Hotel Oligopsonies – OTAs

A munificent supply of projects from the liquidity glut of the last bubble has ensured depressed RevPars for many markets in the US, particularly Manhattan resulting in a few large buyers (read OTAs) controlling fragmented (and many) sellers. Economists refer to such buyers as Oligopsonies, a situation where there are few buyers who "control" the market. Examples abound in other industries from radio stations (Clear Channel) to the music industry where Live Nation is dominant in the area of live music.

Economic history shows that oligopsonies generate oligopolies as the negotiating power of the bit player is gradually dissipated to the point of being non-existent. Essentially, the olipsonists can dictate prices even to the point of putting suppliers out of business. Over time they become oligopolies as they take over the selling function almost completely and effectively are sellers. In the hospitality sphere, it is true that there are scores if not hundreds of credible
OTAs but there a mere handful – probably four – who pose the greatest
threat in terms of pricing pressure. Could those oligopsonies become oligopolies?

For starters, OTAs have moved from being mere data repositories to building brand recognition via frequent stay awards and travel tips while increasing their spending on consumer research. Most of the top OTAs like the Big Four viz. Orbitz, Expedia, Hotwire and Travelocity have also shored up their offerings to compete with brick and mortar travel agents by offering a near-complete menu of offerings such as Travelocity's Experience Finder

Another aspect that entrenches OTAs and enabling oligopsonic pricing is the steep growth in opaque travel sites particularly those operated by the big four. The latest entrant to the field of "secret pricing" is Travelocity as recently reported in the New York Times travel blog heretofore dominated by Hotwire and Priceline. Now Travelocity customers too can take advantage of "deep discounts to customers willing to pay before knowing which hotel they’re committing to" by looking up their rather unimaginatively named "Top Secret Hotels". Somewhat unsurprisingly, the purveyors in the site are 3 and 4 star hotels, the segments most susceptible high negative price elasticity of demand. Initially, hotels participated thinking that by filling up a base with price sensitive customers who did not differentiate between products and then maximizing prices via customers who discriminated on account of service characteristics. That it was a slippery slope to maximum price erosion is now apparent.

The road to price domination and market control is far from smooth. While on the ascendant now, much of their growth is driven by the Great Recession and compression in prices owing to excess supply from the financial glut that enabled it. A couple of factors are likely to check their ascendance one of which is the occupancy tax cases they face in many jurisdictions who are trying to recover "lost" tax dollars on account of the OTAs ability to not pay occupancy tax on the spread in the room rate between what the establishment sells to them at and what they charge the guest. There have been over 50 lawsuits with OTAs prevailing in most of them thus far but jurisdictions are likely to respond by closing the lacunae in their tax code that would make OTAs liable.  Faced with paying an occupancy in the future on what has been virtually pure profit for them, they are less likely to continue to develop into the behemoths that they have almost become. To counter that, OTAs are banding together to try and get the Feds involved in giving them a permanent exemption via a congressional bill. However, a financial revival with better RevPar more than any other concerted action on the part of hoteliers is likely to thwart their growth as it diminishes the incentive of hoteliers to be in thraldom to the OTAs as is the case now.

Ultimately, should the OTAs become real oligopsonies, it would be a deleterious outcome for the industry as they, like oligopolies, could crimp supply artificially in order to drive up their end-user prices. A renewed effort to promote proprietary sites a la the airline industry could go some way to stem their power, A noticeable holdout among the airlines has been Southwest Airlines whose fares are not available on any of the OTAs. It is no accident that it is one of the few successful airlines in a cheerless industry. 

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.