EU's Digital Markets Act Hurting Hotels, Consumers Alike; India Would Do Well To Take Note

Under the EU's Digital Markets Act (DMA), the platforms, henceforth referred to as gatekeepers (Google, Apple, Facebook and Amazon), were obligated to follow the regulations.

Primary research by Mirai and d-Edge Hospital Solutions say changes made to Google search results after the DMA have adversely impacted hotels. The data provides valuable insights for countries, such as India and Brazil, considering similar domestic legislation.

Experts note that government intervention where none is required can cause market failure, resulting in adverse consequences for stakeholders. The DMA restrictions on vertical integration and self-preferencing in online search to benefit hotels and end consumers illustrate this principle.

Vertical integration occurs when a single firm creates products and services at multiple levels of the same supply chain. For instance, Google’s search engine not only provides users with search results but also integrates other services, such as Google Maps, its flight and hotel comparison services.

When a vertically integrated company favours its own products and services relative to those provided by third parties on the same platform, it is known as self-preferencing. In the context of online search, self-preferencing takes the form of preferential ranking, i.e., displaying the vertically integrated firm’s products and services higher on the search results page than third parties.

When users search for a hotel on Google, the top result is its hotel comparison service, which aggregates listings from various sources, including hotel and online travel agency (OTA) websites, and displays their location on Google Maps. Websites of OTAs, such as Booking.com or MakeMyTrip, and hotels are displayed lower on the page.

Recital 51 of the DMA identifies preferential ranking and vertical integration of services on a gatekeeper’s core platform service as problematic because such practices create conflicts of interest, and foreclose competition from other service providers.

For instance, Google’s preferential ranking of its hotel comparison service ostensibly reduces the visibility of OTA and hotel websites, thereby increasing their reliance on Google for visibility, traffic, and bookings.

Article 6(5) of the DMA seeks to prevent such allegedly anti-competitive conduct by prohibiting gatekeepers from preferentially treating their services vis-a-vis those of third parties on its core platform service, i.e., self-preferencing.

In theory, this would require Google to refrain from displaying its own products and services at the top of search results, providing more visibility to hotel and OTA websites. However, the prohibition on self-preferencing does not account for the fact that preferential ranking does not by itself result in market failure and can benefit businesses and end consumers.

Google’s Search Engine Results Page (SERP) Before And After DMA

Illustratively, Google’s placement of its hotel comparison service and Maps at the top of search screens was a source of organic traffic for hotel websites.

Organic traffic refers to visitors who find a website through unpaid search results instead of paid advertisements. This type of traffic is important for hotels because it is cost-effective and often consists of highly interested potential customers.

Google’s DMA-compliant results page, however, shows its comparison service lower on the page. OTA websites are featured at the top due to their spending on Google Ads and search marketing (illustrated below).

As a result, organic traffic to hotel websites dropped by 20 per cent compared to pre-DMA levels, and bookings through intermediation services increased by 36 per cent.

With the drop in organic traffic, hotels have little option but to increase their ad spending to compete with online intermediation services for higher rankings, which in turn increases their reliance on paid traffic vis-a-vis organic generated through Google’s comparison service.

While OTAs help facilitate hotel bookings, they charge commissions ranging from 15-30 per cent on each booking, which eats into a hotel’s profit margins. Additionally, hoteliers allege OTAs accumulate and control vast consumer data, bolstering their ability to offer personalised offerings to users at the expense of hotels.

Also, end users are adversely affected by the revamped search results page as they can't locate hotels on Google Maps, compare prices for different dates and across hotels, and view different booking options for the same hotel/room.

The findings suggest the DMA’s restrictions on preferential ranking by online search engines have yielded negative results for businesses and end users, illustrating the complexities linked to ex-ante competition legislation. 

Policymakers in other countries should closely examine these outcomes and understand how similar ex-ante interventions can play out in their markets. In particular, they must carefully assess the potential repercussions before implementing similar laws, ensuring interventions are grounded in clear evidence of market failure.

(Mohit Chawdhry specialises in research on digital assets, data protection, and digital antitrust. He is a Fellow at the Esya Centre, a New Delhi based technology policy research organisation.Views expressed are personal)