Competition in the Education Industry

10 Oct

Competition in the Education Industry

Many education reform advocates believe the most effective way to improve education is through the creation of charter schools.  The evidence on whether charter schools actually improved academic outcomes for students is at best mixed.  Many studies found that academic outcomes in charter schools are often no better, and sometimes worse, than outcomes in public schools.  In addition, the growth of charter schools in an area, by taking resources and students out of public schools, may worsen the public system.

An alternative more efficient approach to facilitating choice in education would be to create a system where courses taught by outside private firms substitute for courses taught in the public school.   Competition in the education industry could be similar to changes that occurred in the electric utility industry.  Prior to deregulation, one firm controlled both the transmission and generation of electricity.  Deregulation allowed many firms to provide electricity for sale.  Similarly, in education it is possible for a school to allow outside teachers or small firms offering specific courses to compete for students inside a school or a school system.

At this point in time the education industry consists of many local monopolies.  A reformed industry might be monopolistically competitive.  There would be many potential producers but services offered by different producers are not perfect substitutes.

The first section of this post discusses the growth of charter schools.  The second section discusses the possibility of competition between schools and private providers of academic courses.

Charter Schools:

A public charter school is a publicly funded school that is governed by a group or organization under a contract or charter but is not directly run by the local school board or municipality.   The charter school is exempt from many of the rules and regulations governing public schools.  A school’s charter is reviewed periodically and charters can be revoked.  From 1999-2000 to 2009-2010 the number of students enrolled in public charter schools rose from 0.3 million to 1.6 million.  Around 5.0% of public schools are now charter schools.   Over half of charter schools are elementary schools.  Around 55% of charter schools were located in cities.

Some facts on charter schools below:

The growth of charter schools appears to be fastest in cities where the traditional school system is viewed to be of low quality and is struggling.  Charter schools can be created when public schools are closed due to poor performance.  New Orleans, Detroit, Washington DC, and Saint Louis all place more than 30% of students in a charter school.

A large city or market could sustain more than one system while scale economies might prevent growth of separate systems in a smaller market.

The evidence on whether charter schools actual produce better results than traditional public schools is mixed at best.  Some recent studies indicate that charter schools often do not outperform traditional public schools.

Comparison of performance between traditional public schools and charter school may actually overstate potential improvements from the growth of charter schools because charter schools often are able to pick better students and expel poorer ones.

Competitions Between Course Providers:

An alternative way to foster competition in the education industry would involve facilitating choice between teachers provided to schools through the school system and courses and teachers provided to students through private course providers.   This could be accomplished by requiring public schools to give credit to approved courses taught by approved private firms.

There are several reasons why competition between course providers would provide greater improvement in education outcomes at lower cost than would competition between schools.

There is almost always intense political opposition to policy changes that would drastically reduce the number of students going to a public school. Often due to scale economies and the size of the education district there is only enough room for one large school or system and the introduction of private charter school can leave students who are struggling the most in a weaker public system.

Teacher quality varies widely in both traditional public schools and charter schools.  A student who gets a poor teacher in a charter school is no better off than a teacher who gets a poor student in a traditional charter school.  Competition among teachers or firms providing courses is a more direct way to mitigate problems caused by poor teacher performance than is the establishment of a new school.

Economies of scale are lower for a firm teaching one course than for a firm teaching all subjects.  If there are 6 periods to a day one teacher instructing 25 students per period will teach 150 students.  By contrast, one teacher teaching all students in one day will only reach 25 students.

The dollar cost of a voucher to pay for one course is much less than the dollar value of a voucher to pay for enrollment of a student in a competing full-time school.   As a result, the use of a voucher to pay for a course rather than an entire new school enrollment removes fewer resources from the existing public system.

Students differ widely in their abilities.  Public school teachers often are forced to teach to the median student (or even lower) in order to avoid leaving some students behind.  Specialized courses that substitute for or complement an existing curriculum could allow for specialized instruction geared towards a wide range of abilities.   A gifted student could be placed in a program similar to the one offered by Johns Hopkins University.

A less gifted student could be placed in a different course.

The cost of private school could be lowered by providing instruction either fully or partially on line.  There are now many high-quality on-line resources that complement and could compete with in-school instruction.

 Links to resources here:

Increasingly parents have chosen these private sources to complement school work.  Competition between teachers and private course providers would likely increase use of these new on-online resources.

Concluding Thoughts:

The emphasis of school reformers on the creation of charter schools that compete directly with traditional public schools is in my view misguided.  Fixed costs associated with a completely separate school are too high.   Existing public schools  (the existing firm) have a large advantage over potential entrants.  Often the market is only big enough for one school system. Students and teachers vary widely in their needs and ability.  Competition among course providers and teachers is a more cost efficient and direct way to provide educational choices than is competition between schools.



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