CCI Orders Investigation against Online Hotel Booking Service Providers - OYO, MakeMyTrip - for Alleged Anti-competitive Conduct

December 15, 2019

[Prerna Kapur is a student at National Law University, Odisha.]

 

On 28 October 2019, the Competition Commission of India (CCI) ordered the Director General (DG) to conduct an investigation against hospitality giants, Oravel Stays Private Limited (OYO), MakeMyTrip India Private Limited (MMT) and Ibibo Group Private Limited (Go) for allegedly violating Sections 3 and 4 of the Competition Act 2002 (Act).

 

This information was filed by Federation of Hotel and Restaurant Associations of India (FHRAI), which is the apex representative body of the hospitality industry in India. FHRAI currently ranks as the third largest hotel and restaurant industry in the world having associations with over 2,503 hotels and 1,173 restaurants. The informant submitted that OYO has approximately 18,752 hotels registered on its platforms, and its market share for available rooms priced under INR 1,000 (USD 14.18) is approximately 67%. OYO’s cheap pricing scheme serves itself a competitive advantage which makes it easier to secure a dominant position in the market. Moreover, FHRAI submitted that MMT-Go have imposed unfair pricing restrictions on their hotel partners wherein the hoteliers are not allowed to sell their rooms at any other platform at a price below the rate offered on MMT-Go’s platform. Other allegations include cartelization among MMT and OYO to provide OYO with  preferential treatment and parties charging exorbitant commission rates and service fee from its hotel partners.

 

Delineation of the relevant market

 

The hospitality industry has seen a tremendous change in the last decade. The travel services provided can be categorized into three alternative channels (i) direct suppliers (ii) travel agencies and (iii) online travel aggregators (OTAs). Customer autonomy has increased across the spectrum wherein mobile users have enormous options catering to their preferences based on cost, location and other associated features. OTAs like Booking.com, Yatra.com, MMT etc. facilitate their customers with the power to choose from the vast choices available supplemented by search filters to provide a more effective and targeted reach. These apps provide value added services that till date are considered to be a “breakthrough” in the traditional mode of booking.   

 

The second wave of transformation in the hospitality sector was by the 'franchise model' which allowed the shift from capital intensive business structures to light operating models, reaping profits for the participating entities. Consequently, users witnessed the launch of successful participants like AirBnB, Fabhotels, Treebo and OYO. These brands provide budget accommodation giving hoteliers access to identifiable brand recognition and wide customer base while standardizing their quality of service. The budget hotels on OYO’s network are entitled to use its brand and the know-how and are as such perceived as an extension of OYO itself. In both instances (MMT-Go and OYO), the platforms cater to two sets of customers - one that consists of consumers searching for hotels for booking and the other that use the services to sell their hotel rooms. However, their model of operation, which is largely defined by the nature of relationship between the platform and the hotel partners, is different. While OYO adopts the franchise model, MMT-Go is solely an intermediary operating on a distinct mode of distribution. Based on the above distinction, CCI identified the relevant market for MMT-GO to be ‘online intermediation services for booking of hotels in India’ and that of OYO to be ‘franchising services for budget hotels’.

 

Determination of dominance by the parties

 

The informant submitted that MMT-GO is empowered to operate independently of competitive market forces due to its dominant position in the market. This argument was also accepted by CCI as MMT-Go as a group held 63% of domestic hotel online market share in 2017 leaving direct competitors like PayTM, HappyEasyGo, Thomas Cook to have insignificant market presence. CCI observed that direct suppliers do not qualify to be part of the same market as no intermediation is involved in such transactions. Consequently, the market proves to be a highly concentrated one.

 

However, while placing reliance on one of its previous orders[1] passed earlier this year which dismissed similar allegation levied against OYO’s contractual terms and policies, CCI considered OYO to be a significant market player operating within the franchise model but not a dominant one. CCI held that while the OYO brand holds the wide recognition, the franchising hotel sector is an extremely oligopolistic which includes fragmented market players like Treebo and FabHotel. Hence, even if CCI were to rely on figures provided by the informant, the competition dynamics in the relevant market are still unfolding, hindering a deterministic assessment of OYO’s dominance in the market.

 

Allegations levied against the parties

 

As per the information filed by FHRAI, the alleged anti-competitive behavior of the parties is discussed in the subsequent paragraphs:

 

I. Room and price parity impositions

 

The informant alleged that MMT-Go imposed a condition on the hotels whereby the latter are not allowed to sell their rooms on any other platform or their own online portal at a price lower than that offered on MMT-Go’s platform. These impositions are not new and have been regarded as anti-competitive across various jurisdictions in the past.[2] Popularly referred to as the ‘retail most favored nation (MFN)’ clause, it ensures all customers of the platform are guaranteed with the best available price, serving a competitive advantage to the platform owner. CCI opined that such clauses may result in removal of the incentive for platforms to compete on the commission they charge to hoteliers and prevent entry.

