Competition law and public services: insights from the OFT report into higher education

Recent public sector reforms have relied on choice and competition to increase the quality and quantity of service provision, whilst also controlling cost, through a programme known as Open Public Services. The use of choice and competition gives rise to public service markets, and ensuring that these markets function effectively is one of the Competition and Markets Authority’s declared objectives. Higher education constitutes one of the larger public service markets, and to understand how the market for undergraduate education in England functions, in October 2013, the OFT launched a Call For Information. Amongst other things, the OFT wished to consider whether it was plausible for universities to have arrived at a uniform fee for all their undergraduate courses without colluding, and whether the way prospective undergraduates apply for university places could harm competition between institutions, to the detriment of students. The OFT’s higher education report, published in March 2014, provides useful insights into the role of competition law in public service markets and of the challenges of applying competition law in public service markets.

Competition Advocacy

One of the OFT’s clearest findings was that the regulatory environment, rather than service providers, may limit choice and prevent competition. There is also a perceived tension between cooperation and competition, and a more general debate over the desirability of choice and competition in the public service context. This gives an indication of just how much work the CMA, using competition advocacy powers available under section 7 of the Enterprise Act 2002, has to do in order to explain the extent to which choice and competition are an appropriate framework in which to provide public services.

The CMA has moved a long way from the OFT’s initial view, set out in its BetterCare decision and Policy note 1/2004, of competition law’s limited relevance to public service markets. Since 2004 a number of documents (for example: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, and 16) indicate just how keen the CMA and its predecessor have been to show that competition can and has been used to create incentives to improve quality; reduce cost; or innovative in the provision of public services. What we have yet to see is enforcement action.

The substantive approach

The OFT considered whether the way prospective undergraduates apply for university places using the centralised admission system, UCAS, could harm competition between institutions, to the detriment of students. Two features of the application process are that students are permitted to apply for no more that five courses in an application cycle and are prohibited from applying to both the University of Oxford and the University of Cambridge in any given application cycle (para. 6.24-6.30).

Both measures can be described as restrictions of choice. There is an idea that the fundamental purpose of competition law is to protect consumer choice, so that the examined measures would immediately be suspect. The importance of choice has also been emphasised by the CAT (see, for example, paras 255, 468 and 585 of Genzyme v OFT [2004] CAT 4). The OFT concluded that it is “unlikely” that the restrictions on choice “would result in a risk that either institution could manipulate price, quality or choice, to the detriment of students.” (para. 6.27). The OFT arrived at this conclusion by considering competition in two stages: pre-application (when applicants are choosing to which institutions they would like to apply), and post-application (once applicants have submitted their UCAS forms). The OFT report considers the freedom to choose which institutions to apply to drives the competitive response on the supply-side so that competition is most important in the pre-application phase:

“the main factors on which higher education institutions compete to attract students – course features, institutional facilities and tuition fees, for example – are generally set in the pre-application period” (para. 6.27).

Pre-application there is no restriction on choice or competition, since: “Applicants are free to apply for any course offered across all UK higher education institutions, and institutions compete to attract students.” (6.34).

The OFT’s benign treatment of the Oxbridge restriction raises the question of whether it is open to other institutions to adopt similar restrictions. For example, would it be compatible with competition law for LSE, UCL, KCL, Imperial, and QMUL to enter into an agreement whereby a student may apply only to one of the institutions? The OFT analysis suggests that it would be entirely compatible with competition law because there is plenty of pre-application competition and post-application there remains competition from the four other institutions to which the student has applied (6.27). Even if restrictive, the OFT report suggests that the agreement would be justified if it enabled “a more in-depth assessment of each candidate” (6.29). This does not seem to be the correct answer, but the OFT report does not indicate why it is incorrect, or how to distinguish the Oxbridge limitation from this hypothetical case.

Since competition is not for applications but for acceptances, it would seem sensible to consider three phases in the process: in phase I the student makes an application; in phase II universities issue offers to applicants; in phase III the student compares offers and decides which, if any, to accept. The institution’s chance of success in phase III is determined by the offer it makes in phase II. Further, the fewer offers a student receives in phase II the greater the chance of an institution’s offer being accepted in phase III. The potential dampening of competitive fervour that might result from both measures can then be seen from a letter published in the THES to justify the prohibition on applying to both Oxford and Cambridge, claiming:

“If a significant proportion of the applicants to whom [Oxford] offered places were liable to go instead to Cambridge, then to avoid lots of places going to waste, we would have to treat admissions as a central university process, playing the statistics of large numbers rather than selecting the students for our own colleges.”

The justification I see is that a student may not apply to both Oxford and Cambridge because in phase III an offer of a place at Oxford may be spurned in preference for a place at Cambridge. In order to ensure that the offer were not rebuffed the institution would need to increase the attractiveness of its offer or accept applicants may decide to take up a more attractive offer. Perhaps the student would be swayed to accept the offer if it included a scholarship or other discount on the cost of completing the course; or if the fees were generally lower; or because the offer included a guarantee of accommodation for the duration of the course—i.e., competition on things that matter, over and above that which occurred in phase I.

There is both US experience of competition law being applied to similar measures, and a debate as to whether the competition that exists is of the wrong sort (1, and 2). The OFT consider that even if the measures do restrict competition the restriction may be justified on the grounds that “since each additional choice that an applicant makes puts a cost on the institution, it may be efficient to restrict the number of choices that each applicant can make” (6.35), particularly since this may enable “a more in-depth assessment of each candidate” (6.29). The number of applications to Oxford has increased by 46% in the past 10 years. Cambridge has also seen an increase. It is thus not clear that the restrictions are necessary to limit the number of applications, particularly since there is no absolute limit on the number of applications institutions can receive and institutions are actively engaged in attracting applicants.

Further, even in public service markets, any restriction must be “to the benefit of students” or users (6.35). The identified benefits would appear to accrue to the institutions rather than to the students. The OFT held over 50 meetings and analysed over 80 submissions (1.5; and 2.12). Who the OFT met and the content of the written submission is not intended to be disclosed, the OFT stating: “For reasons of commercial confidentiality, material may appear in an anonymous, aggregated, or otherwise redacted form” (para. 2.9). This prevents the veracity and strength of the submissions being tested or countered through public debate.

The OFT approach may be compared to antitrust action currently playing out in the US—CollegeNet, Inc., v The Common Application, Inc., filed on 8 May, 2014. CollegeNet is challenging measures it considers to prevent or discourage applications to institutions other than through Common Application, to the detriment of students. This action may provide a useful review of the benefits of a single application system and of the restrictions necessary for such benefits to be obtained. In any event, the CMA response to the OFT report is eagerly awaited.

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