Changing the Rules of the Game for Hotel Bookings
October 20, 2017 11:09am
By Giuliano Bianchi and Isabella Blengini
Last month the Swiss Parliament ratified a decision to allow Swiss hotels operating on booking.com to offer rooms at lower prices directly to their customers. The digital platform opposed the decision, arguing that it would be the customers who would be hit hardest.
Booking.com allows hotels to sell their rooms on the platform on a commission basis and customers have the convenience of being able to compare prices before booking a room.
For hotels, the main advantage in using the site is that it can dramatically increase their visibility, so much so that some 72 percent of all hotel bookings in Switzerland are made via booking.com. Hence, a hotel that does not appear on the platform is effectively cut out of the market.
Until now, hotels marketing their rooms on booking.com have not been allowed contractually to offer lower prices for their rooms elsewhere. That’s to say: the best deal the customer would be able to find was on the platform. On September 18th, the Swiss Parliament changed the rules of the game: hotels have now freedom to decide their own pricing policies and can offer room prices directly to clients that are lower than the ones appearing on the booking.com.
So what are the consequences for hotels, booking.com -- and, more importantly – customers? What economists call ‘game theory’ may allow us to identify optimal strategies and make forecasts about what will happen next in the Swiss hotel market.
Clients, being aware of the new rules of the game, may decide to increase the amount of time they spend searching for the best possible deal. This will depend on how customers value their time.
The existence of online travel agencies like booking.com increases competition among hotels. At the same time, the platform itself gains power in the market: the larger the number of hotels appearing on the platform, the greater the competition among them and the higher the value of the platform. The Swiss Parliament’s decision creates a new dimension in the marketplace. Now competition is no longer only on the platform, but also between the OTA and the individual hotel’s own marketing activities.
Let’s consider the financial implications. Suppose each hotel has to pay a fee of 20 CHF per transaction to appear on the platform. This means that if a room costs the client 100 CHF, the hotel receives only 80 CHF. Following the Swiss Parliament’s decision, hotels would now be able to sell their rooms on their own website for 85 CHF. This implies that hotels would make a margin of five CHF per room compared with those marketed on the platform. As a consequence, the value of the platform decreases and with it the power to ask for higher fees. As to whether clients go on using the platform would depend on their preferences and time.
Most likely, we will see some convergence between the prices on booking.com and those offered elsewhere. It could well be that, in the most extreme case, the prices might be the same, just as before. However, that would mean more value going to the hotels rather than to the platform. Hotels can only gain from this decision.
Giuliano Bianchi and Isabella Blengini are assistant professors of economics at Ecole hoteliere de Lausanne.
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