The primary approach to evaluate relationship between structure of industry, its conduct and its performance is know as the Structure-Conduct-Performance paradigm. The SCP approach was originally employed by Bain (1956).
The structure mainly referred to market structure mainly market concentration whereas conduct of the firm was characterized by pricing, R&D, advertising, production, choice of technology, entry barriers etc. The theory postulated that structure affects the conduct which in turn affects the performance or social efficiency defined by the extent of market power. The paradigm was based on the following hypothesis:
• Structure impacts the Conduct i.e. lower concentration leads to more competitive behaviour of the firms
• Conduct influences Performances i.e. more competitive behaviour leads to less market power (i.e. greater social efficiency)
Therefore a lower concentration in the market means lower market power. The market concentration is measured by Herfindahl index (H) and market power is measured by the Lerner index (L). In a Cournot oligopoly situation H and L are related through the elasticity of demand as L = H/e. Therefore if the demand is inelastic, changes in concentration can have big effects on market power.
Is it applicable in Education?
What is the price of education? The basic definition would be that price would be the opportunity cost of doing something else if not engaged in education. Naturally, it would be different for different individuals. Depending upon the utility value of education, each person would derive a different price. If we begin with the assumption that each individual values education, though they price it differently, we could say that demand for education is inelastic i.e. from the parents point of view, education is an inelastic good i.e. a change in the opportunity cost (price) would not affect the demand for education, it would be interesting to see the relationship of the inelastic demand of education (low value of e i.e. less than 1) and the realty of the public education system. The public education system could be termed as highly concentrated (H= almost 1). If we put the values in the Cournot model of L=H/e, we would get a significantly high L which means a high market power indicating low social efficiency.
The above argument provides a good base to argue that if we start lowering the H i.e. lessen the concentration by opening up the domain of the public education system and invite private participation, we may observe a higher social efficiency. Private sector would only participate if it sees a rate of return on its investment in a short period of time. Therefore structure becomes an important parameter to influence the conduct of the public education system.
It could also be argued that for rural and urban slum people, education could be highly elastic when the opportunity cost(price) changes e.g. during the harvest season, or under any attractive employment they prefer the children to leave the school however, this phenomenon is not because of the elastic nature of the demand but because of the inefficient existing system where they do not see any value add to their children. Various research studies have indicated that children leave school not because of attractive employment but for apathetic environment of schools. Therefore the inelastic behaviour of a parent/child is common across classes and cultures.
Can we change the structure of education in India?
A country with 284 mn student community ranging from 6 yr. olds to 18 yr. olds (SES 00-01) from different communities, classes, and regions can easily be rated as the largest setting of student community in the world. The public education system in India, which is a shared responsibility of the centre and the state takes care of nearly 184 mn children through an expenditure which is about 4.11% (SES 00-01) of the GDP but in absolute terms may be larger than GDP of many developed countries. Another 100 mn children in the Indian education system gets served through the large private school network which is a combination of both recognized and unrecognized schools.
We would not go into the merits of the education or why education is needed as there is enormous literature available on the subject to make a case for it. We would also not like to debate whether it is a private good or a public good and arguments could be stretched to any lengths on either direction.
Assuming that the public system is reaching out to most of the underprivileged and private system is emerging because there the people have a capacity to pay and the private system is getting its returns on investment, it is logical to conclude that Govt. and private systems have different target segments. However, if we closely look at the entire situation from an economic viability point of view, a different picture emerges.
If we look at the RBI reports of different states on revenue and expenditure and single out the “non-tax revenue on education, sports, arts & culture” (dominantly education, mainly fee and other charges) from the entire revenue collections and similarly single out the expenditure under the same head in the state expenditure, we could easily draw up a table of cost recovery rate (CRR) for each of the state and the nation as a whole. For example, based on the 2000-01 data, we could see that the non-tax revenue under this head was Rs 6611 mn and the corresponding expenditure was Rs. 634982.1 mn, which means the CRR for the year on the “education, sports, arts & culture” was 1.04. Therefore the Govt. subsidy on this head was a whooping Rs.628371 mn (after adjusting for receipts) or nearly 4% of total GDP. At such a low CRR, no private investment would be interested in looking at the sector and even for government managing such a large subsidy is unsustainable for a longer period of time.
