A class-action lawsuit has been filed against several of the largest hotel companies and online travel agencies alleging that rate parity is tantamount to price fixing.
The lawsuit comes on the heels of allegations last month by the U.K. Office of Fair Trade that rate parity is anti-competitive because it limits price competition between online travel agents and increases barriers to entry and expansion for online travel agents.
The suit plaintiffs Nikita Turik, Chicago, and Eric Balk, Cedar Falls, Iowa, represented by law firm Hagens Berman Sobol Shapiro, Seattle, alleges that OTAs Expedia Inc., Sabre Holdings Corp., Priceline.com Inc., Orbitz Worldwide and hotel companies Hilton Worldwide, Starwood Hotels and Resorts Worldwide, Marriott International, IHG, Trump International Hotels Management and Kimpton Hotel & Restaurant Group conspired to use their market dominance to fix prices on hotel rooms to thwart competition on hotel room prices, especially from price-cutting online retailers.
The complaint, filed in a U.S. District Court in San Francisco, contends that the defendants’ unlawful conduct caused plaintiffs and other class members to overpay for their purchases of room reservations and seeks to represent all consumers who have purchased hotel rooms from the online retailer defendants.
“The large online travel sites, working with hotel chains, have created the illusion that savvy consumers can spend time researching hotel rates online to find good deals,” said Steve Berman, managing partner and co-founder of Hagens Berman Sobol Shapiro. “The reality is that these illegal price-parity agreements mean consumers see nothing but cosmetic differences and the same prices on every site.”
According to the complaint, online travel sites account for as much as 50% of hotel bookings in the U.S. and traditionally operate under one of two models. Under the agency model, online retailers charge a service fee to a hotel operator on a transaction basis for booking customers, and that customer pays the hotel directly at a rate set by the hotel.
Under the merchant model, online retailers purchase rooms outright at a negotiated rate from the hotel, and then resell the rooms to consumers at a higher price, increasing or decreasing margins depending on competitive influences. More recently, a new model has emerged that has cut into the traditional online retailers’ profits, the complaint contends, and has led to the creation of the rate parity agreements. In this model, known as the wholesale model, third-party companies buy up unsold blocks of rooms at the last-minute and resell them to smaller price-cutting online retailers, eroding the profits of the traditional online retailers.
Knowing hotels cannot afford to lose access to online distribution networks, online retailers devised what the suit claims is an illegal scheme, extracting agreements from the hotels that online retailers may not sell rooms below the rate parity level, on penalty of termination and as a condition of doing business through the online retailers.
Some industry experts are skeptical of the lawsuit’s merit. “A typical sensationalist lawsuit with no merits,” said Max Starkov, president and CEO, HeBS Digital Hospitality eBusiness, New York City. “Any hotel is entitled to defend its price integrity. Rate parity is not ‘anti-competitive price-fixing,’ it is ‘manufacturer’s established retail price.’ This is not different from Chanel 5 perfume, Tumi luggage, Ralph Lauren shirts, etc being sold at exactly the same price at all department stores nationwide. Apple does exactly the same for all of its products, including iPads, iMacs, etc. This is not price fixing. This is manufacturer’s established retail price, which includes discounts for distributors and retailers.”