Exclusive: ‘Ecosystem’ concerns behind Booking-Etraveli veto sparked friction inside EU Commission

Booking’s bid to buy online travel agent Etraveli looked like the perfect case for EU competition enforcers to advance their “ecosystem” theory of harm and block the deal — but the move caused divisions. Economists within the European Commission were vocal critics, and an internal panel that peer-reviewed the case had similar reservations, MLex has learned. Margrethe Vestager, then commissioner for competition, leaned heavily on the economists to fall into line.

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10 October 2023
By Natalie McNelis

Booking’s bid to buy online travel agent Etraveli looked like the perfect case for EU competition enforcers to advance their “ecosystem” theory of harm and block the deal — but the move caused divisions.

Economists were the most vocal critics of the veto — including within the European Commission, MLex understands. They argued that the case team didn’t have evidence that the acquisition itself would lead to a "significant impediment to effective competition." 

An internal panel that peer-reviewed the case had similar reservations, MLex has learned.

The “ecosystem” theory says that it can be detrimental to competition for a dominant company to expand its business by acquiring companies connected to its core activity. Especially where there are network effects that encourage people to stick with the most popular platform, “customer inertia” could make the dominant company’s platform even “stickier.”

This clash in the EU regulator's competition department sheds light on difficulties faced by merger enforcers as they seek to adapt their rules to the challenges thrown up by the digital economy. 

The commission has been flirting with the ecosystem theory of harm for some time, for instance in its reviews of Meta Platforms' buyout of Kustomer, and Google's acquisition of Fitbit.

But it hadn’t yet found a high-profile merger to test it out, and Booking’s transaction is the first time the commission has used the grounds to prohibit a deal.

Booking, dominant in online accommodation reservations, wanted to acquire a company offering a different but adjacent service — online flights reservations. The regulator accepted that these were different markets, but it said that an online flights travel agent was an "important customer acquisition channel" for Booking’s hotel reservations business.

Booking said the commission was illegally punishing it for trying to improve its service, when what it was doing wouldn’t foreclose any of its rivals — that is, hinder them from competing in online accommodation booking.

The EU watchdog said it didn’t need to prove foreclosure. And indeed the word did not appear in the formal objections to the deal, MLex understands.

Dominance, not foreclosure

Conglomerate cases have traditionally turned on whether the merged entity might subsequently be able to “foreclose” competitors by tying or bundling different products that customers need, or perhaps by reducing interoperability with rivals' offerings.

That could hurt customers in the long run, and it was what led the commission to intervene in, for example, Microsoft-LinkedIn and Google-Fitbit.

In the “ecosystem” theory, though, it is dominance and not foreclosure that takes center stage.

The commission’s position is that for conglomerate mergers in dynamic markets, the traditional foreclosure theory of harm doesn’t always capture the potential competitive effect of deals — for instance when a neighboring acquisition could “entrench” dominance. 

The case team brandished internal documents from Booking that explained its strategic thinking: That a one-stop shop, or “connected trip,” was what consumers want, and the deal would help it grow its business.

For the commission, the deal rationale became evidence, and it was ready to oppose a move that could potentially increase Booking’s dominance in its core market.

In doing so, the regulator might say it is simply relying on classical competition principles: A deal that might strengthen a dominant position is per se a bad thing, surely?

Yet the obligation to prove foreclosure has long stood as a measuring stick for gauging the significance of the potential harm to competition of such conglomerate deals.

It’s notable that in the UK, the Competition and Markets Authority cleared the Booking-Etraveli deal unconditionally in September 2022, after a review that studied Booking's potential to make it harder for rival accommodation online travel agents to compete.

In the UK market, the CMA said, foreclosure wasn't an issue, because the deal "would not materially reduce the ability and incentive of rival suppliers of accommodation OTA services to attract UK consumers (and therefore UK accommodation providers)."

Internal strife

It was the departure from the requirement to prove foreclosure and a "significant" impediment to effective competition that sparked dissent inside the commission’s competition services, MLex understands. 

Relations during the Booking-Etraveli investigation were especially strained with the chief economist’s team, which from the beginning had voiced serious misgivings about the economic foundations of the commission’s “ecosystem” theory of harm — not necessarily as a matter of principle, but as applied to Booking’s case.

When the EU case team concluded that the deal merited intervention, the chief economist’s team opposed the issuance of a formal charge sheet, MLex understands. In response, a panel was put in place to take a fresh look at whether there were sufficient grounds to issue a formal Statement of Objections.

Such “devil’s advocate” panels are almost standard since a string of court reversals that the commission suffered in the Airtours/First Choice, Schneider/Legrand and Tetra Laval/Sidel merger cases in the early 2000s. But what was unusual in this case was how early it was set up: They usually come in to test a proposed prohibition decision. 

The panel that reviewed the Booking SO also had certain misgivings about the commission’s case, MLex understands. 

But Margrethe Vestager, then commissioner for competition, was in favor of the prohibition and leaned heavily on the chief economist’s office to fall into line, MLex has learned.

She and her senior enforcers knew they were treading new ground. But Vestager has, in the past, said that regulators have to be bold and take risks, even if their decisions are ultimately overturned in court.

This one seems certain to face that test: Booking’s lawyers started work on its appeal even before the block was issued.

The commission declined to comment.

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