Booking's Countermove to Price Disparities of Hotel Websites

Booking.com recently dropped the price parity clause in the European Union. This move has caused a wave of questions and uncertainty in the hotel industry. How will the platform respond to hotels that decide to offer lower rates on their own websites to promote direct sales? The answer could redefine the relationship between OTAs and hotels, creating a scenario full of opportunities and challenges.

Will There Be Reprisals?

Booking will not penalize hotels for disparities—at least not in the way you might expect. The OTA was not surprised to be forced to remove the price parity clause. They have been preparing for this change for some time. They delayed it as long as possible, but they already had careful plans to reduce the impact of this price "liberalization." And they did this without attracting too much attention.

Will There Be Increased Pressure on Hotels?

Increased EU pressure on Booking may not lead to greater commercial freedom. It could put the OTA on the defensive, increasing their pressure especially on independent hotels. Therefore, to understand how Booking's defensive strategy might affect hotels with and without price differentials, it is critical to first understand Booking's view of disparities. To that end, we will examine:

• The current status of price parity.
• Why Booking distrusts hotels and combats disparities.
• How hotels “intercept” Booking’s customers.
• Why the end of price parity is a mixed opportunity for hotels.
• Booking’s strategy against disparities.
• The distinction between Algorithmic Retaliation and Algorithmic Persuasion by Booking.com.
• How Booking algorithms reward hotels.

This way, we’ll understand the impact of the end of price parity and how Booking has adapted its strategies to maintain its dominant market position and relationship with hotels.

What Is the Current Status of Price Parity?

Booking.com’s Role as Gatekeeper

On May 13, the European Union designated Booking.com as a “gatekeeper” under the Digital Markets Act (DMA). This designation is due to its dominant position in the online accommodation booking market in the EU.

With this decision, the EU has mandated that Booking.com ensure fair competition and avoid any abusive conditions towards hoteliers and travelers. As a result, Booking.com was forced to remove the price parity clause that previously restricted hotels’ ability to offer more competitive prices on other sites and on their own websites.

Why Does Booking Distrust Hotels and Fight Against Disparities?

As the OTA explains on its website:

"(...) Booking.com undertakes investments to attract guests to and enable them to compare accommodations on its platform. Accommodations set the prices on our platform. The parity clause aims to ensure that rates and conditions posted on our platform are competitive so that guests may benefit from lowered search costs and to prevent that an accommodation would ‘free ride’ on significant investments undertaken by Booking.com."

Billboard Effect

But what does Booking mean by hotels taking advantage of their investments? Basically, it refers to the "tricks" that amplify the "billboard effect."

The billboard effect occurs when users discover a hotel on Booking.com but then book directly on the hotel's website. This reduces the commission that Booking would receive. This effect is even more pronounced if the rates on the hotel's website are lower than on Booking.com, as it encourages users to book directly with the hotel. In this way, hotels benefit from the visibility that Booking provides without paying the corresponding commissions.

The reality is that these "tricks" are not as effective as some hotels may think because Booking has long since learned to counteract them without many realizing it.

How Hotels “Intercept” Booking’s Customers

The hotel booking journey is not linear. Customers may visit dozens of websites before deciding where to book. The following simplified example illustrates how a customer discovers the “XYZ” Hotel in Barcelona through Booking.com.

The Billboard Effect and Competition with Intermediaries

The billboard effect occurs in step 4, highlighted in orange in the last image. It happens when users who found the hotel on Booking.com search on Google for branded keywords (the hotel name) to compare prices. This is the critical moment in the battle for the customer. Google Hotel Ads becomes a crucial showcase, allowing hotels to attract customers from other platforms with enticing offers and competitive rates.

At the same time, intermediaries can use the same tactics as hotels to win customers away from other players in the market. This includes loyal customers of the hotel's own website. This creates a dynamic where both hotels and intermediaries try to capture as many bookings as possible by offering the best prices and conditions.

This example provides a simplified view of the problem, but it shows that OTAs, comparison sites, and hotels compete for the same customers at various stages of the travelers’ booking journey. So the main conclusion is clear: if the main online battlefield is search engines, Google benefits the most from this fight to capture the final customer.

From Booking's view, the more these battles play out at this point, the more it will cost them to get customers.

