A Transcript Between a Naval Ship and a Lighthouse

E-commerce Lighthouses are now more prevalent than ever in the global economy.

This is an old joke that is sometimes used to exemplify the dangers of inflexibility and the need for situational awareness. This joke also speaks on a different level — poorly defined roles. Think about this: if no person were answering a call at the infamous Lighthouse from the alleged US Naval vessel, said vessel would have simply ran aground. The Lighthouse is a helpful guide that saves the ship by answering the call and, eventually, clarifying their role in the chain of events.

The history of Lighthouses has always been surrounded by the idea to improve navigation with an element that has a known position and reliably transmits a signal to others. Lighthouses have evolved to be more visible, more reliable, more predictable, and to cover a greater area.

A Lighthouse is a tool designed as a helpful service, rather than an immovable obstacle. If we examine the evolution of Lighthouses from a modern perspective, they have never actually gone away, but simply have evolved into GPS satellites — objects positioned very high in the sky that transmit their known position back to Earth with great accuracy. Lighthouses are now more prevalent than ever in the operations of global economy.

Lighthouse analogy is easily applied to commerce, specifically the parallel between Lighthouses and Marketplaces. A Marketplace, it too, a tool that is designed to improve navigation of trade, a helpful guide, that strives to become more reliable, more predictable, and more visible to users. In this analogy, we can make the following parallels:

Lighthouse <> Marketplace

Port of Destination <> Consumer

Vessel <> Service or Product

Waterway <> Free Market

A Marketplace and a Service or Product provider have a common goal — to help Service or Product provider reach the Consumer. This goal works perfectly fine as long as all elements act in their designated capacity and stick to their roles.

Whenever Lighthouses begin to act like US Navy ships, or a Port of Destination thinks that it is a Lighthouse, things go terribly wrong — vessels sink, free markets become restricted in navigation, and consumers pay premium for their cargo. Marketplaces, just like Lighthouses, are helpful guides for Service Providers and Consumers, they should never impose terms of sale on to parties, but merely help parties meet their destination.

From the history, however, we also know about attempts to build False Lighthouses in ancient times to run ships aground and salvage their cargo from the wreck. This was called “wrecking,” a practice of taking valuables from a shipwreck. Building false navigation aids is hard because it is an act of Piracy, and requires a substantial investment and a fixed location — it is much easier for Pirates to hoist a false flag on their vessel and board a merchant ship with deception.

In e-commerce, however, the problem of being able to successfully build False Lighthouses is typically by-passed with collusion — it is much easier to build False Lighthouses if some Vessels are in on it.

False Lighthouses destroyed commerce in the ancient times that same way Raked Marketplaces destroy e-commerce today. Raked Marketplaces seed insecurity and doubt, instead of clarity and trust. But how do the operate? Shouldn’t Consumers be aware of Raked Marketplaces and avoid them? In theory, yes, but in practice, Service and Product provides make it much more difficult when they enter into restrictive agreements with Raked Marketplaces.

Collusion is widely understood as an illicit agreement between competitors, for example, to sell or not to sell a product at a certain price. This is not entirely accurate — collusion can take place not just between Service or Product providers, but also between Raked Marketplaces and the Service or Product providers as a mechanism to deceive Consumers.

The Sherman Act specifically prohibits any agreements that restrain free trade, it does not require the agreement to be made between Service or Product providers.

Why is this distinction important? E-commerce is a major part of our lives, and Raked Marketplaces have been abusing the free market in self-interest as a way to rake the experience with use of price parity, price fixing, market allocation, and consumer allocation agreements with Service or Product providers.

Gig Economy Marketplaces

Uber Technologies has been a subject of several private antitrust legal cases in the United States and elsewhere. The main argument behind litigation rests with the fact that Uber claims to be a Marketplace and does not provide transportation services to consumers directly, instead, drivers are independent contractors and not employees. Antitrust law generally holds that price setting activities are permissible within business firms, but bars them beyond firm boundaries. The antitrust law’s firm exemption strictly applies to entities that a platform have a direct control over, such as employees. The core of Uber’s business model is the coordination of consumer prices across drivers as means to deliver upfront fares calculated by an algorithm. Uber has managed to avoid directly litigating this antitrust problem by compelling a consumer (Meyer v. Uber Technologies, Inc.) lawsuit to be moved into arbitration.

In 1951 antitrust case United States v. Richfield Oil Co. the court ruled unequivocally for the government on the grounds that Richfield Oil Co. exercised de facto control over “independent business men,” in contravention of the antitrust laws, despite the fact that they were not employees of the company. This has become the basis for delineation between the realm of labor and antitrust: if subordinate entities are “independent business men” and not employees, it is illegal to exercise control. The United States Supreme Court affirmed the same basic principle against coercion of non-employees by vertical supply contract in the 1964 case Simpson v. Union Oil Co. of California.

Online labor platforms like Uber, Lyft, Handy, Amazon Home Services, DoorDash, and Instacart have perfected a process where workers deal bilaterally with gigs whose employers have none of the standard obligations of employers, while the platform operates the entire labor market to its own benefit — what some antitrust experts call a “for-profit hiring hall.”

