When online travel agencies (OTAs) intentionally modify and reorder search results based on commission fees, the manufactured bias on their websites ultimately costs consumers choice and value, says a new report by Harvard Business School Professor Benjamin Edelman.
Edelman’s report, the Impact of OTA Bias and Consolidation on Consumers, explores the rise of OTA search bias, a problem worsened by increased consolidation in the market. Through a series of transactions, Expedia and Priceline acquired sites that were previously competitors—the two now own 95 percent of the OTA market, and no other OTA controls more than one percent of the market.
The research highlights that this new environment allows OTAs to charge hotels commission fees that are sometimes upwards of 25 percent of the hotel’s revenue. These fees can directly impact how search results are displayed—hotels that choose to pay less or can’t afford to pay more are buried in lower search results or removed from the site altogether. The report found that when hotels have offered lower prices with loyalty programs on their own sites, OTAs have demoted their listings by altering where they appear in search results, changing the color scheme to deemphasize, or even removing photos of the hotels.
“Search bias is inherently deceptive and indeed intentionally deceptive,” Edelman writes in his report. “Consumers reasonably expect that the properties featured on OTAs are those that best match their request, and consumers have no reason to expect properties to be sorted or prioritized based on payment.”
The OTA market’s score on the 2016 Herfindahl-Hirschman Index (HHI), which measures market concentration, falls well above both the Department of Justice’s and the Federal Trade Commission’s (FTC) indicator of a “highly concentrated” market. With limited competition, each OTA can anticipate the others’ pricing, letting the OTAs increase their fees to hotels with greater confidence that the others will match. Comparatively, the hotel industry remains decentralized, with no single firm controlling more than 20 percent of capacity. Smaller hotels are especially vulnerable, lacking the market power to oppose OTA fees.
“After nearly two decades of operation under practices that arguably fall short in disclosure and objectivity,” Edelman writes, “OTAs have created a false impression among many consumers that their listings are comprehensive and presented evenhandedly.”
To address these issues, Edelman’s report outlines a number of policy priorities to eliminate deceptive practices and inform consumers. OTAs would no longer be able to retaliate against hotels that offer consumers a better value. OTAs would not be able to demote hotels in search results, make their links appear broken, or otherwise discourage hotels from offering discounts or other benefits to customers. Another policy suggestion would be to require sort order to objectively reflect a user’s search so that OTAs would no longer be able to retaliate against hotels that offer better value or loyalty programs through their own sites. Additionally, Edelman adds that OTAs should issue disclosures so consumers are aware of the difference between organic and paid results—whether in the form of an email to all registered users, a separate clarifying statement on home pages, or additional disclosures within search results. Lastly, the report suggests that the FTC or state attorneys general should take action and demand internal OTA records to check for misleading practices and deter further misconduct if warranted.
“The extreme consolidation that has occurred among the online travel agencies is raising some important issues for consumers and businesses,” said Katherine Lugar, president and CEO of AHLA. “Professor Edelman’s research shows that less competition amongst OTAs is leading to less choices for travelers, less opportunity for small businesses, and ultimately, a cost for hotel guests. And when you take into account that three out of every five hotels in the U.S. are small businesses, this research is particularly concerning. We hope this report spurs lawmakers and policymakers to take a close look at whether both our customers and small businesses are being adequately protected in the current marketplace.”
The paper’s release comes on the heels of the American Hotel & Lodging Association’s (AHLA) “Search Smarter” consumer campaign, an initiative launched in June 2017 to raise awareness of deceptive online marketing practices. The campaign aims to help travelers avoid lost reservations, additional fees and potentially ruined vacations, whether through “digital middlemen” like OTAs or through fraudulent, third-party sites posing as the hotel. Research released by AHLA in June 2017 shows 55 million of bookings are impacted by these misleading marketing practices occur each year, generating revenues of nearly $4 billion for the misleading sites.