What Does Public Schooling Teach Us About Predatory Pricing?
By Bryan Caplan
Public schools provide education free of charge. The result, unsurprisingly, is overwhelming market dominance. Almost 90% of school-age kids attend public school. Most people think this is a great thing. Maybe they’re right, maybe they’re wrong. Either way, though, public schooling can teach us quite a bit about predatory pricing.
Predatory pricing is one of the simplest business practices to explain: Sell at a loss until you bankrupt your competitors. When you think about it, public schools apply this predatory strategy to an extreme degree. They don’t just sell education at a loss. They “sell” education for free!
What can we learn from this epiphany? First and foremost, predation is a lot less effective than you’d think. After practicing predation to the utmost degree, public schools have only captured 90% of the market.
This is particularly striking when you realize that public schools – unlike normal businesses – can afford to practice predation indefinitely. When a normal business practices predation, competitors naturally wonder, “How long can the predator keep this up?” For private schools, in contrast, there is no light at the end of the tunnel. They keep serving 10% of the market even though they know in their bones that public schools’ predatory pricing will continue without interruption.
A further lesson: In popular nightmares, predation works because its effects are lasting. Sell at a loss, kill each and every one of your competitors, and no rival will dare to challenge you for many a moon. Once you realize that public schools currently practice extreme predatory pricing, though, it’s hard to take popular nightmares seriously.
Try this thought experiment. Public schools suddenly lose all their tax funding. (This could result from a voucher system, or just hard-core austerity). Now that schools have to cover their expenses with tuition, how long will public schools retain their 90% market share? If predation really had lasting effects, you’d expect competitors to remain scarce and scared for years, safeguarding public schools’ incumbent advantage. In practice, though, I suspect that almost everyone – regardless of ideology – would expect public schools to lose at least half of their market share over the following decade. Driving the competition out of business with insanely low prices is not akin to salting the earth so nothing ever grows there again. Not even close.
Bottom line: The example of public schools should deter any normal business from pursing a predatory strategy. If permanently giving your product away for free only yields a 90% market share, what’s the best that could happen if a normal business temporarily sold for 10% below cost? Customers should hope firms will be cocky enough to try predation. The long-run monopoly prices are sheer speculation – and the short-run discounts are undeniable. Unless, of course, your tax dollars are funding the discounts.