CPI Antitrust Chronicle: Booking/eTraveli and one-stop shopping

Expert economists Jorge Padilla, Joe Perkins and Salvatore Piccolo contributed to the recent edition of Competition Policy International’s Antitrust Chronicle, discussing the EC’s prohibition of the proposed merger between Booking and eTraveli. In the article, the authors draw on theoretical work in the economic literature to consider what factors might be important to consider, particularly the scale of any shopping costs and the risks of foreclosure or increased barriers to entry.

This article was originally published by Competition Policy International here. The views expressed in this paper are the sole responsibility of the authors and cannot be attributed to Compass Lexecon or any other parties.

Abstract

Based on the limited public information to date, there has been significant speculation about the reasons for the EC’s prohibition of the Booking/eTraveli merger. In this article, we draw on theoretical work in the economic literature to consider what factors might be important to consider, particularly the scale of any shopping costs (costs that consumer incur from visiting multiple different firms) and the risks of foreclosure or increased barriers to entry. In this context, the scale of shopping costs has contrasting implications; high shopping costs both increase the risk that the merger results in foreclosure or increased barriers to entry, and also increase the expected benefits to consumers of permitting it. The shopping costs approach is only one possible theory of harm connected to ecosystems. However, we might expect to see similar dynamics emerging in relation to other theories too, in which the source of the efficiency is also the source of the potential harm. The critical link between efficiencies and potential anti-competitive effects thus makes it particularly important for competition authorities to balance these impacts in their merger assessments.

The recent European Commission (“EC”) prohibition decision of the proposed merger between Booking and eTraveli has generated significant interest as a rare EC prohibition in the technology sector. Analytically, it has also generated interest as an example of a merger prohibited primarily on the basis of an ecosystem theory of harm – that is, the EC did not appear to be particularly concerned by traditional horizontal or vertical effects, but instead emphasised that the merger would enable Booking to strengthen its position through an expansion of its travel services ecosystem.

Such ecosystem effects can raise challenges for traditional merger analysis, as there is no necessary link between the products involved – they may be neither substitutes nor complements. As of yet, there is limited public information on the analytical approach that the EC adopted in this case. There is also limited academic literature to draw upon to consider such ecosystem theories of harm – a notable exception is a recent article by Chen & Rey (2023), which assesses the theory of conglomerate mergers particularly in the context of bundling, but with some discussion of shopping costs too.

In this note, we outline a framework based around longstanding theoretical work on one-stop shopping effects and merger control, in particular Klemperer & Padilla (1997). We show that this suggests an inextricable link between the potential benefits of a merger and its potential harms. That is, the risk of foreclosure only emerges in this framework as a result of the reduced costs that consumers face. The shopping costs approach is only one possible theory of harm connected to ecosystems. However, we might expect to see similar dynamics emerging in relation to other theories too, in which the source of the efficiency is also the source of the potential harm. The critical link between efficiencies and potential anti-competitive effects thus makes it particularly important for competition authorities to balance these impacts in their merger assessments.

Read the CPI Antitrust Chronicle here