Select Committee on Trade and Industry Second Report


4  THE COMPLAINT FROM THE FEDERATION OF SMALL BUSINESSES

29. Worried about the impact the level of concentration in public house ownership was having on some of its members, the Federation of Small Businesses (FSB) asked the OFT to investigate the market for the resale of beer through tied public houses in 2002. The concerns the FSB expressed were: tied tenants paid too much for their beer; they paid too much rent and did not receive adequate support from their pubcos, especially when levels of trade fell below expectations; and the beer tie itself restricted choice. In relation to the last point, the FSB said "the exclusive purchasing obligations imposed on tied tenants were anti-competitive".[29] More formally, the FSB asked whether the two prohibitions of the Competition Act 1998 had been breached through pubcos making anti-competitive agreements with their tenants (the Chapter I prohibition)[30] or by their abuse of a dominant, or jointly dominant position (the Chapter II prohibition).[31] They also asked whether there were grounds for referring the pubcos to the Competition Commission under the monopoly provisions of the Fair Trading Act 1973 (which was shortly to be replaced by the market reference provisions of the Enterprise Act 2002).[32]

30. The OFT declined to conduct such an inquiry. They explained to us that they considered the beer tie did not constitute an infringement of EU competition law and so were unwilling to investigate these claims further. They found no grounds for withdrawing the benefit of the exclusion from the Chapter I prohibition as, they argued, agreements made between tenants and their pubcos concerned the transfer of land rights—the public house. As such, they took the view that the Competition Act (Land and Vertical Agreements Exclusion) Order 2000 would apply as it excluded from consideration agreements between businesses which were not vertically integrated. Even if the Order did not apply in this case, the OFT maintained the Chapter I prohibition would still not be applicable to such agreements as pubcos bought drinks from a number of sources rather than predominantly one source, or were too small to contribute significantly to the foreclosure of public houses to competitors.[33]

31. When analysing the possible application of Chapter II, the OFT suggested they had significant doubts that public houses constituted a discrete market: in their view the relevant market would include all on-trade premises, including clubs and restaurants. Given this market definition, the OFT considered it unlikely that an individual firm, or group of firms, would be considered to be dominant as "no one pub company, and not even a group of the larger ones, has anything approaching a 40% market share".[34] They were unwilling to refer such cases to the Competition Commission as in their judgement competition appeared to be working well in the on-trade and was not being prevented, restricted or distorted by the pubcos.



29   Appendix 22, para 2 Back

30   Chapter I prohibition in the CA1998 applies to agreements between undertakings that have the object or effect of preventing, restricting or distorting competition in the UK and is equivalent to Article 81 of the EC Treaty. Back

31   Chapter II of the CA1998 prohibits conduct by one or more undertakings which amount to an abuse of a dominant position if it affects trade in the UK. Back

32   Appendix 22, para 16 Back

33   Ibid., paras 21-22 Back

34   Ibid., paras 18-19 Back


 
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