Competition and Quality in Deregulated Industries: Lessons for the Education Debate

I. INTRODUCTION In the past decade an intense debate has raged over the issue of "school choice." Proponents urge that it is a beacon of hope for low-income students trapped in under-performing public schools, whereas critics argue that it will accelerate the deterioration of those same public schools. The purpose of this paper is not to rehash that debate. Rather, it is to examine the underlying empirical basis for predictions about the potential effects of school choice programs. Two empirical questions in particular are central to discussions about school choice: * Does school choice benefit the children who leave traditional public schools in order to attend charter schools or private schools? * How does school choice affect the children who remain behind in the traditional public schools? Questions of this sort are hardly new or unique to schooling. At their core, both questions examine the impact of increased competition upon quality of a particular product-in this case, schooling. The former examines quality for customers of new entrants into the market, and the latter examines quality provided by incumbent providers after the introduction of competition. On one level, framing the inquiry in these terms"competition," "quality," and "products"-when the subject matter is as important and value-laden as the rearing and education of our children may seem a bit dry and detached. But for a subject of such paramount importance, objective analysis of the data is at least as valuable as it is for more mundane questions, such as the optimal pricing of widgets. In both instances, the data may not be the end of the discussion but it can at least provide common facts upon which to base our arguments. Furthermore, on the economic questions of whether increased competition benefits the customers who continue to purchase from incumbent suppliers as well as the customers who opt to purchase from new competitors, significant empirical learning already exists in multiple industries. Indeed, a substantial body of evidence addresses these questions for a wide variety of critical products and services that have seen substantial deregulation and concomitant increases in competition during the past two decades. Surface freight transportation, telecommunications, and air transportation are three of the most prominent industries in which scholars have extensively documented the impact of competition on quality. This paper summarizes the results of those studies and compares them with the findings of empirical studies that assess the effects of competition on education. Wherever possible, we separately assess how competition has affected the quality of schooling that the new entrants and the incumbent suppliers have provided. A. Education and Deregulated Industries: Similarities and Differences Education and the deregulated transportation and communications industries share notable similarities. All of them produce complex services for which quality is an important dimension. Access to their services is considered an important social objective. And for all of them, we are examining the effects of a move from a largely monopolized or cartelized market to a more competitive market. It should be possible, therefore, to test general hypotheses about the potential impact of competition on service quality. However, an understanding of key differences between education and the deregulated industries should temper such a discussion. Competition takes somewhat different forms in education and in infrastructure. B. Forms of Competition Deregulation in transportation and communications typically constituted legalization of competition and removal of entry barriers and price controls.1 The elimination, reduction, or restructuring of cross-subsidies between different groups of customers often accompanied such pro-competitive IMAGE FORMULA171deregulation. …