Now let us look at this whole thing a little differently on looking at the sources of the present revenue. As discussed earlier, the role of the Govt. is to ensure that education, an important public good reaches the underprivileged at no cost to them. Though it would be enough to consider this benefit to reach the 26% (1999-00) below poverty line population, taking a conservative approach, let us consider the 24% SC/ST population (COI, 01) and an additional 32% OBC population (NSS 2000) as the real beneficiaries of the subsidy. Again taking a conservative approach let us assume that the revenue of Rs.6611 mn is coming from the balance 44% of population who is also being served by the present system. Presently the per capita expenditure on education is about Rs. 3447.24.
Now let us construct an education system for the 81.05 mn student population. Studies have indicated that the private schooling system in India are less costly than the public system and operate at a cost of about 40% of the public system i.e. at a per capita expenditure of Rs. 1378.90. Now again following a conservative approach, we assume that the students have a capacity to pay Rs. 50 per month i.e. Rs. 600 a year (Agarwal, NIEPA, 2000). In addition to this, suppose these schools under a PPP model get a Rs. 1100 subsidy from the Govt. (this could actual come from the Rs. 2068.35 saving on account of reduced per capita expenditure under the new model). This shows a revenue of Rs. 1700 per child vs. a cost of Rs. 1378.9 giving a nearly 23% rate of return on investment to the private sector. Not to forget that we have taken a conservative approach to the whole thing and assuming a higher revenue and lower cost because of economies of scale achieving a higher ROI would not be unreasonable.
Now let us look , how it impacts the public system. Moving the 44% population of 81.05 mn to the private domain would lower the Govt. subsidy by Rs. 190239 mn. A nearly 30% drop in burden would mean that Govt. would be able to focus its efforts better and raise the efficiency coefficient of its delivery. For the first time we would be able to argue that the GDP share of education could actually be lowered to 2.84% of GDP.
Between 2001-2005, there has been a tremendous growth in the private education system not only in the urban centers but also rural centers. According to a study by Karthik & Kramer, nearly 1/3rd of the villages have a private school which shows that the above argument is informally creeping into the system and there is duplication of expenditure in the economy i.e. the same child is experiencing an expenditure of Rs. 3447 from the govt. and Rs. 1378 from the private sector.
Some of the limiting factors of such models are also well recognized like specific targeting, managing non-plan expenditure, teacher unions etc. In both rural and urban setting, differentiating students who need public vs. private schooling is a stupendous task – the much discussed “voucher system” could be a solution but it has its own limitations. More than 90% of non-plan expenditure is the salary component of teachers and administration (Kingdon 2005) . Modeling, to ensure that this component also gets into the market domain needs strategic insights in designing. Naturally the unions would have to play a constructive role in looking at not only the welfare of the teachers but also children.
Rather than the complete handover of a section of population to the market, another way of looking at the situation is the capacity under-utilization of the present infrastructure. Private sector could play a role in managing the present capacity to a better utilization and avoid creating new infrastructure.
An efficient legislature and bureaucracy could ensure the roll out of such models. This way the public system would have a more targeted approach to a section of society which really needs its intervention. The reduction in the scale and scope of administration would also ensure greater efficiency.
New Structure leads to New Conduct
A new market with relatively lesser concentration would influence the conduct in the sector. Conduct is defined as behaviour (both firm and buyers) like advertisement (promotion) strategies, entry barrier regulation, internal efficiency (productivity) of firm, firm size, standards and quality delivered.
Naturally a less concentrated market would involve advertisement pushing up the prices and reducing social welfare, however at the same time the firms would push down the costs through better productivity and increase their margins. This is where policy intervention might be required to cap the prices so that the firms do not earn super-normal profits. The firms would also ensure economies of scale because the fixed cost component i.e. the school infrastructure, teacher salary etc. are relatively high and variable cost is very low, the ROI could only be achieved through economies of scale. However if there is disinvestment as suggested above, the existing infrastructure (the school buildings and the school teachers) could be used ensuring a faster ROI for investors. Regulation would have to ensure that not everybody enters the market - policies could be laid down to ensure that only competent firms enter the market.
Standardization or quality of education would become important parameters for the service delivery. With the change in structure and a well targeted segment who is paying the fee would demand higher quality or they may simply switch to competition. Unlike consumer products where quality enhances the cost of the product, education is a product which does not necessarily need high costs to deliver high quality. What it needs is high motivation (through recognition etc.) and support mechanisms (effective training systems, platforms for academic discussions etc.) for the teacher to deliver.