The Importance of Comparison Shopping

The price disparities shown in the previous image highlight Booking as one of the most expensive channels to book this hotel. This isn't always the case; however, this perception is damaging to the OTA and has led them to develop a sophisticated system to minimize these differences.

For Booking, the comparison phase is critical to both their brand positioning (“there is no one cheaper than us”) and their profitability. Therefore, they need to minimize the leakage of bookings from OTAs to hotel websites and avoid having to bid more on Google Hotel Ads to prevent and compensate for this leakage.

In 2023 alone, Booking invested nearly $7 billion in marketing to attract customers and ensure competitive rates. In fact, Booking is one of Google's largest global advertisers. The company also invests heavily in offline campaigns, as evidenced by its advertising presence during the 2024 UEFA Euro Cup.

Therefore, it is understandable that Booking feels that hotels offering better prices on their own websites are taking advantage of their multimillion-dollar investments and visibility. From the OTA's perspective, they are driving customers to their sites without adequately compensating the platform. However, direct sales advocates argue that OTAs are also trying to win direct customers from hotels. They do this by offering better prices or investing more in advertising. This is especially true for branded searches for the hotel, as shown in the previous example. And it does happen.

Nevertheless, it is clear that Booking plays an important role in promoting hotels to travelers worldwide, investing significant resources in both financial and technological initiatives.

Why the End of Price Parity is a Mixed Opportunity for Hotels

The removal of this clause in itself does not represent a major advance or significant change. Many hotels, even large chains, have been breaking parity for years. They usually do this through their "loyalty clubs," where they offer better rates on their websites than on Booking.com and other OTAs. What has changed is that Booking is now under EU scrutiny as a gatekeeper.

So the question is: what will happen now? Will rate disparities increase outside of these loyalty clubs?

A Limited Commercial Victory

Independent hotels and small European chains may have more commercial freedom now. They can set more competitive prices on their websites and other intermediaries. But it is not certain that this will result in higher net revenues. Nor is there any guarantee that they will succeed in reducing their dependence on Booking.com.

The experience in Italy is a good example. The ban on the price parity clause in 2017 did not stop Booking from gaining market share there. This shows the uncertainty around this issue (see the European Hotel Distribution Study 2020). I could share more examples too.

Moreover, it is hard to imagine that Booking.com would tolerate a significant increase in price disparities. This would jeopardize its substantial investments in marketing and technology. As a result, many believe that the end of price parity could lead to more pressure from Booking.com on hotels. This could be especially true for independent hotels and those that are not part of the major chains. While this is a reasonable consideration, the manner in which Booking might exert this increased pressure is quite different from the retaliation many expect.

From Retaliation to Algorithmic Persuasion by Booking.com

Booking.com has invested significant resources to develop strategies to counteract the effects of the ban on price parity. In 2015, following the first European laws against this clause, then-CEO Darren Huston warned that they would use technology to protect fair conditions and prevent rate disparities.

Big companies like Booking.com anticipate problems. They don't react to them late. In this regard, the company implemented proactive measures long ago to counter price disparities. And they have proven to be effective. These strategies have let Booking.com grow steadily, even in markets where the price parity clause has been banned for years. As a result of these proactive measures, Booking.com is now in an advantageous position to maintain its market dominance.

Measures to Counteract Disparities

But what specific measures are we discussing? Is there a possibility of retaliation? If we define retaliation as "a severe treatment that, without leading to a violent break in relations, one party adopts against another to respond to adverse actions, we could expect that Booking might implement "algorithmic retaliation" that would penalize the visibility of or even temporarily exclude hotels with disparities. Similar to what Google does with sites that use illegal techniques to rank high in search results. However, this is not the case.

Since I wrote about how Booking's algorithm worked, many things have evolved. One of these is the company's "algorithmic strategy." Instead of retaliation, Booking has implemented a strategy of "algorithmic persuasion," which is based on influencing and guiding the behavior of hoteliers rather than simply penalizing them.

