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Mixed Oligopoly in Education

  • Helmuth Cremer
  • Dario Maldonado

This paper studies oligopolistic competition in education markets when schools can be private and public and when the quality of education depends on “peer group” effects. In the first stage of our game schools set their quality and in the second stage they fix their tuition fees. We examine how the (subgame perfect Nash) equilibrium allocation (qualities, tuition fees and welfare) is affected by the presence of public schools and by their relative position in the quality range. When there are no peer group effects, efficiency is achieved when (at least) all but one school are public. In particular in the two school case, the impact of a public school is spectacular as we go from a setting of extreme differentiation to an efficient allocation. However, in the three school case, a single public school will lower welfare compared to the private equilibrium. We then introduce a peer group effect which, for any given school is determined by its student with the highest ability. These PGE do have a significant impact on the results. The mixed equilibrium is now never efficient. However, welfare continues to be improved if all but one school are public. Overall, the presence of PGE reduces the effectiveness of public schools as regulatory tool in an otherwise private education sector.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4163.

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Date of creation: 2013
Date of revision:
Handle: RePEc:ces:ceswps:_4163
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  1. Elizabeth M. Caucutt, 2002. "Educational Vouchers When There Are Peer Group Effects--Size Matters," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 195-222, February.
  2. Foster, Gigi, 2006. "It's not your peers, and it's not your friends: Some progress toward understanding the educational peer effect mechanism," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1455-1475, September.
  3. Patrick McEwan, 2001. "The Effectiveness of Public, Catholic, and Non-Religious Private Schools in Chile's Voucher System," Education Economics, Taylor & Francis Journals, vol. 9(2), pages 103-128.
  4. Julian R. Betts & Darlene Morell, 1999. "The Determinants of Undergraduate Grade Point Average: The Relative Importance of Family Background, High School Resources, and Peer Group Effects," Journal of Human Resources, University of Wisconsin Press, vol. 34(2), pages 268-293.
  5. David J. Zimmerman, 2003. "Peer Effects in Academic Outcomes: Evidence from a Natural Experiment," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 9-23, February.
  6. Angrist, Joshua & Lang, Kevin, 2004. "Does School Integration Generate Peer Effects? Evidence from Boston's Metco Program," IZA Discussion Papers 976, Institute for the Study of Labor (IZA).
  7. BOADWAY, Robin & MARCEAU, Nicolas & MARCHAND, Maurice, 1995. "Issues in Decentralizing the Provision of Education," Cahiers de recherche 9528, Université Laval - Département d'économique.
  8. De Fraja, Gianni & Iossa, Elisabetta, 2002. "Competition among Universities and the Emergence of the Elite Institution," Bulletin of Economic Research, Wiley Blackwell, vol. 54(3), pages 275-93, July.
  9. Dario Maldonado, 2008. "A model of school behavior: tuition fees and grading standards," DOCUMENTOS DE TRABAJO 005106, UNIVERSIDAD DEL ROSARIO.
  10. Donald Robertson & James Symons, 2003. "Do Peer Groups Matter? Peer Group versus Schooling Effects on Academic Attainment," Economica, London School of Economics and Political Science, vol. 70(277), pages 31-53, February.
  11. Laura Romero & Elena del Rey, 2004. "Competition Between Public And Private Universities: Quality, Prices And Exams," Economics Working Papers we046423, Universidad Carlos III, Departamento de Economía.
  12. David J. Deming & Claudia Goldin & Lawrence F. Katz, 2011. "The For-Profit Postsecondary School Sector: Nimble Critters or Agile Predators?," NBER Working Papers 17710, National Bureau of Economic Research, Inc.
  13. Kirjavainen, Tanja & Loikkanen, Heikki, 1996. "Efficiency Differences of Finnish Senior Secondary Schools: An Application of DEA and Tobit-Analysis," Discussion Papers 570, The Research Institute of the Finnish Economy.
  14. de Bartolome, Charles A M, 1990. "Equilibrium and Inefficiency in a Community Model with Peer Group Effects," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 110-33, February.
  15. De Fraja, Gianni & Valbonesi, Paola, 2012. "The design of the university system," Journal of Public Economics, Elsevier, vol. 96(3), pages 317-330.
  16. repec:oup:restud:v:63:y:1996:i:2:p:237-64 is not listed on IDEAS
  17. Dominic J. Brewer & Eric R. Eide & Ronald G. Ehrenberg, 1999. "Does It Pay to Attend an Elite Private College? Cross-Cohort Evidence on the Effects of College Type on Earnings," Journal of Human Resources, University of Wisconsin Press, vol. 34(1), pages 104-123.
  18. Caroline Hoxby, 2000. "Peer Effects in the Classroom: Learning from Gender and Race Variation," NBER Working Papers 7867, National Bureau of Economic Research, Inc.
  19. W. Bentley MacLeod & Miguel Urquiola, 2009. "Anti-Lemons: School Reputation and Educational Quality," NBER Working Papers 15112, National Bureau of Economic Research, Inc.
  20. repec:oup:qjecon:v:110:y:1995:i:4:p:941-74 is not listed on IDEAS
  21. Stephanie Riegg Cellini & Claudia Goldin, 2014. "Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges," American Economic Journal: Economic Policy, American Economic Association, vol. 6(4), pages 174-206, November.
  22. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March.
  23. repec:oup:qjecon:v:116:y:2001:i:3:p:777-803 is not listed on IDEAS
  24. Evans, William N & Oates, Wallace E & Schwab, Robert M, 1992. "Measuring Peer Group Effects: A Study of Teenage Behavior," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 966-91, October.
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