Working Paper: CEPR ID: DP14771
Authors: Sean Ennis; Marc Ivaldi; Vicente Lagos
Abstract: This paper examines the impact of most favored nation (MFN) clauses on retail prices, taking advantage of two natural experiments that changed vertical contracting between hotels and major digital platforms. The broad E.U. intervention narrowed the breadth of “price parity” obligations between hotels and major Online Travel Agencies (OTAs). Direct sales by hotels to customers subsequently became relatively cheaper. Comparisons with hotel pricing outside the E.U. confirm the reduction in prices for mid-level and luxury hotels. France and Germany went further and eliminated all price-parity agreements. This stronger intervention was associated solely with a significant additional price-reducing effect for mid-level hotels in Germany. Overall, wide MFNs are associated with higher retail prices. Regulating MFNs reduced prices with primary effects coming either from the narrow price-parity intervention or, perhaps, from direct sales becoming cheaper than OTAs in both E.U. and non-E.U. countries, and, interestingly, not from complete elimination of MFNs.
Keywords: price parity clause; most favored nation; most favored customer; hotel industry; impact evaluation; online travel agency; digital platforms
JEL Codes: K21; L14; L42; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory changes (G18) | Retail prices (P22) |
| Wide MFN clauses (L42) | Higher retail prices (D49) |
| Narrow PPCs (L19) | Lower prices for midlevel and luxury hotels (Z30) |
| Narrow PPCs (L19) | Cheaper direct hotel channels than OTAs (Z30) |
| Regulatory change (G18) | Softening of price competition (D43) |
| Elimination of price parity agreements (L42) | Significant price-reducing effect (D40) |
| Wide PPCs (D39) | Detrimental effects on price competition (L11) |
| Regulatory change (G18) | Higher probability of direct channel being cheaper than OTAs (D49) |