Uber drivers are not employees, so then they must be independent businesses, and hence Uber setting the terms on which they transact with customers, including fixing the prices charged to customers, constitutes a violation of the Sherman Act’s ban on restraints of trade.

Real Estate Referral Fee Networks

In residential real estate, several “paper” brokers are actively using “blanket” referral agreement between the “paper” broker and a Partner Agent for a random transaction that may or may not happen sometime in the future is executed in advance. “Paper” broker actively disengages from its licensed activities so that every Partner Agent knows that referral brokerage will not compete with them.

RESPA (12 U.S.C. 2607) Section 8 narrowly allows payments under cooperative brokerage and referral arrangements between real estate agents and real estate brokers. This limited exemption on kickbacks only applies to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.

A “paper” brokerage does not act in a real estate brokerage capacity, instead, their real estate license is used to collect a blanket referral fee from the largest number of brokers possible. Sherman Act, effectively, requires all active real estate brokers to proactively compete for consumers without entering into agreements that restrain free trade. An agreement or an understanding between brokers not to compete for a mutual profit is a “per se” violation of antitrust regulations in the United States.

It is a per se violation of the Sherman Act for real estate brokers to agree on a “standard” referral fee that will be paid for producing a client. Real estate professionals are not allowed to enter into “standard” referral agreements because such agreements always restrict free trade.

Such products include: Zillow Flex Program UpNest 
Rocket Homes Realtor.com Opcity Opendoor Brokerage Nobul NAEBA 
mellohome LemonBrew Clever Real Estate Sold.com Landed HomeLight 
SimpleShowing Redfin Partner Program and many others.

To comply in good faith with RESPA (12 U.S.C. 2607) Section 8 exception for cooperative brokerage and referral arrangements, real estate agents must render referral agreements in a particular instance for a particular transaction.

Actions of such referral schemes directly increase the costs of owning homes in the United States due to added referral fees, consumer allocation practices, and reverse completion between brokers. Partner Agents in the scheme have no incentive to compete for consumers with lower fees, instead, they have an incentive to compete for referral broker’s attention. In this scheme, both colluding parties benefit from offering consumers higher commissions.

A “paper” broker promotes Partner Agents as a way to limit competition with those agents outside of the network, thus limiting free-market competitive forces and steering consumers in self-interest.

Some of these referral brokers go as far as establishing rates and rebates for participating Partner Agents, where “price fixing as a service” propositions have a common theme: consumers seem to get the benefit of lower rates. However, such savings are fabricated.

Brokers must never agree on commission rates or rebate amounts with any outside party. Agents must take care to avoid even the implication that they have discussed or reached an agreement about their service fees, service offerings, and rates due to any outside influence.

Commission rates should never be fixed through collusion. All commissions and rebates must be set by each real estate agent individually and may only be negotiable between the consumer and the real estate agent. All quality and honest real estate professionals establish pricing for their services independently, and without any kickbacks. The truth is, every single agent is different, and every single agent has an individual commission structure.

Online Travel Agencies (OTA)

Booking-dot-com is wholly owned by the Booking Holdings Inc. Over 90% of Booking Holdings Inc. revenues come from booking commissions. The company is ranked as one of the largest in the United States corporations by revenue.

Booking-dot-com business model aggregates hotel offerings around the world and takes a commission on each booking between 10 and 30 percent, typically 20 percent. In the United States, the company establishes price party contracts with all hotels. With Booking-dot-com, hotels sometimes choose to pay for higher ranking with a higher commission rate.

Online travel agencies (OTA’s) do not care which hotel is booked by the user, as long as the hotel is booked on the platform the agency receives a commission. Thus OTA’s can heavily advertise hotels via the Big Five channels, far outperforming any individual ad spending by any individual hotel or a hotel chain.

OTA’s receive a higher economic benefit per ad as a result. In effect, hotels are forced to participate with OTA’s or lose the majority of their bookings because they receive lower per-ad benefit over hotel aggregators.

To hide their exigent commission Booking-dot-com further engages in price parity (rate parity) contracts with all hotels that it lists (except in countries where rate parity has already been outlawed.)

This means that hotels can’t offer the same rooms at cheaper rates on the hotel’s direct web pages. Without such price parity agreements, hotels would be able to list rooms for a lesser rate directly because there is no commission attached. Price parity clauses are, in effect, price-fixing schemes.

Booking-dot-com argues that their business model requires price parity clauses agreements to exist, however, this logic fails to consider the weight of US antitrust regulations.

The existence of the Booking-dot-com is secondary to the existence of fair market practices in the booking industry. Booking-dot-com should never be able to govern the pricing strategy of any business that it has no direct control over. The free market is not here to accommodate Booking-dot-com poor business model.

By employing rate parity agreements, Booking-dot-com has created a monopoly where it has no real incentive to lower commissions. By continually turning ads into commissions, Booking-dot-com further uses rate parity clauses to prevent competing travel agents to offer lower hotel prices as well and removes any incentive for alternative OTA’s to lower their commissions.

