Competition forges world-class firms

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As Michael Heseltine determines whether to refer the proposed merger between the Halifax and Leeds building societies, he should reflect on the principles behind Britain's competition policy. Sir Bryan Carsberg recently resigned from the top job a t the Office of Fair Trading because he believed that such policy should be run in the interests of the consumer. Mr Heseltine seems to believe it should serve the interests of business - and he ultimately makes the decisions.

Usually no conflict arises because the interests of business and the consumer coincide, but in the significant minority of cases whenthese interests clash, policy should be to put the consumer first. Mr Heseltine - and Graeme Odgers, whom he appointed torun the Monopolies and Mergers Commission - have often failed to do this. Sir Bryan identified several situations in which companies were exploiting their market power, only to find Mr Heseltine and Mr Odgers were not prepared to act.

Thus Sir Bryan argued that the merger of Airtours and Owners Abroad would damage holiday-makers' interests. Mr Heseltine waved it through. The MMC conducted an investigation into the perfume industry at the behest of the OFT, which argued that manufacturers were conspiring to keep prices high. The MMC ruled that consumers were more concerned about exclusivity than price.

Mr Heseltine claims that his decisions, and those of the MMC, are in the consumers' interest. He argues that domestic market conditions are increasingly irrelevant in a world of international competition: blocking mergers and takeovers might prevent the development of world-class companies in Britain. But this is a flawed view of how world-beating companies develop. The best way to forge them is by domestic competition, not to patch them together in state-sponsored alliances.

Mr Heseltine should recognise this and return to the "Tebbit doctrine" of 1984 under which domestic competition is the central concern of merger investigations.

His decision to refer the bids by GEC and British Aerospace for VSEL, the submarine maker, to the MMC bodes well. His reported failure to refer the proposed merger between Halifax and Leeds does not. But his most important task is to appoint a competition hawk to replace Sir Bryan - and not to stand in his or her way.