Sunday, 12 November 2017

School uniform monopolies

I recall many years ago having an argument with a school administrator about uniform requirements (if I recall correctly, this was about school shorts that were the correct colour, but were not allowed because they didn't have the school logo embossed on them). My side of the argument was that the school was using its market power over uniforms to create a monopoly (there was only one uniform provider who sold the school shorts with that particular logo) and unfairly price gouge parents. So, I was interested to read this story in the New Zealand Herald last week:
The new Education Minister has planned action to stamp out "covert" fundraising by schools such as marking up uniforms to make a profit.
Chris Hipkins told the Herald the new Government's overall objective was to make sure a state school education in New Zealand was free...
"At the moment, particularly around things like the big mark-ups on uniforms, schools are finding ways of getting around the rules that they shouldn't be asking parents to pay. We are going to be taking a much firmer line on that..."
A Weekend Herald price comparison carried out earlier this year found parents with a boy and girl at secondary school could pay $700 for just the uniform basics.
The Commerce Commission has received complaints about the costs of uniforms and stationery and issued procurement guidelines, recommending schools make the supplier-selection process transparent and tell parents why deals were entered into. It is illegal to enter an agreement that substantially lessens competition in a market.
With school uniforms, there are few substitutes. If your child is going to School A, you need the appropriate uniform for School A. This gives the school considerable market power (the ability for the seller to set a price above the marginal cost of the uniform). Since most schools are not uniform producers or sellers themselves, they instead transfer that market power to a uniform provider. Usually this takes the form of an exclusive deal with the uniform provider, where that provider is the only one that can sell the school's uniforms, and in exchange the school receives some share of the profits. This creates a monopoly seller of the uniforms, and the monopoly maximises its uniform profits by raising the price. The result is that parents must pay higher prices for uniforms, which must be purchased from the exclusive uniform provider.

One might argue (as the Herald article does) that this is a covert way of increasing school fundraising, in the absence of the ability for schools to do so through higher school fees. A rational school would want to maximise this source of revenue, and they can do that by ensuring that there are few substitutes for the uniform (because, when a firm has market power, the mark-up over marginal cost can be greater if there are fewer substitutes for what they are selling). When I was at school, any shorts of the correct colour were acceptable for my school uniform. However, one way that rational schools can ensure that there are few substitutes for uniform items is to require each item to have the school logo printed or embossed on it. So now, every child must wear not just the correct colour item, but the correct colour item endorsed by the school (and sold by the exclusive monopoly uniform provider).

However, you might not be concerned with high uniform costs if you believe that the additional money you pay is going to the school. But this is probably not the case at all, because schools probably cannot capture all of the excess profits that they create through this market power. If there are many potential uniform providers, then ultimately the school can probably receive the entire profits from the market power, since they could play uniform providers off against each other until they get the best offer (equal to the entire profits from selling uniforms). But if there are few potential providers, this is not the case, and the successful bidder will capture at least some of the profits. And that is what my argument with the school administrator was about, all those years ago. I had no problem with giving the school extra money, but objected to enriching the exclusive monopoly uniform provider.

An idealistic solution to this problem would be to 'adequately' fund schools, so that they don't feel the need to create market power in the uniform market in the first place. However, that would ignore the fact that any school would be better off with a little bit more funding, and so a rational school would always engage in this practice regardless of the level of government funding they receive. The only way to prevent this practice then is to regulate against it. Labour has pledged to draw up 'guidelines' for schools. If they are enforceable, then that might be the best we can hope for, unless school uniforms were abolished entirely.

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