This presentation by the OECD Competition Division was made at the workshop on Competition in Publicly Funded Markets (28 February 2019). Find out more at http://www.oecd.org/daf/competition/workshop-on-competition-in-publicly-funded-markets.htm

1. COMPETITION IN PUBLICLY
FUNDED MARKETS
Chris Pike
Competition Expert
28 February 2019

2. • What are publicly funded markets?
• Why are they used?
• Why complicated for agencies?
• Examples of parallels
• Examples of differences
Agenda

3. • Education & Skills
• Employment
• Prisons & Probation
• Waste & Recycling
• Libraries
• Defence
What are publicly funded markets?
• Elderly care
• Health care
• Child care
• Transport
• Housing
• Post
• Pensions

4. Publicly funded markets offer policymakers a third-way that addresses
the weaknesses of both free market and government delivered services:
1. They recognise that markets left to their own devices do not
provide some services in a way that meets policy goals.
2. But also recognise that non-market delivery will not do so either.
Firstly, they break the link that free markets create between a user’s
need and their ability to pay, allows the service to be based on need.
• These needs can be defined by a democratically agreed policy goal.
Indeed competition - as a delivery mechanism - not an objective in
and of itself - should not contradict this goal.
Secondly, introducing regulated market mechanisms can create
powerful incentives for services to be provided in ways that are efficient,
innovative and responsive to users.
Why are they used?

5. • These are often politically difficult topics
– Government’s are held responsible for market outcomes that they
purchase even if they do not directly provide - so no room for
abdication of responsibility, but nevertheless requires releasing
direct levers.
– Sensitivity and confusion over privatisation vs. marketization
• In debates on competitive reform there is often a focus on
whether ‘competition’ improves quality or not
– But, given the multiplicity of competitive systems, such
conclusions are hard to draw.
– What is more useful is to identify the set of rules that deliver the
goals of policymakers in the most efficient, innovative and user-
responsive way.
– These rules will likely differ for different goals, and for different
characteristics of services, users and institutions.
so, no one-size-fits-all answers
Why are these markets complicated for
agencies?

6. • Breaking the link between need and ability to pay means…
– … subsidising services - and relying on public funding can mean these
markets are largely served by not-for-profit organisations or SOEs.
• creates scope for competitive neutrality problems.
– … splitting the role of user and payer - which means either the user does
not choose the provider, or that the payer does not choose.
• Each of which can create problems of unresponsiveness.
• Using market mechanisms creates…
– … scope for providers to exploit information asymmetries – since these
are experience/credence goods, and so the quality can be unobservable
prior to purchase and even afterwards.
– … a risk of entry/exit – important but creates challenges in maintaining
continuity of service, which is important in these strategic services.
• Can make policymakers nervous about allowing entry or extra capacity.
– … a risk that providers choose not to serve certain users
Why are these markets complicated for
agencies?

7. • The problem: the incentive in an unregulated market is to attract high
margin users, and to filter out unprofitable users.
– This does not require dominance, and is unlikely to infringe competition law.
• The logical policy response is to impose a public service obligation (PSO) on
all or at least some providers.
– If the obligation is imposed on all providers it may raise considerable barriers to entry.
E.g. a school that must accept every applicant, a hospital that must treat every condition
– If the obligation is imposed on just some providers, then if it is excessively or
inadequately compensated it can distort the level playing field.
E.g. a selective school/hospital without a PSO will leave unprofitable students/patients to
non-selective providers.
If the obligation is undercompensated then these non-selective providers may not be
able to compete on a level playing field for profitable students/patients.
Certainly neither the selective nor non-selective schools/hospitals compete to be
chosen by unprofitable students/patients.
So this will exacerbate inequality (potentially conflicting with a key policy goal).
• Alternatively if the non-selective school/hospital is overcompensated then it
may use that to cross-subsidise and foreclose more efficient rivals.
• Pricing the PSO at the right level is therefore key.
Example of a parallel between markets:
Cream-skimming

8. • Is it feasible? Will it generate competitive pressure?
– Is there time to choose? and options to choose from?
• e.g. Isolated schools / emergency hospital vs planned treatment / urban
schools
• Is competition for users’ choice desirable?
– In some markets users may want higher ‘quality’ that conflicts
with other policies. e.g. prisoners wanting hotel facilities,
students wanting higher grades, parents wanting schools with
similar pupils (religious background, wealth)
– In some markets where quantity is uncertain, users may want
higher quantities - e.g. patients wanting unnecessary treatment /
antibiotics
• And there may be a risk of suppliers taking advantage and inducing
additional demand.
• Although this should not be confused with the risk of higher quality or
productivity inducing additional demand (a sign of success)
Example of differences between markets:
User choice

9. • Topping up
– Including tax breaks for private purchases
• Capacity constraints
– Physical constraints, impact of fixed costs on prices
• Risk of exit interrupting continuity of service
– Different necessity for ensuring uninterrupted continuity of services
• Information on multi-dimensional products for users
• User biases
– Inertia when faced with ‘free’ products
• Role of for-profit providers
– How observable are the different aspects of quality – what opportunities exist to take
advantage (Besley & Malcolmson)
• Principal agent problems with sometimes conflicted advisors
– GPs, councils
• Effectiveness of incentives for managers of non-profits / SOEs
– Personal incentives (see work on bonuses in the financial sector). Role for mutuals (Le
Grand, Hutton)?
Other parallels/differences to explore

10. • Draw together experience on lessons learned:
– Both from the same market in other countries
– And other markets in other countries
• One thing to consider is whether there is value for OECD
countries in developing a competitive reform toolkit for those
that are considering using market mechanisms to deliver their
policy goals in these services.
• This could:
– take in the characteristics of the service
– take in the characteristics of the users & existing institutions
– take in the other policy goals
– and delivers a tailored recommendation about how to best use
competition to deliver the service in a way that meets
policymakers objectives.
What to do?