How to spot a monopoly – holiday hotels edition
Our economies are dominated by a shrinking number of increasingly dominant firms, in sector after sector. A new report from the tourism and hospitality association Hotrec sheds new light on rising monopoly power in that domain – and the harms that flow from that power.
One can measure market power in several ways: Concentration Ratios, the Herfindahl-Hirschman Index (HHI), the Lerner Index, excess profits, and markups (these are explained in a short section at the bottom). Another useful approach is look at how certain metrics evolve over time. A good example comes from Amazon, a firm that is just too big. An excellent new report from Finanzwende, now available in English, exposes how fast big tech firms are colonising financial and payments systems, how dangerous this will be, and offering solutions.
Source: ILSR (left hand graph, fee rates); SOMO (right, costs of sending a standard parcel)
Amazon has grown fast so it should enjoy economies of scale: fee rates and unit parcel costs should fall, not rise. But we see exactly the opposite.
This evidence flies in the face of a dominant “consumer welfare” ideology which holds that big firms are efficient because of economies of scale and scope; and that these ‘efficiencies’ trickle down to consumers, so all will be well. (This ideology helps explain why the European Commission has blocked just 0.2 percent of notified mergers in 20 years). Economies of scale exist, but under this ideology firms have been allowed to merge and grow almost without limit, far beyond any point of optimal size. The more power a firm has, the more it can "mark up" prices of products above the costs of producing them: these markups have risen sharply in recent decades.
Are hotels being monopolised?
The new report from Hotrec, based on a survey of over 3,000 hoteliers, clearly points to rising monopoy power. Booking (71%), Expedia (14.4%) and HRS (4.6%) enjoy a combined market share of 89 percent. So this market is heavily monopolised - and increasingly so:
Technically, this market has an HHI (see below) of over 5,200: regulators consider HHIs above 1,800 to be highly concentrated. This is already a gigantic regulatory failure.
And what of the impacts? It’s hard to find comparable historical data on how Booking’s rates have changed over time: Hotrec don’t provide this data (and didn’t answer our query about this), except to report high and often rising commission rates.
And what of the impacts? It’s hard to find comparable historical data on how Booking’s rates have changed over time: Hotrec don’t provide this data (and didn’t answer our query about this), except to report high and often rising commission rates.
Industry reports suggest Booking charged a five percent commission in its earlier years; its standard rate had risen to 12-15 percent a decade ago; and now averages 15-18 percent, plus extras. That isn’t a scientific comparison, as the services offered have improved, but it certainly flags a problem. And Hotrec’s survey has some harder indicators:
“There is a widespread complaint about the high commission rates . . . Booking.com and Expedia are frequently mentioned for their monopolistic practices. . . . They dominate the market and control pricing . . . Concerns over the fairness and transparency of OTA [Online Travel Agents] practices . . . Problems contacting OTAs for support, particularly Booking.com . . . Poor communication with guests . . . A few hoteliers have taken a stand against OTAs, refusing to list their properties or collaborate due to high costs and unfair practices.”
Cory Doctorow talks of “Enshittification” – firms in their early years win market share by providing better products for customers and business users, but once they are dominant and indispensible for customers (e.g. people going on holiday) and businesses (e.g.hotels) they can profitably degrade those services, for example with higher fees, or demands for “pay to play” advertising payments to boost search rankings – knowing their users won’t go elsewhere.
It’s safe to say that there’s good evidence of monopoly power, and its abuse, in hospitality.
The “price parity” trap
Booking often also has power to impose “price parity” clauses, which can raise prices on other sites. These clauses say that a hotel’s lowest offering must be on Booking: and this disallows hotels from offering cheaper rates on their own websites, or on other sites like Expedia. As we saw with Amazon, this is a “one-two punch” of higher prices: first, high fees or commissions (see below) force hotels to raise prices on the dominant platform, then price parity forces them to raise prices off the platform, to match those higher on-platform prices. The result is inflation, and fewer people going on holiday.
This abuse of market power should be illegal – but in reality this is in a grey zone. Andres Acevedo, a Swedish competition lawyer, told us: “Whether or not Booking's price party clauses are illegal under EU competition law has been discussed in more or less every EU jurisdiction. It's been a complete mess.” The issue, in Europe, is now up for a preliminary ruling by the European Court of Justice.
More broadly, the European Commission, which until recently rarely saw a merger it didn’t love, did make an exception for Booking last year, and recently blocked its efforts to buy a rival, eTraveli. The EC has also designated Booking as a “gatekeeper” under the Digital Markets Act, so it will be subject to more intense scrutiny and obligations from now on.
In terms of what else to do about all this – that’s for another time. But for now, we’ll say that Booking’s market share is far, far too high, and that regulators need to start breaking things up.
Endnote: Measuring Market Power
Regulators and analysts measure market power in several ways.
One is the Concentration Ratio. A CR 4 of 86%, for example, means that the largest four firms in a market enjoy an 86% share of that market. This is intuitive and useful, but defining the market can be hard: big firms push to define the market as broadly as possible, to dilute their share. Once, a U.S. supermarket chain merger was blocked when the combined entity would have enjoyed a 7.5% market share. But regulators have long given up on that: now some firms (like Google, in search) enjoy CR1s as high as 90 percent.
Another is the HHI, or Herfindahl-Hirschman Index. You square the market share of each firm, then add those squares. If there are 100 firms with one percent market share each, the HHI is 100 (add up all the one-squareds). If a firm has 100 percent market share, the HHI is 10,000 (100 squared). This is a more accurate if less intuitive way to show market power, but defining the market is still a problem.
Another approach is to look at financial measures, like excess profits. The Balanced Economy Project did a study on the largest UK firms providing children’s social care, comparing rates of return to benchmark rates, and found excess profits of £22,000 per child per year (the CMA found roughly the same).