 

Competition regulatory authorities across the globe have categorized MFN clauses into two types - ‘wide’ and ‘narrow’. Wide MFN clauses specify that the price offered by the provider may not be lower on any other price comparison website (PCW), on the provider’s own website and, in some cases, on any sales channel possible; narrow MFN clauses specify that the provider’s own website will not offer a lower rate than what is available on the PCW. Wide MFNs, therefore, prohibit lower prices being offered through other sales channels, while ‘narrow’ MFNs prohibit lower prices being offered only on the provider’s own website. Hence, it is not surprising to see that UK’s Competition and Markets Authority did not find there to be any adverse effect on competition arising from narrow MFNs but has previously noted that wide MFNs reduce entry, innovation, competition and infringe on hotels price of sovereignty.   

 

As per clause 1.3 of the agreements between the hoteliers and MMT-Go, “[t]he Hotel shall maintain rate parity, and room availability parity between Facilitators and other travel agents, other sales channels of third parties and the Hotel itself”. CCI characterized such restriction as “wide” in nature and was of the opinion that such restrictions merit investigation under Sections 3(4) and 4 of the Act. 

 

II. Denial of market access

 

The informant also alleged that MMT gives preferential treatment to OYO on its portal and has delisted its direct competitors like Fab Hotel and Treebo. CCI opined that OYO as a budget hotel chain is in a vertical relationship with MMT, which is essentially a distribution platform for hotels. Both have considerable presence in their respective market segments, and any restrictive agreement which may lead to refusal to deal with some players can potentially have adverse effect on competition under Section 3(4) of the Act.

 

Other allegation raised by the informant which shall also be investigated by the DG pertain to parties indulging in predatory pricing by offering hotel rooms on their platform below the 'average room rate' wherein OYO specifically has been alleged to charge over 30%  lower than the price of the hotel rooms that are not listed on its platform. CCI also raised concerns about the platform charging excessive commission from its hotel partners. The commission rate/fee would usually takes the guise of contractual clauses such as ‘performance linked bonus’ wherein for every 10 rooms of a particular hotel booked through its platform, MMT-Go pays the hotel only for 9 rooms. Thus, the price of the tenth room is, in effect, part of the commission/brokerage which MMT-Go is otherwise charging from the sale.

 

Keeping the above-mentioned discussion in mind, CCI held that there exists a prima facie case for investigation against MMT-Go and OYO for allegedly violating the provisions of Section 3(4) of the Act. Further, a prima facie case for investigation under Section 4 of the Act is established against MMT-Go since it was found to be a dominant player in the market. Hence, CCI ordered a detailed investigation report by the DG under Section 26(1) of the Act.

 

Author’s take

 

With the intent to further the deterministic factors enlisted under Section 19(4) of the Act, CCI has previously acknowledged that market share is only one of the factors that decide whether an enterprise is dominant or not.[3] In two-sided markets, network effects may enable a large platform/network to become dominant and insulate itself from potential competition as entrants may find it difficult to challenge the large incumbent. The Competition Appellate Tribunal has previously held that factors such as financial strength, technological capabilities, brand value etc. are also relevant factors that strengthen the ability of any enterprise to assert its dominance over the market.[4] The order suggests that financial resources and the incentives associated with the model are contributory factors to allow assessment of dominance to be seen from a perspective that is not confined to the limits of the market share of an enterprise. Indian courts have used a rather unique method in determining dominance within the digital market. Typically, courts are required to first determine whether or not the enterprise exerts a significant competitive influence in the market. However the Supreme Court of India in Uber India Systems Private Limited v. Competition Commission of India flipped the order of determination of abuse of dominance. The court held that because of its ability to operate on losses and provide heavy discounts on its ride sharing app, Uber enjoys a dominant position in the market. Considering the current market realities of two-sided platforms which attract huge investments and technological strength, it hardly seems fair for CCI to hold that OYO is not a dominant entity. However, much reliance can also be placed on the recent Delhi High Court order in Competition Commission of India v. M/s Grasim Industries Limited, which concluded that CCI's opinion as recorded in a prima facie order under Section 26(1) of the Act does not restrict the DG's investigation. Consequently, one can trust the DG investigation to expand its wings towards the alleged abuse of dominant position by OYO within the meaning of Section 4 of the Act as well.

 

 

 

[1]In Re RKG Hospitalities Private Limited and Oravel Stays Private Limited, Case Number 3 of 2019  https://www.medianama.com/wp-content/uploads/oyo-cci-order.pdf.

 

[2]United States. v. Apple, Inc. before the United States Court of Appeals for the Second Circuit https://www.justice.gov/atr/case-document/file/624326/download ; Booking.com B.V and Booking.com before the Dusseldorf Court of Appeal (Germany) https://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Entscheidungen/Kartellverbot/B9-121-13.pdf?__blob=publicationFile&v=2;  Case AT.40153 E-book MFNs and related matters (Amazon) before the European Commission http://ec.europa.eu/competition/antitrust/cases/dec_docs/40153/40153_4392_3.pdf.

 

[3]In Re Mr. Ramakant Kini and Dr. L.H Hiranandani Hospital Powait, Mumbai Case no 39 of 2012 https://www.cci.gov.in/sites/default/files/392012_0.pdf ; In Re: Noida Software Technology Park Ltd. and Star India Pvt. Ltd. Case No. 30 of 2017 https://www.cci.gov.in/sites/default/files/Case%20No.%2030%20of%202017.pdf.

 

[4]In the matter of: The National Stock Exchange of India Limited v. Competition Commission of India Appeal No. 15 of 2011.

 

 

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