School Competition and Product Differentiation

This paper explores how market structure affects private schools’ choices of quality in response to competition when quality has a match-specific component. I develop and estimate an equilibrium model of school competition in Pakistan, a country with a large private schooling market. The estimates show that match-specific quality matters: moving a student from her worst to best possible match school increases test scores by 0.3 s.d. Profit-maximizing private schools choose their match-specific quality in response to the marginal rather than the average student. Since rich students are more responsive to quality when they make enrollment decisions, the average private school chooses a match-specific quality that advantages rich students at the expense of poor students. From the point of view of maximizing learning, match-specific quality is significantly misallocated. The entry of an additional private school exacerbates the incentive to cater to wealthy students, increasing inequality within private schools by 0.1 s.d.

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