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Evaluation of an OFT Intervention

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Evaluation of an OFT Intervention Evaluation of an OFT intervention Independent fee-paying schools May 2012 OFT1416 © Crown copyright 2012 You may reuse this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government-licence or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected]. Any enquiries regarding this publication should be sent to us at: Marketing, Office of Fair Trading, Fleetbank House, 2-6 Salisbury Square, London EC4Y 8JX, or email: [email protected]. This publication is also available from our website at: www.oft.gov.uk. CONTENTS Chapter/Annexe Page 1 Executive summary 1 2 Introduction 6 3 Theory, methodology and data 9 4 Descriptive analysis 18 5 Econometric analysis 22 6 Conclusion and estimate of consumer benefits 31 7 References 33 A List of SS Schools and Non-SS Schools 34 B Market for independent schools 37 C FT score and rank 38 D Econometric analysis 40 E Dispersion analysis 52 F Consumer detriment averted 58 1 EXECUTIVE SUMMARY 1.1 The Office of Fair Trading (OFT) has a public commitment to evaluate each year at least one of its previous interventions. These evaluations help us to understand whether and how our projects have achieved the desired impact, and whether the outcomes could be further improved. The OFT relies on findings from such evaluations to learn lessons that can be applied to future comparable interventions. 1.2 In this context, the OFT’s evaluation team has evaluated the impact of the intervention addressing the anti-competitive practice of 50 independent fee-paying schools in the setting of fees during academic years 2001/02 to 2003/04. This research has been carried out by OFT economists and independently reviewed by Professor Stephen Davies.1 1.3 The main aim is to understand whether the OFT intervention had an impact, and to estimate this impact in terms of reduced school fees. To do so we have collected data on the evolution of school fees and other variables before and after the OFT’s intervention. Background 1.4 For the academic years 2001/02 – after the Competition Act came into force – to 2003/04, the OFT held that the exchange of future pricing information between the Sevenoaks Survey schools ‘had as its object the distortion of competition within the United Kingdom’.2 It was not necessary therefore for the OFT to come to a conclusion as to whether the information exchange had an anti-competitive effect. 1.5 The schools concerned had exchanged information relating to their intended fee increases and fee levels for boarding and day pupils in relation to the academic years 2001/02, 2002/03 and 2003/04. The 1 Stephen Davies is Professor of Economics at the University of East Anglia 2 OFT (2006) ‘Exchange of Information on Future Fees by Certain Independent, Fee–Paying Schools’, (See paragraph 1402) OFT1416 | 1 information was exchanged through a survey, known as the 'Sevenoaks Survey'. Between February and June of each year, the schools concerned gave details of their intended fee increases and fee levels for the academic year beginning in September. Sevenoaks then collated that information and circulated it, in the form of tables, to the schools concerned. The information in the tables was updated and circulated between four and six times each year as schools developed their fee increase proposals in the course of their annual budgetary processes. 1.6 The key features of the infringement that were instrumental in the OFT’s assessment of the information exchange as an object offence included: • The information that was exchanged related to future intentions of price, and was confidential and not publicly available. • It was done on a regular and highly systematic basis, and for a number of years. • The timing of the exchange corresponded with the timing in which school fees for the following year were set. 1.7 The economic literature suggests that the exchange of future confidential pricing intentions is likely to result in harm for consumers and reduce overall welfare. The primary way in which this can happen is through the facilitation of coordination. Market participants coordinating either explicitly or tacitly over prices may be able to charge higher prices for the goods and services they supply. 1.8 In theory, the exchange of confidential future information about changes in school fees may have resulted in higher school fees. If the OFT’s intervention in stopping the information exchange did have an impact, we would expect this to be manifest in a reduction of school fees compared with the counterfactual of no OFT intervention. Therefore, the primary focus of the analysis in this report is on identifying whether there is evidence that school fees have fallen as a result of the intervention. OFT1416 | 2 Methodology 1.9 This evaluation has relied principally on data on school fees, rankings and other characteristics from online ‘FT 500’3 annual rankings and from the ‘Best-Schools’4 datasets. 1.10 We have analysed fees data over time, looking at the evolution of fee levels and annual fee changes for the schools involved in the Sevenoaks Survey (‘SS Schools’) before and after the OFT’s intervention. To control for other factors that may also have had an impact on the determination of fee setting, most notably the economic downturn, we have been able to compare fees to those set by a sub-group of schools not involved in the Sevenoaks Survey (‘Non-SS Schools’). Further, we have used ‘difference-in-differences’ econometric analysis to exploit the Non-SS Schools as a control group in testing whether the intervention had a statistically significant impact on the fees that the SS Schools charged. Empirical findings 1.11 The key finding of the econometric analysis is that since OFT intervention, boarding fees have been on average 1.6 per cent lower, and day fees 1.5 per cent lower, than we would expect in absence of intervention. The result for boarding fees is statistically significant at the 95 per cent level, and robust to a range of sensitivity checks. The result for day fees was less statistically significant5 and less robust to sensitivity checks. 1.12 We have used the results of the econometric analysis to present best estimates of benefits to the consumer arising from lower school fees. 3 FT annual rankings are found for instance here: www.ft.com/reports/schools2006 4 See www.Best-Schools.co.uk 5 The boarding fees findings are statistically significant at the 95 per cent level (meaning there is less than a five per cent probability that there was no effect). The day fees findings are only statistically significant at the 90 per cent level, and unlike the boarding fees results are not robust to sensitivity tests. OFT1416 | 3 Total discounted savings to the consumer6 can be estimated (in 2010 prices, discounted to the present) as • £85m in boarding fees • £20m in day fees. 1.13 Given the high degree of confidence placed in the findings in relation to boarding fees, the analysis therefore suggests that OFT intervention has realised savings of at least £85m to the consumer in the post- intervention period 2004/05 to the present, equating to average savings of £495 per boarder per annum. 1.14 There are a number of reasons for regarding the estimate of consumer savings as conservative. The first is that, in using the Non-SS Schools as a control group for the econometric analysis, we have implicitly assumed that this group was not impacted by the OFT intervention. We consider that this assumption supports the conservativeness of the estimate on the grounds that the OFT intervention is likely to have had an indirect impact on the Non-SS Schools, as we would expect the majority of them to be in competition with SS Schools. To the extent that the OFT intervention led to a reduction in SS Schools fees, we would expect competition between SS Schools and Non-SS Schools to create incentives for Non-SS Schools – and other independent fee-paying schools not considered in this analysis – to respond by in turn lowering their own fees. A second reason is that to the extent that OFT intervention had an industry-wide effect, the difference in differences methodology will underestimate the impact of intervention in lowering fees of SS Schools. 1.15 In relation to the two reasons above, we note that average annual real fee changes decreased significantly and steadily following OFT intervention for both SS Schools and Non-SS Schools, from approximately seven per cent during the infringement to four per cent in 6 See Annexe F for calculation of point estimate and range of consumer benefits. OFT1416 | 4 the four-year period immediately after intervention (before the onset of the financial crisis and recession). While this may be explained by other factors, it would also be consistent with a broad cross-industry impact of OFT intervention. 1.16 The third reason is that the analysis does not attempt to quantify the deadweight loss averted of OFT intervention,7 focusing only on the transfer of surplus back from schools to the consumer. The final reason is that the estimate does not take account of the wider deterrence effects of this competition enforcement action across the economy. In this respect, the OFT has published previous research which finds evidence of significant deterrent effects.8 7 See Annexe F for discussion of estimation of deadweight loss averted.
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