How Booking’s Algorithmic Persuasion Works

• Reward Collaborators. The Booking algorithm does not directly penalize hotels with pricing disparities. Instead, it rewards those that maintain price parity and collaborate with the platform by providing them with increased quality (not just quantity) visibility.
• Participation is completely voluntary. Hoteliers are encouraged to maintain price parity on a voluntary basis and benefit from participating in the competitive dynamics that drive Booking’s revenues and fund its multimillion-dollar marketing campaigns.
• Minimize lost bookings. Instead of reducing the visibility of hotels with disparities, which could negatively impact Booking.com’s revenues (due to the lower number of bookings they would generate), the OTA minimizes its losses by impoverishing the visibility of these hotels. This also weakens the billboard effect that these hotels could benefit from.

Thus, Booking’s strategy is not about reducing visibility as punishment. It is a more intelligent and sophisticated approach that facilitates collaboration with hoteliers. This is a strategy based on the use of technology to generate positive messages and immediate quantifiable results with the aim of persuading rather than coercing hoteliers.

How Booking Algorithms Reward Hotels: Quality Visibility

The algorithms are designed to reward hotels that make a greater strategic and economic contribution to Booking.com by driving more valuable customers to them. Simply put, the system aims to significantly increase bookings for these hotels by channelling travelers who are likely to make immediate or near-immediate bookings with more spending available for longer stays, premium rooms, etc.

Balancing Motivation and Reward

Booking has balanced motivating, rewarding, and securing hotels on its platform with two key strategies:

• Persuasion and Motivation Techniques: Applying principles from behavioral economics to persuade hoteliers and travelers.
• Artificial Intelligence and Data Mining: Using AI and data mining to better understand its users and the competitive dynamics among hotels.

This methodology is particularly effective with independent European hotels, with whom Booking has been able to build lasting relationships from the very beginning.

Conclusion

Booking.com's “algorithmic persuasion” strategy allows the company to maintain its competitiveness and profitability while motivating hoteliers to collaborate voluntarily, ensuring a positive experience for both hotels and travelers.

It is evident that rewarding is not the same as punishing, and Booking has a sophisticated method of doing so. Moreover, given that Booking has been designated as a gatekeeper, it is expected to continue acting in a more discreet manner.

In other words, rather than expecting harsh retaliation against hotels with disparities, as one might hypothesize, it is more likely that the OTA will create new solutions to more visibly reward hotels without disparities. This way, it can counter a potential new wave of disparities just as it has been doing so far: penalizing “naughty” hotels as an indirect, gradual, and effective result of the rewards given to the more collaborative hotels.

In conclusion, it is expected that Booking will not explicitly penalize hotels with disparities. However, it is likely that Booking will continue to take measures that indirectly increase their booking acquisition costs. This will be the result of impoverishing the quality of these hotels' visibility both directly on its own platform and indirectly on the hotels' websites as a result of a lower quality billboard effect.

At a time when tourism is booming, Booking's algorithmic persuasion strategy helps drive sales without upsetting hotels. The current high market demand further rewards cooperative hotels and partially compensates for the lower quality of visibility of hotels with disparities. However, rewarding or compensating does not guarantee that the hotel will fully capitalize on the current surge in market demand. It also may not reduce commissions. Or improve customer acquisition costs (including direct and hidden costs).

This is why the outcome for hotels with or without price parity can vary significantly depending on how they design their 360-degree direct and indirect distribution strategy. Therefore, the decision to break or maintain price parity and how to do so can have a huge impact on their final economic benefits.

Next Steps: Refocusing Distribution Strategies

If you’ve made it this far, you’re probably wondering about the potential opportunities in Booking strategy. How can hotels change their distribution to use them without paying higher commissions? To answer these questions, we will need to delve into:

To answer these questions, we will need to delve into:

• How Booking algorithms channel its better travelers to premium hotel partners.
• What kind of algorithms are used for this purpose.
• How Booking uses technology to motivate and persuade hoteliers.
• The psychological foundations that underpin this strategy.
• The techniques or mechanisms that drive Booking’s strategy.

All these points will be explained in detail in my next article.

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This article is based on my own opinions, which have been shaped by years of experience, research, and field results. However, each reader should evaluate this information and determine its applicability to their situation.

The authenticity of the content: 100% of this article was written by me. Gen AI software such as ChatGPT, Google Gemini, Claude 3.5, and others were used to improve the translation, generate visuals, and polish my writing.