Recommended Policy Solutions Include Clear Disclosure, Increased Regulatory Action
Washington, D.C., (July 12, 2017) – Online travel agencies (OTAs) intentionally modify and reorder search results based on commission fees, creating bias on their websites and ultimately costing consumers choice and value, according to a report released today by Professor Benjamin Edelman of the Harvard Business School.
The paper – “Impact of OTA Bias and Consolidation on Consumers” – explores the rise of OTA search bias, a problem worsened by increased consolidation in the market. Through a series of transactions, Expedia and Priceline own numerous sites that were previously competitors. In fact, Expedia and Priceline now own 95 percent of the OTA market.
The research points out that in this new environment, OTAs are now able to charge hotels exorbitant commission fees – sometimes upwards of 25 percent of the hotel’s revenue. These fees can have a direct impact on how search results are displayed: Hotels who choose to pay less – or simply can’t afford to pay more – are often punished, buried in lower search results, or removed from the site altogether.
“Search bias is inherently deceptive and indeed intentionally deceptive,” Edelman writes in his report. “Consumers reasonably expect that the properties featured on OTAs are those that best match their request, and consumers have no reason to expect properties to be sorted or prioritized based on payment.”
Edelman’s report presents several key findings:
Almost all OTAs are owned by Expedia or Priceline. No other OTA controls more than one percent of the market.
The 2016 Herfindahl-Hirschman Index (HHI) for OTAs is 5,069. According to the DOJ and the FTC, a HHI over 2,500 indicates a “highly concentrated” market.
With limited competition, each OTA can anticipate the others’ pricing, letting the OTAs increase their fees to hotels with greater confidence that the others will match.
When hotels have offered lower prices with loyalty programs on their own sites, OTAs have demoted their listings by altering where they appear in search results, changing the color scheme to deemphasize or even removing photos of the hotels.
The hotel industry remains strikingly decentralized, with no single firm controlling more than 20 percent of capacity. Smaller hotels, especially, lack the market power to forcefully oppose OTA fees.
“After nearly two decades of operation under practices that arguably fall short in disclosure and objectivity,” Edelman writes, “OTAs have created a false impression among many consumers that their listings are comprehensive and presented evenhandedly.”
To address these issues, Professor Edelman outlines a number of policy priorities to eliminate deceptive practices and inform consumers.
OTAs would no longer be able to retaliate against hotels that offer consumers a better value. For example, OTAs would not be able to demote hotels in search results, make their links appear broken, or otherwise discourage hotels from offering discounts or other benefits to customers.
Sort order must objectively reflect a user’s search. If sort order truly reflected a user’s search, OTAs would no longer be able to retaliate against hotels that offer better value or loyalty programs through their own sites.
OTAs should issue disclosures so consumers are aware of the difference between organic and paid results. This could be in the form of an email to all registered users, a separate clarifying statement on home pages, or additional disclosures within search results.
The Federal Trade Commission (FTC) or state attorneys general should take action and demand internal OTA records to check for misleading practices and deter further misconduct if warranted.
“The extreme consolidation that has occurred among the online travel agencies is raising some important issues for consumers and businesses,” said Katherine Lugar, President and CEO of AHLA. “Professor Edelman’s research shows that less competition amongst OTAs is leading to less choices for travelers, less opportunity for small businesses, and ultimately, a cost for hotel guests. And when you take into account that three out of every five hotels in the U.S. are small businesses, this research is particularly concerning. We hope this report spurs lawmakers and policymakers to take a close look at whether both our customers and small businesses are being adequately protected in the current marketplace.”
The paper’s release comes on the heels of the American Hotel & Lodging Association’s (AHLA) “Search Smarter” consumer campaign, an initiative launched in June 2017 to raise awareness of deceptive online marketing practices. The campaign aims to help travelers avoid lost reservations, additional fees and potentially ruined vacations, whether through “digital middlemen” like OTAs or through fraudulent, third-party sites posing as the hotel. Research released by AHLA in June 2017 shows 55 million of bookings are impacted by these misleading marketing practices occur each year, generating revenues of nearly $4 billion for the misleading sites.
To learn more about how to ensure the best possible booking experience, visit: www.ahla.com/searchsmarter.
About Benjamin Edelman
Benjamin Edelman is an associate professor at the Harvard Business School (HBS), where he studies and teaches about the economics of online markets. His current research explores the public and private forces shaping Internet architecture and business opportunities. He has written about the implications of growing market concentration in Internet search and resulting risks for advertisers and led the fight against deceptive advertising software, "spyware" and "adware." Edelman holds a Ph.D. from the Department of Economics at Harvard University, a J.D. from the Harvard Law School, an A.M. in Statistics from the Harvard Graduate School of Arts and Sciences, and an A.B. in Economics from Harvard College (summa cum laude). He is a member of the Massachusetts Bar. View a full biography and prior publications here.