It would also be interesting to look at the kind of regulation mechanisms available in the private sector education and what more needs to be built in. Presently the system is private or semi-govt. boards like CBSE, ICSE or state boards which are mostly outcome oriented i.e. they only conduct examinations and there is hardly any intervention in the processes followed in these schools e.g. Std X and Std XII board results are the only public indicators of achievement levels in education which unfortunately represents a small section of the society. If more public indicators are built in at Std. III, Std. V and Std. VIII, it would give a more transparent progression of how children are learning at every stage.
The conduct of the schools, pupil teacher ratio, pedagogy, infrastructure requirements are at the whims and fancies of the management of these schools. If a new structure is being thought of, it would become imperative to build in suitable regulatory mechanisms which also look at the processes inside the school so that children are not deprived of their childhood (which had been the case in many private schools) and learning does not become a burden. Standards like number of hours of teaching-learning, quality of teachers, admission procedures, non-rote based pedagogy etc. could be set to not only ensure healthy learning but also equity in schools.
Conduct Influences Performances
What could be the parameters to measure a successful education system? Apart from the usual measures of high attendance rate, high achievement levels and low drop-out rate, it would be worthwhile to measure the success from an economic angle i.e. how much benefit it has resulted not in the private sector after restructuring but in the balance public sector which has been structured to take care of the most underprivileged of the society. Apart from profitability, it would be interesting to measure the transition into higher education and the subsequent employability and performance.
Normally it is argued that the present 30-35% of the private school system has been responsible for the kind of developments we are experiencing in the country. On the contrary, it is also argued that this is the school system which is perpetuating the divide between the rich and the poor. The unregulated pricing in these schools, non-transparent admission policies, undue academic pressures etc. are not in consonance in with the education policies laid out in the various policy documents. There is also a large parallel education system which is duplicating the regular curriculum in the form of tuitions and coaching classes. The performance based on the restructuring could also measure these factors like growth in equity, contribution to national economic growth, lessening of dependency on coaching institutions , and high achievement amongst children of the lower section of the society.
Conclusion
Applying theories and principles prevalent in the industry to public goods and systems is not unthinkable. The study also brings out systematically that how structure influences the conduct of the industry and ultimately the performance by meeting its objectives. As we see from this study, the popular principles of SCP paradigm in a public good like education is not limited to theoretical application but also a practical one as illustrated by a model. Many such models could be built to improve the efficiency of the government systems and enhance social welfare.
The structure mainly referred to market structure mainly market concentration whereas conduct of the firm was characterized by pricing, R&D, advertising, production, choice of technology, entry barriers etc. The theory postulated that structure affects the conduct which in turn affects the performance or social efficiency defined by the extent of market power. The paradigm was based on the following hypothesis:
• Structure impacts the Conduct i.e. lower concentration leads to more competitive behaviour of the firms
• Conduct influences Performances i.e. more competitive behaviour leads to less market power (i.e. greater social efficiency)
Therefore a lower concentration in the market means lower market power. The market concentration is measured by Herfindahl index (H) and market power is measured by the Lerner index (L). In a Cournot oligopoly situation H and L are related through the elasticity of demand as L = H/e. Therefore if the demand is inelastic, changes in concentration can have big effects on market power.
Is it applicable in Education?
What is the price of education? The basic definition would be that price would be the opportunity cost of doing something else if not engaged in education. Naturally, it would be different for different individuals. Depending upon the utility value of education, each person would derive a different price. If we begin with the assumption that each individual values education, though they price it differently, we could say that demand for education is inelastic i.e. from the parents point of view, education is an inelastic good i.e. a change in the opportunity cost (price) would not affect the demand for education, it would be interesting to see the relationship of the inelastic demand of education (low value of e i.e. less than 1) and the realty of the public education system. The public education system could be termed as highly concentrated (H= almost 1). If we put the values in the Cournot model of L=H/e, we would get a significantly high L which means a high market power indicating low social efficiency.
The above argument provides a good base to argue that if we start lowering the H i.e. lessen the concentration by opening up the domain of the public education system and invite private participation, we may observe a higher social efficiency. Private sector would only participate if it sees a rate of return on its investment in a short period of time. Therefore structure becomes an important parameter to influence the conduct of the public education system.
It could also be argued that for rural and urban slum people, education could be highly elastic when the opportunity cost(price) changes e.g. during the harvest season, or under any attractive employment they prefer the children to leave the school however, this phenomenon is not because of the elastic nature of the demand but because of the inefficient existing system where they do not see any value add to their children. Various research studies have indicated that children leave school not because of attractive employment but for apathetic environment of schools. Therefore the inelastic behaviour of a parent/child is common across classes and cultures.
