Anti-competitive practices

BY FA IS A L B A R I | 4/24/2015

A FRIEND had her son, in grade two, admitted to a private school in Islamabad. She had to pay Rs75,000 upfront. This included tuition fee for three months, admission fee and a number of other charges, including costs for books and notebooks.

This is not the most expensive of private schools that she could send her child to. Another one had asked for Rs90,000. And a more expensive one had estimated the initial cost to be around Rs150,000.

All this money is non-refundable and the next bill, for tuition fees, is due in three months.

A colleague in Lahore wanted to change his son`s school. But he could not as the minimum amount of money required for that, even at the relatively `low fee` private schools, was turning out to be approximately Rs30,000. This was roughly equivalent to the monthly salary of my colleague.

Are all these fees and other charges justified? Is it fair to charge fees in quarterly chunks, and demand advance payment? Can schools set the charges at any level they like? Almost 40pc of enrolled children now go to private schools. In cities such as Lahore, Karachi, Islamabad and Rawalpindi, the percentage of children going to private schools is much higher than at other places. Private schools with some reputation are in high demand for a place in their classrooms. They clearly have market power.

But the question is, should these players be allowed to exploit this power in the education `market`? In one case, even though the student was going to graduate in April, the school insisted on getting payment for the April-June quarter.

Competition can lead to efficiency and quality improvements. As firms compete, they cannot charge more than their competitors for the same, or a similar, product or service as customers can switch to the cheaper provider. Firms also need to provide better service than their competitors to woo customers. But competition only works if a) products and services are comparable, b) customers have quality and price information about the goods and services that competitors offer, and c) customers are able to switch providers. If the costs of switching, known as entry/exit costs, are high, the threat of customers leaving an inefficient and/or costly provider does not become fully effective and hence the pressure that competition is supposed to create gets dissipated.

Before number portability, switching from one mobile phone provider to another was not an effective threat. People wanted to keep the same number but also wanted to be able to get services from any of the providers in the market. It is no wonder that the largest service provider at that time was not too fond of introducing number portability.

Once number portability was introduced, the threat of switching became more effective. The mobile industry, as a whole, has seen rapid and significant reductions in prices that are still continuing, and we have also seen services become better over time. The threat of a switch has played a part in this story.

If it costs Rs30,000-odd for a child to move from one low-fee school to another, or Rs100,000-odd for an elite school, how can the threat of a switch be effective? And cost is not the only variable in the decision to move schools. Education, unlike a lot of other goods and services, has many dimensions that parents and students care about. Distance to school, curriculum issues and medium of instruction are some of these. All of them make switching harder to use as a threat. The high cost of switching mal

There is a regulatory angle to all this. If schools are using these charges as ways of reducing the effects of competition, should the Competition Commission of Pakistan not be looking at some of these `fees` and charges in more detail? Keeping an eye on the use of anti-competitive measures to the detriment of developing markets, competitors, or consumer welfare, in any area, falls within the purview of the CCP.

There is also the issue of bundling (coupling two services or goods), again a practice frowned upon in competition literature in economics, that schools are clearly indulging in. Why should schools insist on students getting books, notebooks and other supplies from the school? This not only allows them the opportunity of exploiting their monopoly power, it works against the interest of the retailers of books and stationery. There is already a CCP decision where a university that had insisted on selling computers to its incoming MBA class was asl

Many schools seem to be getting away with a number of bundling practices. Children are asked to buy books and stationery from schools, some schools also provide uniforms, and some have tried to create transport arrangements too. All these are practices that can be abused to charge customers more or to foreclose competition in a particular market. Again, a priori, all such practices are suspect and are usually not allowed in most markets. If there is a particular benefit to consumers or competition in any such practice, it is up to the provider to demonstrate that before the practice is allowed. The CCP is, again, mandated to look into such issues.

The private sector is a major player in education. But the sector, to date, continues to work in a relatively less regulated environment. This creates issues that need to be looked at from the perspective of the optimal development of markets. We have mentioned two issues above, there are others too that need attention. We will come back to others in the weeks to follow.

Published in Dawn