Clause 28 - Relevant customer benefits

Enterprise Bill – in a Public Bill Committee am 5:00 pm ar 30 Ebrill 2002.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

Again, I will be brief. The provision on ''relevant customer benefits'' is valuable and, contrary to what I said a moment ago about another issue, it is helpful that the clause sets out those benefits in detail. However, I want to draw the Under-Secretary out a little more in terms of the sort of investigation that she envisages under the clause and the practical considerations.

There are two groups of benefit, the first of which is fairly obvious:

''lower prices, higher quality or greater choice of goods or services''

in subsection (1)(a)(i). One is tempted to take the view that most mergers would involve less choice rather than more, so it would be interesting to hear more about the reasoning behind that sub-paragraph.

To return to some points made by my hon. Friend the Member for Huntingdon during a previous debate on dentistry—it seems aeons ago and I am glad that we have not heard much about it recently—I am pleased that the Under-Secretary is not taking the same route that one or two consumer organisations misguidedly took by expecting prices to be the same for the same services. I hope that she is, by definition, in the clause accepting that prices may vary enormously for the same goods or services.

I want to draw the Under-Secretary out further on subsection (1)(a)(ii) which refers to ''greater innovation''. I presume that that means greater technological innovation in the delivery of services—for example, by internet and so on—and in the sort of product available. It would be helpful to have a sketch of the sort of innovation that she envisages, bearing in mind that the provision applies to ''future customers'', according to the last line of the clause, as much as to current customers, and how the judgment will be made so that the relevant customer benefits exception comes into force.

Photo of Mark Field Mark Field Ceidwadwyr, Cities of London and Westminster

Without wishing to introduce too many references to dentistry, I also want to get my teeth into something and ask the Under-Secretary to do likewise. The underlying purpose of the Bill is to encourage certainty, consistency and predictability. How does she balance customer benefits, about which the clause goes into admirable detail, with substantial lessening of competition, to which the key clause 20 refers? How can the uncertainty that will be brought about possibly be in keeping with the raison d'être of the Bill?

Photo of Ken Purchase Ken Purchase Labour/Co-operative, Wolverhampton North East

I am worried that we seem to be writing get-out clauses. I draw the attention of my hon. Friend the Under-Secretary to subsection 1(a)(i) and ask in a friendly but probing way, ''Lower prices, for how long? Higher quality, what if it falls?'' Those questions can be addressed, but I am worried that the provision may provide the opportunity to continue with a merger when, in truth, consumers will benefit not at all.

I also draw to my hon. Friend's attention subsection (2)(a), which refers to ''a reasonable period'', whatever that might mean in terms of the process of a merger. Will she deal with timing and say whether those escape clauses do a disservice to consumers when the onus should be on the merging companies to prove that they will bring positive benefits?

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

Two situations might be relevant and could affect the decision of the competition authorities in relation to consumer benefits. In the first situation, one of the circumstances in which the OFT might decide not to refer is where it expects customer benefits to outweigh the competition concerns. The second situation relates to a reference. If a merger is referred, the Competition Commission has the task of deciding whether a merger will result in a substantial lessening of competition. The Competition Commission can have regard to customer benefits and will have discretion to apply lesser competition remedies than would otherwise be the case in that second scenario. The discretion would extend from the Competition Commission clearing the merger without applying any competition remedies, if it decided that nothing could be done about competition problems without eliminating the relevant customer benefit, to taking those remedies into consideration.

The challenge in identifying the framework, as the hon. Member for Cities of London and Westminster (Mr. Field) remarked in his contribution, was to identify a framework that would allow such benefits to be taken into account without undermining the central importance of the competition analysis. That is certainly true and we believe that we have such a structure. At stage one, the OFT can choose not to refer a merger where it believes that the customer benefits outweigh the competition concerns, but to reach such a belief, we expect that the benefits will have to be significant and certain. To some degree that deals with the question of my hon. Friend the Member for Wolverhampton, North-East (Mr. Purchase), but not entirely. I accept that the certainty is important, as it covers time as well as existence.

Where there are doubts, a reference would always be made so that the issues could be studied in depth. At stage two, the Competition Commission will always have to reach a decision on the substantial lessening of competition test. It will have to take into account customer benefits at the relevant stage of setting remedies.

The hon. Member for Eastbourne asked for examples. I have quite a few. I will not detain the Committee long in giving them; I will just run through a couple. For example, a network benefit in mobile telecommunications is that the more users who join a particular mobile network, the more valuable the network becomes to those users—they can contact more people, in more locations, at lower cost as the network increases in size. In the case of large economies of scale, where the effect of scale economies on prices is sufficient to outweigh that of a substantial lessening of competition, such circumstances could lead to an overall reduction in prices—provided that the authorities were satisfied

that the economies of scale would be realised in spite of a significant reduction in competition and prices after the merger would remain lower than they were pre-merger.

My hon. Friend the Member for Wolverhampton, North-East made a point about ''reasonable time''. That can be interpreted by lawyers, who will decide whether the OFT or the Competition Commission are doing things properly. My third example is that of a merger producing more innovation through research and development benefits. The hon. Member for Eastbourne mentioned that in his remarks. Investment in research and development often involves large fixed costs and there may be circumstances where critical mass is needed—in terms of research expertise or capital or both. Under those circumstances, that can be secured only through a merger, although substantial benefits may be gained from that.

Photo of Nigel Waterson Nigel Waterson Ceidwadwyr, Eastbourne

My request for some examples has been vindicated. The Minister has been very helpful and it is easier to grapple with specific examples. On the innovation point, let us assume that two pharmaceutical companies want to merge. There will often be a critical mass argument to have the research and development focused on a new product or a combination of two existing products, but at what point is the balance struck between the domination—we do not have a dominance test, sadly—of the market by the new company and its one very successful product? Again, that is a difficult example to conjure with, but it is important that we understand the way in which the Under-Secretary's mind works. How strong will the innovation argument within this exception clause be in such a context?

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

That will depend on the circumstance of the case. That balance should not be disregarded; it must be weighed up when considering substantial lessening of competition. The circumstances described are ones in which that issue will have to be examined, but it will vary from situation to situation. That is shown in the examples that I gave and we could construct many examples, under each main heading.

The competition authorities will have to examine that balance as they go through each case. They will also have to examine the economic significance of customer benefits and the competition issues that arise. The core of our response is to ensure that we get the balance right. Competition can be balanced in the context given, but only in the way that we have set out in the Bill.

Question put and agreed to.

Clause 28 ordered to stand part of the Bill.