Once, long ago, I was accompanying my father on a fruit buying expedition. We were checking prices from different stall owners. One of them gave us a price, for bananas, which was a rupee or so cheaper than his neighbour. The neighbour heard that and got infuriated. I still do not understand why, maybe there was a history to the two of them but this triggered quite a price war between the two, the first one I had ever witnessed. They kept reducing the price of bananas initially, and then everything we wanted to buy from them. In an effort to outdo each other, they clearly went below their cost of purchase. The end came when my father, concerned that the two would come to blows if we did not find a way of exiting without favouring one or the other, decided to walk away from the entire thing. Both of them lost business in an attempt to undercut each other, but it was my first lesson in how competition can be good for the customer and can impose discipline on sellers.
Many years later, I read the relevant economic literature that points out that rivalry can not only make prices competitive, it can also have other salutary impacts too. It can incentivise producers to be more customer-centred, it can spur innovation (an effort to keep ahead of the field), and it can have quality improving effects too.
In bits and pockets, across our economy, we do see such impacts of competition. On the whole, banks have had to reduce prices, improve customer services and offer more products to retain or attract customers as we have allowed foreign and local private banks to enter the market and as we have privatised state owned banks. Similarly, again generally speaking, we have seen some of the impacts of competition in telecommunication market too. Tariffs have come down rapidly, for local as well as international calling, services have expanded, and quality of services has also, on the whole, improved over the last decade or so.
But it is important to realise that for competition to have the mentioned salutary effects, a number of pre-conditions have to work. It is not just the presence of competitors, automatically, that makes the markets better and respond to customer demands, it is only effective competition and effective contestability that can do that. In other words, customers have to have the real choice of moving from one provider to another, without costly barriers, for actual exit or the threat of exit to work, and it is only when more producers can effectively enter a market or effectively threaten to enter a market that there will be pressure on the existing producers to make their products/prices better and respond to their customers.
If this ability, to effectively threaten switching to another provider from the customer and the ability to enter the market from a potential producer is not there, competition, even when there are multiple suppliers, will not work to lower prices, improve quality and/or make producers more customer-centred.
Let me give an example from a non-traditional market but where this competition rhetoric has almost gone unquestioned. A lot of people argue that low fee private schools, which are now thickly populating urban areas at least, provide competition to the public schools as well as each other. And this will be good as parental choice, and inter-school competition with which new schools can be opened will a) lower fees, b) increase quality of education and c) make schools respond to parental demands more.
And we do see some of the impacts. Around 35-40 percent, reportedly, of school going children in Pakistan are now attending private schools. Clearly, there must have been quite an exodus from state institutions as all of this cannot possibly be new enrolment (if it was new enrolment, our enrolment numbers would show much bigger increases year to year than they actually do). And the quality that private schools give, actual or perceived, must be higher than public schools; otherwise, why would parents, where this choice is available, choose to pay tuition fees when they could have sent their children to free public schools.
But at another level the competition does not seem to be working very well. There is plenty of evidence, from test scores and survey data, that shows that even though low fee private schools, on average, do produce better results than public schools the differences are not large and even children from these private schools do not learn much and do poorly if judged against standards of what children should be learning. And there is no evidence to suggest that where neighbouring schools do compete for children the competition is through fee reductions or through offering better quality instruction.
There is also some evidence that there are significant barriers that schools try to erect around students/parents so that their ability to switch schools or threaten to switch schools becomes limited. These take the form of admission, security and other types of fees (fixed and sunk costs), distinct curricula or books, distinct uniforms and/or teaching styles. The above make it hard for parents to switch schools (exit) in case they are not happy with what a school does, and to the extent these barriers are effective, schools will also not respond to parental concerns and complaints and they will also not feel the threat of competition from existing or potential entrants.
Similarly, if schools have specific ideological concerns that they address through the education that they provide, like the large number of low-fee private schools that advertise that they also provide Quran education, Arabic language instruction and/or religious instruction, to that extent they are providing a differentiated product and hence schools that do not offer this type of instruction will be less threatening for them.
The case of public schools is even harder. Public schools are organisationally structured in a way that the head teachers, the person responsible for the school, at the level of the school, have almost no power to change anything and respond to competition even if they wanted to and even if the school was losing a lot of children to the competition. She cannot get new teachers, get rid of those who cannot perform, add anything to books being taught, change facilities being given and/or change anything even pedagogically. So, unless the provincial bureaucracy is fleet footed and responds, but it cannot as the nature of the competition will vary from school to school, the public schools will just have to witness the effects of competition and the argument that competition can improve quality of education will not hold for public schools.
Before we conclude about the salutary effects of competition, which can be very real, we have to dig a bit deeper and see if the prerequisites for making competition work to produce the desired effect are present or not. In many cases, given the rather early state of development of most markets in our economy, the prerequisites will not be there. This is where the work of the Competition Commission of Pakistan, on research and data gathering/organisation and dissemination, would have been very useful. But the Commission, for whatever reason, continues to meander sleepily and only wakes up intermittently to focus on a big case before becoming comatose again. But this lack of vigilance on competition side must be costing us billions in terms of inefficiency, lost consumer satisfaction, and potential gains from innovation and efficiency. When competition works, it can do wonders. But it is a lot of work to ensure it works and this is where we are failing.
The writer is an Associate Professor of Economics at LUMS (currently on leave) and a Senior Advisor at Open Society Foundation (OSF). He can be reached at fbari@sorosny.org