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Mixed Oligopoly in Education

  • Cremer, Helmuth

    ()

    (Toulouse School of Economics)

  • Maldonado, Dario

    ()

    (Universidad de los Andes)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7264.

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Length: 30 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7264
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  1. Gianni De Fraja & Paola Valbonesi, 2009. "The Design of the University System," Discussion Papers in Economics 09/19, Department of Economics, University of Leicester.
  2. Kirjavainen, Tanja & Loikkanent, Heikki A., 1998. "Efficiency differences of finnish senior secondary schools: An application of DEA and Tobit analysis," Economics of Education Review, Elsevier, vol. 17(4), pages 377-394, October.
  3. Robin Boadway & Nicolas Marceau & Maurice Marchand, 1996. "Issues in decentralizing the provision of education," International Tax and Public Finance, Springer, vol. 3(3), pages 311-327, July.
  4. Stephanie Riegg Cellini & Claudia Goldin, 2012. "Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges," NBER Working Papers 17827, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
  7. Deming, David J. & Goldin, Claudia D. & Katz, Lawrence F., 2012. "The For-Profit Postsecondary School Sector: Nimble Critters or Agile Predators?," Scholarly Articles 8642952, Harvard University Department of Economics.
  8. Dario Maldonado, 2008. "A model of school behavior: tuition fees and grading standards," DOCUMENTOS DE TRABAJO 005106, UNIVERSIDAD DEL ROSARIO.
  9. 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.
  10. 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.
  11. MacLeod, Bentley, 2009. "Anti-Lemons: School Reputation and Educational Quality," Department of Economics, Working Paper Series qt3rc708kd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  12. 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.
  13. 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.
  14. Caroline Hoxby, 2000. "Peer Effects in the Classroom: Learning from Gender and Race Variation," NBER Working Papers 7867, National Bureau of Economic Research, Inc.
  15. Edward P. Lazear, 2001. "Educational Production," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 777-803, August.
  16. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
  17. Evans, William N & Schwab, Robert M, 1995. "Finishing High School and Starting College: Do Catholic Schools Make a Difference?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 941-74, November.
  18. 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.
  19. Zimmerman, David J., 1999. "Peer Effects in Academic Outcomes: Evidence From a Natural Experiment," Williams Project on the Economics of Higher Education DP-52, Department of Economics, Williams College.
  20. 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).
  21. 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.
  22. Donald Robertson & James Symons, 1996. "Do peer Groups Matter? Peer Groups versus Schooling Effects on Academic Attainment," CEP Discussion Papers dp0311, Centre for Economic Performance, LSE.
  23. 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.
  24. 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.
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