Enterprise Bill

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Mr. Purchase: In referring to earlier dissonance between a Labour Member and the Government, the hon. Gentleman was in danger of causing the hon. Member for Eastbourne to swallow his own words. Are we now hearing exactly the same?

Mr. Lansley: I am debating the amendment in accordance with my hon. Friend's intention. He rightly raised a point of order because he wanted to ensure an opportunity for sufficient scrutiny of the Government's proposals. He was not intending to affirm that, save the presence of minority parties, only two arguments must be presented in Committee–the Government argument and an Opposition argument–as opposed to those on a series of Opposition probing amendments. The purpose of such amendments, and of having sufficient time to debate them, is to explore the issues.

The hon. Gentleman will no doubt test me again on the amendments. We should certainly reflect carefully on amendment No. 214 and consequential amendments. We are trying to introduce a merger-control regime that is closer to that in the United States than in the EC. My hon. Friend the Member for Eastbourne spoke about the European Community's case, but he was simply pointing out that several merger-control regimes explicitly acknowledge a failing firm defence. The amendments propose something akin to the EC structure, but if we were going to adopt the US merger regime–or something like it–it would be more logical to construct something closer to the US failing firm defence rather than the EU defence. The issue in the US failing firm defence that really matters is the point mentioned by my hon. Friend: in the absence of the merger, the assets of the firm will exit the marketplace. That is the key.

The other issues are not so significant. The fact that firms succeed and fail is a perfectly normal part of a market mechanism. One should not normally allow dominance to occur because if there are sufficient opportunities for entry to the marketplace, one firm will disappear, another will arrive and assets will go out of one company's control and into another's. If those assets were to exit the marketplace, however, a risk of reducing competition arises.

The real test is whether, in the absence of a particular merger, competition will be reduced because the assets of the firm that would have been taken over–the enterprise that will cease to be distinct–will not be retained and not continue to supply the marketplace. They may be lost. The lack of capacity to supply the marketplace may be a detriment to consumers. That will obviously have to be balanced against the position in the marketplace and, particularly, any increase in dominance on the part of the company that buys out the other. Whether another company could take over those assets is relevant, but a second-order rather than a first-order question.

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My hon. Friend has done the Committee a service by raising this matter. We must think carefully about the US regime and whether anything has been identified that is lacking from the existing criteria that should be applied to making reference. We must be satisfied theoretically–we often think issues through theoretically rather than practically–that in the absence of an additional criterion of the sort that I mentioned, the Office of Fair Trading could assess whether assets would exit the marketplace or whether, in the absence of a merger, they would be taken over by someone else who would occupy a less dominant position, thereby keeping the competition going by the application of the substantial lessening of competition test. The key is whether that test is sufficiently flexible, as the Minister said, to be able to deliver the possibility of a non-reference or some sort of undertaking without the explicit identification of the failing firm defence in the criteria set out in the measure.

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One other point should be borne in mind. We are modelling our merger regime more closely upon those that apply in the United States, which rests more on its merger regime than we do. We depend slightly more on our complex monopoly provisions and on the chapters I and II prohibitions under the Competition Act. We have to be careful that we do not try to do everything through the merger control regime rather than taking other routes. For example, in the absence of a failing firm defence, and if a dominant position were to result from a company going out of business and the assets leaving the marketplace, any abuse that might arise from it might be more effectively handled through the chapter II prohibition than might be the case in the US regime. It is probably done more effectively here and in the European Union than it is in the United States.

Miss Johnson: It might help if I first speak to Government amendments Nos. 176, 177 and 178 and then come to the points made by hon. Members in the debate on the other amendments in the group.

The amendments affect clauses 20, 31 and 42. They make it clear that a substantial lessening of competition arising from a merger, as well as any adverse effects which result from the substantial lessening of competition, may be outweighed by customer benefits in the Office of Fair Trading's consideration of a reference decision. The amendment to clause 42 makes the same change in relation to any report that the OFT makes to the Secretary of State in a merger case in which she has intervened. These are minor changes made for clarity and to harmonise the language of these clauses with that of clause 33, which concerns the decisions of the Competition Commission on a merger reference.

