Competition in the Education Industry: An Industrial Organization Perspective

Why competition among schools fails—and competition among courses could work

Dec 02, 2025

Education reform is treated like ideology, but it’s really an economics problem. Charter schools attack the wrong market. Real reform would introduce competition where learning happens—inside schools, not between them.

Many education reform advocates continue to argue that the most effective way to improve education is through competition—most commonly via charter schools, vouchers, and private alternatives taking on the local public school. Politically, education policy has long been framed as a partisan conflict: Republicans promote choice and privatization; Democrats emphasize equity, funding stability, and the protection of public institutions and public school teachers. However, the political landscape is not completely divided by party.

A prominent example of the Republican divide comes from Texas. In 2025, Greg Abbott signed into law one of the largest school-voucher programs in U.S. history, pushing public funds directly toward private education. That legislation passed only after intense opposition from Republican lawmakers in rural districts, who warned that vouchers would hollow out already-fragile local school systems.

A growing group of centrist and reform-minded Democrats now support limited forms of competition, especially when framed as innovation rather than privatization. Figures such as Rahm Emanuel and Arne Duncan have at various times expressed openness to Republican-backed education reforms—ranging from regulatory flexibility and charter expansion to choice-oriented funding mechanisms—underscoring that support for competition in education is not confined to one party.

The education debate today is no longer simply left versus right. It is increasingly a debate within both parties about what form competition should take—and where it should be applied.

The debate has largely been shaped by ideological preferences. This memo recognizes that competition or lack of choice in the education sphere is an issue which needs to be addressed through an industrial organization or microeconomic framework.

The Charter-School Debate

A charter school is a publicly funded but privately operated institution operating under a renewable state contract. The charter movement grew rapidly in large cities such as New Orleans, Detroit, Washington DC, and St. Louis, where dissatisfaction with existing public systems was high.

Evidence on academic performance of charter schools is mixed. Some studies find modest gains in certain cities; many find no improvement; others show weaker outcomes. Two widely cited reviews summarize this literature particularly well:

· An ERIC literature review finds charter performance roughly equivalent to district schools, with wide regional variation:

https://eric.ed.gov/?id=ED536259

· A large meta-analysis by the Center on Reinventing Public Education shows small average gains in math, little consistent improvement in reading, and enormous performance dispersion across schools:
https://crpe.org/wp-content/uploads/CRPE_meta-analysis_charter-schools-effect-student-achievement_workingpaper.pdf

Together, these reviews confirm that charters are not a uniform solution.

Selection effects complicate interpretation because children with more involved parents are more likely to get accepted into the charter school, thereby elevating charter school performance in evaluations.

From an industrial-organization perspective, however, the deeper problem is structural.

Charter schools attempt to compete at the institutional level. Each charter replicates a full organization—buildings, administrators, compliance systems, transportation, support services. These are high fixed costs. In smaller districts, markets simply cannot support parallel systems.

When charters enter, the result is often not productive competition but fiscal cannibalization of a limited tax base. The incumbent public school weakens. High-need students become more concentrated. The market fragments without becoming efficient.

This is not how competition works in successful industries.

Education as a Market-Structure Problem

Public schooling today is largely a system of local monopolies. Families face switching costs. Teachers face little direct competition. Administrators face weak incentives to change because funding arrives regardless of outcomes and dissatisfied families have few alternatives. This is a classic economic dilemma.

Policymakers talk about choice while ignoring:

Economies of scale
Barriers to entry
Regulatory capture
Adverse selection
Switching costs
Product differentiation

A more realistic goal is not perfect competition but monopolistic competition—many providers offering differentiated services inside a shared system.

And the correct unit of competition is not creating competition between schools. It involves creating competition between course providers.

Competition Between Course Providers

Instead of encouraging competition between institutions, policy should encourage competition within them.

Public schools should grant credit for accredited outside providers, including:

Universities
Technical institutes
Online platforms
Independent educators
Specialty programs

This mirrors what happened in electricity markets when generation was separated from transmission. Infrastructure stayed centralized. Services became contestable.

Under this model:

Schools remain platforms
Instruction becomes modular
Competition becomes targeted

Why Course-Level Competition Works Better

1. It preserves scale economies.
Schools still handle transportation, counseling, administration, meals, and facilities. Competition occurs only where scale economies are weak.

2. It disciplines instruction directly.
Charters reshuffle poor teachers. Competition between course providers encourages students and parents to seek the best or most effective teacher.

3. It lowers political resistance.
Reform within institutions faces less opposition because many people favor their local school and oppose its closure even when it is ineffective.

4. It lowers fiscal risk.
Course vouchers extract far fewer resources than school vouchers.

5. It improves student matching.
Schools teach to the middle of the ability spectrum. Course competition allows specialization.

6. It scales digitally.
Online instruction reduces cost per unit dramatically.

Teacher Shortages and Course Scarcity

The United States faces severe teacher shortages in:

Math
Science
Computer science
Special education
World languages
Advanced coursework (AP / IB / upper-level STEM)

High-poverty, rural, and inner-city districts are disproportionately affected.

As a result, many students are simply never offered certain classes. Districts eliminate advanced science, computer coding, or foreign language instruction not because demand is absent, but because instructors are unavailable.

Course-level competition helps mitigate this problem.

· A firm specializing in language instruction could serve multiple districts simultaneously.

· A mathematics provider could offer Algebra II statewide.

· A physics provider could teach remotely across dozens of communities.

Education today behaves as though every school must produce every specialty in-house. No competitive industry works that way.

A Student Perspective

Now let’s personalize this situation.

A middle-school student struggles in math.

· The textbook is dense.

· The pace is wrong.

· The teacher is overwhelmed.

Unless the parents are wealthy, there is no alternative. Private tutoring costs hundreds per month. Test-prep firms charge thousands. Specialized math programs are geographically scarce.

This student has viable options under a modular course system, which allows the student the opportunity to take the math course with the provider of their choice.

Course-level competition equalizes access the way institutional competition never can.

Conclusion

In many jurisdictions—especially rural areas—there is a natural monopoly at the school level. Maintaining a single school often makes economic sense, and draining resources through competing institutions may do more harm than good. Recent experience in places like Texas illustrates the political and practical limits of trying to restructure education through school-level competition alone. Closing or weakening local schools is both economically risky and politically toxic.

From an industrial-organization perspective, however, the problem is not monopoly itself—it is where monopoly exists.

The current system makes two mistakes:

It tolerates monopoly where scale economies are weak (instruction and course delivery).
It disrupts institutions where scale economies are strong (schools as organizations).

Course-level competition offers a better balance. It preserves centralized institutions where scale matters—transportation, administration, student services—while introducing competition where it is most effective: at the level of instruction. Entry is cheaper. Innovation is easier. And families gain access to different voices without dismantling the system that already exists.

If reform is going to succeed, it will not come from replacing schools – it will come from opening the existing school to diverse opportunities.

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