Can we change the structure of education in India?
A country with 284 mn student community ranging from 6 yr. olds to 18 yr. olds (SES 00-01) from different communities, classes, and regions can easily be rated as the largest setting of student community in the world. The public education system in India, which is a shared responsibility of the centre and the state takes care of nearly 184 mn children through an expenditure which is about 4.11% (SES 00-01) of the GDP but in absolute terms may be larger than GDP of many developed countries. Another 100 mn children in the Indian education system gets served through the large private school network which is a combination of both recognized and unrecognized schools.
We would not go into the merits of the education or why education is needed as there is enormous literature available on the subject to make a case for it. We would also not like to debate whether it is a private good or a public good and arguments could be stretched to any lengths on either direction.
Assuming that the public system is reaching out to most of the underprivileged and private system is emerging because there the people have a capacity to pay and the private system is getting its returns on investment, it is logical to conclude that Govt. and private systems have different target segments. However, if we closely look at the entire situation from an economic viability point of view, a different picture emerges.
If we look at the RBI reports of different states on revenue and expenditure and single out the “non-tax revenue on education, sports, arts & culture” (dominantly education, mainly fee and other charges) from the entire revenue collections and similarly single out the expenditure under the same head in the state expenditure, we could easily draw up a table of cost recovery rate (CRR) for each of the state and the nation as a whole. For example, based on the 2000-01 data, we could see that the non-tax revenue under this head was Rs 6611 mn and the corresponding expenditure was Rs. 634982.1 mn, which means the CRR for the year on the “education, sports, arts & culture” was 1.04. Therefore the Govt. subsidy on this head was a whooping Rs.628371 mn (after adjusting for receipts) or nearly 4% of total GDP. At such a low CRR, no private investment would be interested in looking at the sector and even for government managing such a large subsidy is unsustainable for a longer period of time.
Now let us look at this whole thing a little differently on looking at the sources of the present revenue. As discussed earlier, the role of the Govt. is to ensure that education, an important public good reaches the underprivileged at no cost to them. Though it would be enough to consider this benefit to reach the 26% (1999-00) below poverty line population, taking a conservative approach, let us consider the 24% SC/ST population (COI, 01) and an additional 32% OBC population (NSS 2000) as the real beneficiaries of the subsidy. Again taking a conservative approach let us assume that the revenue of Rs.6611 mn is coming from the balance 44% of population who is also being served by the present system. Presently the per capita expenditure on education is about Rs. 3447.24.
Now let us construct an education system for the 81.05 mn student population. Studies have indicated that the private schooling system in India are less costly than the public system and operate at a cost of about 40% of the public system i.e. at a per capita expenditure of Rs. 1378.90. Now again following a conservative approach, we assume that the students have a capacity to pay Rs. 50 per month i.e. Rs. 600 a year (Agarwal, NIEPA, 2000). In addition to this, suppose these schools under a PPP model get a Rs. 1100 subsidy from the Govt. (this could actual come from the Rs. 2068.35 saving on account of reduced per capita expenditure under the new model). This shows a revenue of Rs. 1700 per child vs. a cost of Rs. 1378.9 giving a nearly 23% rate of return on investment to the private sector. Not to forget that we have taken a conservative approach to the whole thing and assuming a higher revenue and lower cost because of economies of scale achieving a higher ROI would not be unreasonable.
Now let us look , how it impacts the public system. Moving the 44% population of 81.05 mn to the private domain would lower the Govt. subsidy by Rs. 190239 mn. A nearly 30% drop in burden would mean that Govt. would be able to focus its efforts better and raise the efficiency coefficient of its delivery. For the first time we would be able to argue that the GDP share of education could actually be lowered to 2.84% of GDP.
Between 2001-2005, there has been a tremendous growth in the private education system not only in the urban centers but also rural centers. According to a study by Karthik & Kramer, nearly 1/3rd of the villages have a private school which shows that the above argument is informally creeping into the system and there is duplication of expenditure in the economy i.e. the same child is experiencing an expenditure of Rs. 3447 from the govt. and Rs. 1378 from the private sector.