Amendments No. 213, 219, 237 and 253 refer to the customer benefits issue, and the benefits to suppliers. The amendments expand the definition of customer benefits where the term appears in the Bill to include benefits to upstream suppliers of a merging entity. The definition of customer benefits is important; in certain circumstances they can affect the decisions taken by the competition authorities. At stage 1, the OFT can have regard to defined customer benefits in deciding

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whether to refer a merger. At stage 2, the Competition Commission can have regard to defining customer benefits in deciding what action to take to remedy a competition problem. The aim of a customer benefits limb is to allow the authorities to have regard, where appropriate, to certain types of customer benefit that can arise from the merger notwithstanding a substantial lessening of competition. If these potential benefits only flow upstream to suppliers, but not downstream to customers of the merging entity, it is immediately obvious that the substantial lessening of competition is providing a significant bottleneck preventing any benefits being passed through the supply chain. This would suggest that the substantial lessening of competition is sufficiently strong to prevent any customer benefits being obtained.

A merger that results in a substantial lessening of competition is almost invariably harmful to customer and consumer interests. It should be possible to allow such a merger to proceed only where the authorities are confident that there are offsetting customer benefits. We do not think that the regime should be structured to take account of benefits that benefit only upstream suppliers and their shareholders, but have no wider benefits for customers.

Where benefits to upstream suppliers manifest themselves in benefits to customers further down the chain, it would be possible to take account of them under the definition of customer benefits set out in clause 28 of the Bill provided they take the form of lower prices or higher quality choice or innovation. Indeed, it is difficult to identify examples of benefits that would only flow upstream without also having an impact on customers downstream. There is therefore no need to make special provisions for supplier benefits.

In developing the new merger regime we have sought to retain a tight definition of customer benefits to maintain the primary focus on competition while providing flexibility to deal appropriately with the rare circumstances where a merger may produce customer benefits notwithstanding a substantial lessening of competition. Expanding the definition, and expanding the factors that can in certain circumstances be weighed against a loss of competition, risks undermining the competition focus of the regime, undermining its certainty, and complicating the assessment task of the competition authorities.

Amendment No. 212 would require the Secretary of State to make regulations to define the meaning of markets of ''sufficient importance'', which exercised the hon. Member for Southport in his consideration of this on behalf of his hon. Friend the Member for Orkney and Shetland. It would thereby restrict the discretion that the clause gives the OFT to assess against all the relevant facts and circumstances of a particular case whether a market or markets associated with a merger were of sufficient importance to justify further investigation by the Competition Commission. I was not entirely clear whether the hon. Member for Southport realised that this was not about the initial investigation but about looking further into markets associated with the merger, the further investigation by

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the Competition Commission, and whether a reference should be made. In giving the OFT discretion to make this assessment we wish in particular to give it discretion to avoid references being made where the costs involved in the reference would be disproportionate to the size or significance of the markets concerned.

The Government believe that judgments of that type are best made on a case-by-case basis by the experts in the competition authorities. We believe that the OFT will be able to reach sensible decisions under the formula we propose, and do not think that it would be sensible further to define the concept or to impose a rigid legal framework for such a judgment. The variety of markets and situations that can arise could well lead to any more precise definition having unintended consequences as new facts appeared, with inappropriate references being made.

Depending on the circumstances of the case in relation to the question of what sufficient importance is, which exercised the hon. Gentleman, the OFT could take the view that a small, but fast growing market would meet the importance test, whereas another market of a similar size in long-term decline would not. However that very example shows the need for care in seeking to prescribe what is to be treated as important, and to argue for leaving the OFT scope to exercise its discretion sensibly. I hope that I have reassured the hon. Gentleman about the importance of some small markets in the definition of sufficient importance.

The OFT will be publishing general advice and information about the making of references by it, which will enable it to give guidance from time to time on matters it considers likely to be relevant to the assessment of importance. As part of that process, the OFT will consult businesses and others on their views. We note that the decisions that the OFT makes may be the subject of appeal to the CAT, such that the OFT will need to consider those matters carefully.

On the failing firms defence, the amendments seek to ensure that the special circumstances of a merger involving a failing firm can be taken into account. I agree that this is desirable. However, no special provision is required. In applying the substantial lessening of competition test, the competition authorities will already be able to take account of those issues where they arise. When considering whether a merger would result in a substantial lessening of competition, the competition authorities will have to analyse a number of scenarios. Two key scenarios will be, first, the situation that would result from the merger taking place, and, secondly, the situation that would develop if there were no merger.

Clearly, if an enterprise is about to go out of business, it will affect the analysis because the authorities will be comparing the post-merger situation against a market without the failing firm. In that event, they may conclude that the merger will not result in a substantial lessening of competition. That is another attraction of the substantial lessening of competition test. It ensures that the authorities have

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the flexibility to consider how the merger will affect the competitive forces in a market. However, many different issues can arise and it is not attractive to pick out a few in the legislation. In fact, that would call into question the normal economic application of the test.

 
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