An agreement between sellers or retailers and other distribution platforms that the same lowest or best terms for a product or service are offered.
What Is A Parity Clause
A parity clause requires sellers or retailers to offer the lowest price or best terms for their product or services on their platform and to other marketplaces. It prohibits sellers from offering better deals in comparison to the competition or other marketplaces advertising their prices. Having parity clauses ensures there are consistent rates for a product or service across all distribution channels.
You can find parity clauses in legal agreements between sellers and other distribution channels. The practice of enforcing parity clauses is also called rate parity, best available rate, or best rate guaranteed. You can often find the use of parity clauses in the online travel agency market (OTA), hotel industry, and the online food ordering and delivery market.
Since 2010, countries have questioned whether parity clauses violate competition law. For example, in 2013, the German competition authority investigated booking platforms like Expedia and Booking.com that used parity clauses in contracts with hotels. On January 9th, 2015, the Düsseldorf Higher Regional Court declared that using broad price parity clauses breached competition law.
Real-World Example Of A Parity Clause
Parity clauses and rate parity are most commonly used within the hotel industry when determining room rates. When a hotel and its distributors, such as online travel agency platforms, agree to sell rooms at the best available rate, this practice is known as rate parity. A hotel will not give additional discounts on their website that would make the room price cheaper when booked directly through the hotel.
A real-world example of a parity clause in effect is between Booking.com and the hotel Bellagio in Las Vegas, Nevada, United States. If you go to the Booking.com website, you will see that Booking.com lists a Bellagio Resort King room for two people as $159 per night for the dates of April 1st, 2021, to April 2nd, 2021. Similarly, going directly to the Bellagio hotel's website will show that the Bellagio lists a Resort King room at an average of $159 for those exact dates. These two consistent prices on different platforms are an example of rate parity.
The Bellagio hotel's website also provides a disclaimer that if anyone finds a lower room rate from a third-party provider within 24 hours of booking the room, the Bellagio will match the rate and give an additional 10 percent off the lower rate. This statement indicates that the Bellagio hotel is confident they are operating at rate parity with all other marketplaces advertising their rooms.
Types Of Parity Clauses
There are two main categories of parity clauses: a narrow parity clause and a wide parity clause. The two differ in their scope and effects.
A narrow parity clause prevents a seller or retailer from offering better prices or terms on its own website. For example, it restricts a hotel from offering better deals on its website than what an online travel agency is advertising on its marketplace. However, the hotel is allowed to provide better prices and terms to competing marketplaces.
A wide parity clause ensures that all platforms can advertise the lowest rates offered through any channel. A wide parity clause restricts a hotel from offering better deals on its website and any other competing marketplace. Compared to a narrow parity clause, these additional restrictions make a wide parity clause more likely to be anti-competitive.
Significance Of A Parity Clause
Having parity clauses can ensure an equal playing field when it comes to selling certain products and services. It can lead to price uniformity across different marketplaces, which come with both positive and negative results. For instance, it can create a barrier to entry for new sellers or retailers since they can't attract customers by offering more competitive prices. On the other hand, less competition can be a good thing for those already in the marketplace.
Having consistent rates across all distribution channels can create consumer confidence when they decide to purchase. The consumer will feel like they are receiving the best rate available and more likely to buy.
However, a wide parity clause can reduce competition between platforms. For instance, a hotel or airline can't offer better rates on its own website to attract customers away from third-party travel booking websites. Businesses will then have to take into account potential commission rates from third-party platforms. This reduction of competition can result in higher prices for the customers who are getting offered a less variety of deals.
Parity Clause vs. Rate Disparity
A parity clause ensures consistent rates across all distribution channels. In contrast, a rate disparity occurs when a price shown on the seller or retailer's website is different, such as lower or higher, than the price shown on other distribution channels. Referring back to the Bellagio example above, if the Bellagio hotel were to provide customers with a 20 percent discount on the Resort King room, making their price less than Booking.com's listed price, there would be a rate disparity.
Sometimes rate disparity can occur if an online travel agency creates prices at their sole discretion because they have no contractual obligations to a hotel. It can also happen when the distribution channel works together with the hotel to create a commissionable model that changes the product or service price.