Platform monopolization by narrow-PPC-BPG combination: Booking et al.

Abstract

The price parity clauses (PPCs) that online booking platforms impose have come under antitrust scrutiny. Wang and Wright (2017) show how by preventing showrooming, a narrow PPC can reduce search costs and benefit consumers under between-platform competition. In response to having to give up its wide PPC to hotels, Booking.com emphasized its best price guarantee (BPG) to customers. We observe that a narrow PPC combined with a (low hassle costs) BPG leaves only Wang and Wright’s Price Parity and Monopoly Equilibrium (PPME), in which consumers are worse off than with no platform operating at all. A more-efficient (incumbent) platform can deter entry with the BPG, while the narrow PPC eliminates competition from direct sales channels. An equally-efficient platform could enter and compete consumer prices down because of the existence of hassle costs, yet this equilibrium is fragile to network effects. If sellers have incentives not to price differentiate between platform(s) and their direct sales channel, a narrow PPC alone suffices to sustain the PPME in both cases. The detrimental pricing contract combination that we point out calls for different platform competition policy.