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Non-bidding arrangements regarding online ads closely examined

In the Netherlands, many hotel chains make arrangements with booking websites not to advertise on search results for their brand names. These types of arrangements may lead to higher prices for consumers. That is the conclusion of an article written by experts at the Netherlands Authority for Consumers and Markets (ACM). They assessed what the effects of such arrangements are on the prices of hotel rooms.

Under these arrangements between hotels and booking websites, booking websites are not allowed to bid on online advertising space that search engines present if consumers enter the name of the hotel as a search term. In its ‘Guidelines regarding arrangements between suppliers and buyers,’ ACM had already explained that such types of arrangements are usually prohibited because they restrict competition.

How do the arrangements work?

If you as a consumer enter the name of a hotel in a search engine, an automated instant auction will be held behind the scenes about what search result should be presented at the top of the list. Such auctions take mere hundredths of seconds. Since a hotel has made arrangements with a booking website that the latter does not place any bids in the auction if the consumer enters the brand name of the hotel, the consumer will only be presented with an ad of the hotel and with the unpaid search results. That favors the hotel as the consumer does not immediately get to see a booking website, which means that the hotel faces less competition from other hotels on the booking website, and is thus able to charge higher prices. One potential benefit of the arrangements is that advertising expenditures can go down. The hotel could pass on such savings to consumers by lowering its prices. However, the article shows that the prices of rooms in hotels that have made such arrangements are slightly higher than rooms in hotels that have not made such arrangements.

With regard to this topic, ACM has closely collaborated with the UK competition authority (CMA), and has taken advantage of the knowledge it had gained in its market study into digital comparison tools (DCTs).

The digital economy

Digitalization has led to fundamental shifts in Dutch society. Businesses increasingly use data and algorithms in order to offer consumers innovative services and products. With these innovations, the digital economy offers businesses and consumers many benefits. Each day, consumers use the Internet to find information, and to buy, sell and compare products and services. These markets must continue to function well. Distortion of competition, and deceptive practices vis-à-vis consumers have no place in well-functioning markets.

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Working paper ACM price effects of search advertisement restrictions (PDF - 710.78 KB)