  69% - had not differentiated between OTAs for room availability since the switch by Booking.com and Expedia to narrow parity clauses. 90% of hotels that responded to the electronic survey said that there had been no change in the basic commission rate charged. Some indication that the switch from wide to narrow parity led to an increase in room price differentiation between OTAs by hotels in eight of the ten participating Member States; and that in Germany, the prohibition of Booking.com's narrow parity clause led to an increase in room price differentiation. Ariel Ezrachi, Oxford CCLP

Food for thought – Virtual Competition To what extent does the “invisible hand” still hold sway? What are the effects on choice and competition ? The end of competition as we know it? In markets continually manipulated by bots and algorithms, is competitive pricing an illusion? As power shifts to the hands of the few – what are the risks to our economic and overall well-being?