Competition: Kill or Cure?

In my dusty corner of academia, competition is increasingly prominent: legal services, legal aid, and student fees have been pushing up the agenda and now, it seems, they are arriving in threes: markets red in tooth and claw. 2011 promises to provide at least one watershed moment in the implementation of the Legal Services Act when MDPs are permitted in the Autumn. The legal aid green paper promises to revive tendering for criminal and then civil and family legal aid (or what remains of it). Student fees, well, we’ll see: the government and Universities are working out that the technicalities of pricing and providing competition when there will still be ceilings on the numbers of students are, um, complicated.

My focus today is legal services with some comments on legal aid. It is important for some clear thought and research on the impact of competition, in the legal services sector. The Legal Services Board and the professions have been skirmishing around this in a number of contexts, referral fees in particular, but the broader impact needs to be thought through if the regulators are to come up with appropriate regulatory strategies. Nicholas Timmins’ story in yesterday’s Financial Times highlighted some interesting findings on competition in health which are likely to be highly relevant. He quotes Anita Charlesworth, chief economist at the Nuffield Trust for Research and Policy Studies in Health Services (and a former public services director at the Treasury) and Dr. Zack Cooper (a health economist at the LSE). Cooper says:

“I am about as pro-competition in healthcare as you are going to find. But price competition would be a hugely retrograde step. To introduce it is not to learn the lessons from the NHS’s own experience and from abroad. There is a very clear story both from here and from the US that price competition lowers quality and that the fixed prices in Medicare [the US health system for the elderly] raised it.”

Professor Carol Propper, Health Economist at Bristol University, in a related story by Timmins, indicated price competition increases mortality rates. Put another way, in health care, price competition kills. All three experts point in very similar directions.

Intrigued by the quotes, and armed with a new Kindle which is encouraging me to read in a way not achieved since primary school teachers took to handing out merit badges, I have begun looking at some of the health economists work (See, for example, Gaynor and Cooper and Propper). On my initial reading, this is what it appears to say:

Competition in health care can be thought of occurring in three main ways: competition on price; competition on quality (where price is held constant); and competition on both quality and price.

Competition on quality is dependent on consumers knowing about and responding to differences in quality.

Competition on price alone diminishes quality. That is not always bad: prices and quality may be higher than the client needs or wants: gold-plated service or the idea of the dentists’ smile being the obvious examples.

Competition on quality alone (where price is fixed) increases quality (to risk the reader’s wrath by employing two more medical metaphors, this is not to be sneezed at – more people lived as a result).

The research on competition where there is quality and price competition is mixed. My initial reading suggests that price can reduced, quality appears to have been reduced sometimes and increased in others.

The most likely way of explaining the difference in results is whether consumers know about and respond to differences in quality. That is, for competition to occur successfully on the basis of quality consumers have to perceive real differences in quality and perceive that those differences in quality are worth paying for.

Where does this leave us in relation to legal services? The most important thing that this suggests to me is that for a market for legal services to function effectively, signals about the relative quality of legal services have to be at least as strong as, if not stronger than, signals on price if quality is not to diminish significantly as a result of competition. Most of the research on consumers of legal service suggest that it is assumed by potential clients that all lawyers are equally competent, although I suspect also – based partly on my own work – that clients have some inchoate ideas about relative quality (my instinct is they use specialisation and price (‘you get what you pay for’) as proxies). Ensuring that stronger signals of relative quality are developed and acted upon should be a central goal of either professional service providers interested in providing a higher level of service, professional regulators or both. Whether we should let the market work this out for themselves or the regulators should step in first is an interesting question which may vary depending on the risks posed in particular markets and the costs of intervention.  At the moment though the market seems to be responding to ideas of quality which are based around very flimsy notions of service.

A second point is that a defence against a race to the bottom will be regulatory floors to protect minimum standards of quality. Here the important question is whether regulation is both proportionate and strong enough to prevent quality dropping to dangerously low levels. The LSC have come closest to a strong system with peer review of legal aid work, but that appears to be a system in decline. I have seen no indication that this will survive the cuts and the green paper on legal aid is interesting in the almost total absence of any discussion of quality.

A third point is the implications for legal aid. Competition on price and quality is clearly dangerous in public policy terms but it is not a hopeless policy position. If there is reasons to suspect that prices are too high then competition on price might lower price to ‘welfare maximising’ levels. It will be interesting to observe which parts of the market the Government tackles through competition and their reasons for suggesting prices are too high in those areas. This should be a key part of the debate if they are to persist with price competition. Similarly, the research suggests competition on the basis of quality is much more likely to produce good outcomes for clients and for government (Gaynor’s work suggests this is true if, and only, if the level of funding is adequate in the first place). The extent to which the government pays sufficient regard to decent indicators of quality will be telling. The omens so far are not good.

4 thoughts on “Competition: Kill or Cure?

  1. presumably the government’s answer to your legal aid quality question is the lsc, or whichever body replaces it, will contract with fewer, larger suppliers. this will enable it to audit them thoroughly. this is almost certain to be the result of the criminal legal aid consultation, and who knows, the civil one as well.

  2. Richard

    Another interesting post. I assume that you are considering a publicly funded legal service as opposed to the free market? I wasn’t entirely sure. One of my major concerns is that society, in its broadest sense, has and is getting used to accepting much lower levels and standards of client service than hitherto might have been the case. I accept that we might be prepared to complain but not enough to matter. We have almost conditioned ourselves to accept that lower price = lower service + lower quality. Until we start to see people rising up and challenging the steady decline, then things will only continue to get worse. Sorry to sound so gloomy.


    1. Thanks Julian. I meant the post to apply to both publicly funded and privately funded work. For what it is worth, my view of increased competition is that it might improve on ‘service’ elements – that’s what customers understand and what intermediaries like QS are concentrating on. It’s the impact on technuical competence which particularly interests me. Both are important.

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