Some of the limiting factors of such models are also well recognized like specific targeting, managing non-plan expenditure, teacher unions etc. In both rural and urban setting, differentiating students who need public vs. private schooling is a stupendous task – the much discussed “voucher system” could be a solution but it has its own limitations. More than 90% of non-plan expenditure is the salary component of teachers and administration (Kingdon 2005) . Modeling, to ensure that this component also gets into the market domain needs strategic insights in designing. Naturally the unions would have to play a constructive role in looking at not only the welfare of the teachers but also children.
Rather than the complete handover of a section of population to the market, another way of looking at the situation is the capacity under-utilization of the present infrastructure. Private sector could play a role in managing the present capacity to a better utilization and avoid creating new infrastructure.
An efficient legislature and bureaucracy could ensure the roll out of such models. This way the public system would have a more targeted approach to a section of society which really needs its intervention. The reduction in the scale and scope of administration would also ensure greater efficiency.
New Structure leads to New Conduct
A new market with relatively lesser concentration would influence the conduct in the sector. Conduct is defined as behaviour (both firm and buyers) like advertisement (promotion) strategies, entry barrier regulation, internal efficiency (productivity) of firm, firm size, standards and quality delivered.
Naturally a less concentrated market would involve advertisement pushing up the prices and reducing social welfare, however at the same time the firms would push down the costs through better productivity and increase their margins. This is where policy intervention might be required to cap the prices so that the firms do not earn super-normal profits. The firms would also ensure economies of scale because the fixed cost component i.e. the school infrastructure, teacher salary etc. are relatively high and variable cost is very low, the ROI could only be achieved through economies of scale. However if there is disinvestment as suggested above, the existing infrastructure (the school buildings and the school teachers) could be used ensuring a faster ROI for investors. Regulation would have to ensure that not everybody enters the market - policies could be laid down to ensure that only competent firms enter the market.
Standardization or quality of education would become important parameters for the service delivery. With the change in structure and a well targeted segment who is paying the fee would demand higher quality or they may simply switch to competition. Unlike consumer products where quality enhances the cost of the product, education is a product which does not necessarily need high costs to deliver high quality. What it needs is high motivation (through recognition etc.) and support mechanisms (effective training systems, platforms for academic discussions etc.) for the teacher to deliver.
It would also be interesting to look at the kind of regulation mechanisms available in the private sector education and what more needs to be built in. Presently the system is private or semi-govt. boards like CBSE, ICSE or state boards which are mostly outcome oriented i.e. they only conduct examinations and there is hardly any intervention in the processes followed in these schools e.g. Std X and Std XII board results are the only public indicators of achievement levels in education which unfortunately represents a small section of the society. If more public indicators are built in at Std. III, Std. V and Std. VIII, it would give a more transparent progression of how children are learning at every stage.
The conduct of the schools, pupil teacher ratio, pedagogy, infrastructure requirements are at the whims and fancies of the management of these schools. If a new structure is being thought of, it would become imperative to build in suitable regulatory mechanisms which also look at the processes inside the school so that children are not deprived of their childhood (which had been the case in many private schools) and learning does not become a burden. Standards like number of hours of teaching-learning, quality of teachers, admission procedures, non-rote based pedagogy etc. could be set to not only ensure healthy learning but also equity in schools.
Conduct Influences Performances
What could be the parameters to measure a successful education system? Apart from the usual measures of high attendance rate, high achievement levels and low drop-out rate, it would be worthwhile to measure the success from an economic angle i.e. how much benefit it has resulted not in the private sector after restructuring but in the balance public sector which has been structured to take care of the most underprivileged of the society. Apart from profitability, it would be interesting to measure the transition into higher education and the subsequent employability and performance.
Normally it is argued that the present 30-35% of the private school system has been responsible for the kind of developments we are experiencing in the country. On the contrary, it is also argued that this is the school system which is perpetuating the divide between the rich and the poor. The unregulated pricing in these schools, non-transparent admission policies, undue academic pressures etc. are not in consonance in with the education policies laid out in the various policy documents. There is also a large parallel education system which is duplicating the regular curriculum in the form of tuitions and coaching classes. The performance based on the restructuring could also measure these factors like growth in equity, contribution to national economic growth, lessening of dependency on coaching institutions , and high achievement amongst children of the lower section of the society.
Conclusion
Applying theories and principles prevalent in the industry to public goods and systems is not unthinkable. The study also brings out systematically that how structure influences the conduct of the industry and ultimately the performance by meeting its objectives. As we see from this study, the popular principles of SCP paradigm in a public good like education is not limited to theoretical application but also a practical one as illustrated by a model. Many such models could be built to improve the efficiency of the government systems and enhance social welfare.
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