In their feeble defense, Booking-dot-com claims that hotels are free to walk away from participating in price parity clauses. However, this is not a legitimate excuse for breaking antitrust laws when engaging with hotels that do decide to participate in the scheme.

Obviously, from a legal perspective, anyone is free to walk away from a scheme that breaks an antitrust law, but that doesn’t solve the actual problem if others choose to participate in said scheme. Hotels that walk away from Booking-dot-com lose the majority of their bookings, making this scheme a vicious circle that can only be broken down with enforcement of the Sherman Act.

Today, Booking-dot-com wants to establish a rake on a hotel booking experience, tomorrow another company wants to establish a rake on some other B2C industry with parity clauses. Raked marketplaces must suffer from an exigent rake on any service, not benefit from it and have it guarded with the use of parity clauses.

Consumers must be able to have an incentive to seek out rake-less or low-raked marketplaces that help them archive that same results.

Competing marketplaces must be able to undercut exigent rakes established by others and be able to offer lower overall rates to consumers as a result.

Hotel operators must be able to freely determine which services promote bookings fairly by being able to offer alternative pricing as they wish.

If a service can provide a hotel with a higher booking volume subject to a lower rake, that service must have a competitive advantage. The poor and monopolistic revenue model of Booking-dot-com is not an excuse for nationwide price parity.

Transition to Open Marketplaces

An Open Marketplace, by definition, has a zero rake on any goods and services; Open Marketplace never buys items for subsequent resale either. An Open Marketplace is an independent source of information that treats purchases and negotiations for goods and services as digital content, regardless of any present monetary value.

Open Marketplaces are very rare ever-elusive online unicorns because they tend to truly operate as Internet media companies and can only grow in mega-markets.

Most importantly, Open Marketplaces do not need to enter into agreements that restrain free trade — there is nothing to restrain the trade against because all Products and Services offered via Open Marketplace are organically set for their best price. Open Marketplaces facilitate free trade between Service or Product providers and Consumers.

Today, the list of Open Marketplaces is highly limited due to the enormous difficulty of building them. Google Search, for example, is in a continuous battle with itself to be an Open Marketplace, as it looks to balance unbiased search with rakes on various products and services across almost every market vertical imaginable. Despite these flaws, Google Search, in many ways is designed to function as an Open Marketplace for many consumer verticals, even if it sometimes fails to achieve the intended goal due to inherent drive of pay-to-play on the Internet.

There is an undeniable opportunity to build a massive Open Marketplace for these three massive markers: Gig Economy, Residential Real Estate, and Online Travel.

Google Travel has been actively targeting the travel sector and these results have been highly devastating to the Booking Holdings and Expedia Group products.

Gig Economy is still heavily price-fixed. Current efforts of the government officials are focused on turning Gig Economy Marketplaces into Service Providers (ex. California AB 5 wants to change Uber Technologies into Uber Transportation.) I firmly believe that until the Federal Trade Commission or the Department of Justice takes this issue under investigation on the grounds of Section 1 of the Sherman Act violation, Open Marketplaces in Gig Economy will be impossible to build correctly. VC-backed price-fixing schemes are incredibly hard to destroy organically — these must be disrupted in federal court first.

Real Estate Referral Fee Networks are excellent disruption material by an Open Marketplace. First, Referral Fee Networks must lie to consumers to exist — all results offered by any Referral Fee Network are biased. Second, Sherman Act does not allow for “blanket” referral fees between brokers. Third, RESPA prevents brokers from taking and offering referral fees when acting outside of brokerage capacity. Fourth, this industry rakes in about $15 billion in junk fees, which make up a great deal of money to be offered back to Consumers. Fifth, the real estate industry lives in the past, and Consumers are looking for ways to make their homeownership options more affordable.

Despite the fact that home prices have evolved into 2020 standards, the 6% standard commission remains the product of 1950’s.

Fully-scaled Open Marketplace in real estate is still a theory, but at HomeOpenly we believe it will revolve about an ability to aggregate local savings for 130 million homes in the United States. From the perspective of Consumers, the best and the most reliable information must exist in relationship to the home they are looking to sell or buy. This information is only possible to produce as an Open Marketplace because it operates with Consumers on “upfront” basis rather than hoping to sell a “blind match” with a random broker.

As a matter of the Internet user experience, it is in our interest to empower, to use, to build, and to protect open “Google for X” marketplaces, but at the same time, make all possible efforts to stop “UBER for X” raked marketplaces from building and reaching the scale of a BigTech Enterprise.

Open Marketplaces are difficult, these are not wooden Lighthouses anymore, but full blown GPS satellites. Such efforts, however, offer much greater accuracy and much greater scale than ever before. Open Marketplaces are already changing the way e-commerce operates in online travel, but now this approach is about to take on its biggest challenge — real estate.

Author: Litesand

Antitrust, real estate, e-commerce, fintech, proptech, bigtech

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