Travel sites like Expedia (EXPE), Orbitz (OWW), and Travelocity appeal to consumers wanting to quickly compare prices and find the best deals. But according to consumers Nikita Turik and Eric Balk, we're being played.
Turik and Balk are seeking class action status for a lawsuit alleging that these travel sites, as well as Priceline (PCLN) and others, not only failed to offer consumers the best deals, but actually conspired with several large hotel chains to fix prices and prevent competitors from offering you cheaper rooms.
How did the travel sites manage to prevent smaller online retailers from offering lower prices? According to the plaintiffs' lawyer, they pressured hotel chains like Starwood Hotels (HOT) and Marriott International (MAR) to enter into "price maintenance agreements," which set a minimum price that hotels could offer to third-party wholesalers. These agreements prevented hotels from using more substantial discounts to book rooms that would otherwise remain unoccupied.
But how did the defendants get the hotels to agree to these conditions? After all, the deal prevents the hotels from getting what revenue they can from rooms that are likely to remain vacant without the lure of discounts.
The answer lies in the fact that these hotels rely a great deal on large travel websites to gain bookings. According to the plaintiffs, roughly 50% of hotel rooms in the United States are booked through online retailers like Expedia, Orbitz, and Travelocity. And according to industry researcher TravelClick, sites like these accounted for 11.4% of hotel bookings in North America among individual business and leisure travelers in 2011.
In other words, these hotels were worried about losing access to the marketing services offered by the online travel companies, which bring in a great deal of their business.
The plaintiffs complain that these travel sites "created the illusion that savvy consumers can spend time researching hotel rates online to find good deals," and thus misled consumers. Indeed, the implicated websites do create such an impression.
Consider, for example, Expedia's claim that "As the world's largest online travel agency, we make it easy to get the best prices on flights, hotels and flight + hotel vacations." Orbitz also leads customers to believe it helps them find good deals by claiming, "[L]et Orbitz be your best source for cheap travel rates. We'll get you there on the cheap with hotel discounts, cheap airfare and more." And Travelocity lures consumers with the prompt, "Enter your email address to get great savings and deals."
Therefore, if the plaintiffs' allegations are true, then not only are these travel sites preventing consumers from getting better deals from other sources by preventing the major hotel chains from offering substantial discounts, but they are also misleading consumers with the false promise of great deals.
Will the Outcome Be Good for Consumers?
In addition to unspecified damages, the plaintiffs' demands include a court order preventing the defendants from continuing their alleged price-fixing practices. If it is ruled that such price-fixing indeed occurs, a victory for the plaintiffs could bring cost savings for consumers. In addition to allowing hotels to offer bargain prices, putting an end to "price maintenance agreements" would reopen the market for smaller online retailers to challenge the dominance of the larger online travel portals.
Motley Fool contributor M. Joy Hayes, Ph.D., is the Principal at ethics consulting firm Courageous Ethics. She doesn't own shares of any of the companies mentioned. Follow @JoyofEthics on Twitter. The Motley Fool owns shares of Priceline.com. Motley Fool newsletter services have recommended buying shares of Priceline.com.
Are Online Travel Deal Sites Ripping You Off?