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What market structure best represents international school tuition centers in Hong Kong?

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Abstract

The assumption that international school tuition centers experience high barriers to entry and have the possibility of earning abnormal profits suggest that this industry might result in welfare loss within the Hong Kong economy. Hence, I am interested to find out “What market structure best represents international school tuition centers in Hong Kong?”

 

Surveys were conducted with international school students. Results indicate that the industry has a CR = 85.8% with NTK, ITS and HKExcel as the three dominant firms, relying on non-price competition. In order to discover how these firms established brand loyalty and what are the different rules and barriers to entry involved, interviews were conducted with former and current employees of the dominant centers. Locations of the tuition centers were also investigated. Geographical patterns suggested that Hotelling’s Law is applicable to this industry, therefore suggesting an oligopolistic nature. However, the PED for tuition services seems to be elastic and the prices charged for the courses across the three main firms show minimal evidence of price rigidity or competition, suggesting that the industry shows features of a monopolistic competition. Little evidence of collusive behavior implies that the industry has minimal risk of being prosecuted under the Competition Ordinance.

 

Overall, the international school tuition center industry is an oligopolistic market showing features of a monopolistic competition. However, this imperfect competitive market demonstrates that there is market failure. Since tuition is taking resources away from mainstream education, financial resources going into tuition can perhaps be redirected into school educationso the quality of school-based education can improve.

Introduction

According to The Hong Kong Institute of Family Education, 95% of students in Hong Kong attend tuition centers (The Hong Kong Institute of Family Education, 2013). This demonstrates that tuition is in high demand among the Hong Kong population and the market shows economic significance in the country. The market is divided between tutoring centers focusing on local school curricula and international school curricula with the former significantly larger than the latter. There is also significant informal tutoring on a private basis – an aspect that is impossible to accurately measure, however, one that would impact the behavior of firms in the market.

 

As an International school student, I have attended tuition centers that focus on International school education over the years. From my observation, the service provided seems to require minimal variable costs, since the product being sold is knowledge. It therefore seems that this market is a lucrative market with firms wanting to enter this market facing many barriers such as high rent and high labour turnover. Due to my familiarity with international school tuition centers, it is appropriate to focus on the area of international school tuition centers.

 

As an economics student, I have been exposed to imperfect market structures and how they lead to short run and long run profits. If my assumption of high barriers to entry is true, it would suggest that there may be abnormal profits in the market and therefore welfare loss within the Hong Kong economy. Furthermore, after the HKDSE was introduced in 2012 (HK Exchanges and Clearing Limited, 2011), some local school students decided to study either the IB Diploma or GCE A-Level to avoid the HKDSE Chinese exam because half of all candidates fail the subject annually and stops them from entering local universities (Yau & Chau, 2015). Hence,more local schools are starting to introduce the IB Diploma Programme (Yau, 2015). This has led to increasing demand in the international tuition market with some local schools moving to IB and therefore, any anti-competitiveness of the tuition centers that already created some welfare loss to the society may suddenly get much worse. Hence, there is a broader relevance to the Hong Kong economy, as government has recently created regulations in all markets. The Competition Ordinance was passed by the Legislative Council in June 2012 and ha commenced full operation since December 2015 (Competition Commission, 2015). This means that it is now illegal to collude, fix prices or to abuse market power. If the international school tuition center industry is established as a concentrated market, and that the market does have some level of anti-competitive behavior through collusion, then there may be legal implications, such as restrictions or imposition of penalties. Hence, I am interested in whether the government should be looking at the shadow education environment to see if it falls within the scope of the legislation. This has led me to the research question of “What market structure best represents international school tuition centers in Hong Kong?”

In order to develop an answer to this question, I am looking at the following three specific sub questions:

  • What are the characteristics of the main firms in the market?
  • How do firms differentiate themselves to established brand loyalty?
  • What is the relationship between the price and non-price factors in the market?

Methodology

This essay will focus on answer the research question through a combination of primary and secondary data sources.

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  • Secondary research

    Relevant economic theory will be reviewed to understand the characteristics of different market structures and how firms in different markets tend to behave and exercise their power. Other economic theories will also be reviewed as it may add relevance to the way that the market is structured. In addition, articles and journals from community and government websites will be used as references to understand the role of international school tutoring in the Hong Kong market so analysis about the industry can be carried out more in depth. The price list of the three main international tuition centers will be compared and analyzed to find out if price competition exists. The Competition Ordinance will be analysed to discover what the consequences are if there is evidence of collusion in a market.

     

    Since tuition is offered throughout Hong Kong because of location of different schools, it is unlike many other markets, which maybe geographically concentrated. I am interested to find out if there are any forms of clustering or imperfect distribution of the tuition centers or are they just distributed randomly. I will use online mapping software to see how well it fits in with the idea of geographical and physical concentration of centers. I will be looking at where they are located to see if there are any kind of correlation between where they are located and any other market structure issues such as homogeneity and convenience.

    Primary research

    Cluster sampling will be conducted with a sample of 50 students. Surveys will be given out to current high school students who study in three international schools in Hong Kong. The aim of the survey is to find out how tuition centers differentiate themselves to establish brand loyalty, the nature of the price elasticity in the industry and to determine the estimated market share. A survey blank is included in Appendix A.

     

    I will then interview past and current employees of the three largest firms. The interviews will be recorded and transcribed. Respondents to both surveys and interviews will be offered confidentiality to encourage participation. All interview questions will be the same for consistency, comparison and contrast (see Appendix B). The aim of the interviews is to understand the characteristics of the main firms in the market and the relationship between price and non-price factors in the market.

     

    I will then compare results to the theory and decide which market structure best represents the international school tuition center industry.

    Economic theories

    A market structure describes the characteristics of market organization that influence the behavior of firms within an industry (Tragakes, 2011). The four main types of market structures in economics include: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. Figure 1 summarized the characteristics of each market structures.

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  • Perfect Competition
    Monoplistic Competition
    Oligopoly
    Monopoly
    Number of firms
    Many
    Many
    Few dominant firms
    One or one dominant firm
    Type of product
    Homogenous
    Differentiated
    Differentiated or homogenous
    Unique with no close substitutes
    Barriers to entry
    None
    Low
    High
    High
    Abnormal Profits (Short run)
    Yes
    Yes
    Yes
    Yes
    Abnormal Profits (Long run)
    No
    No
    Not always
    Yes
    Market power
    Price taker
    Price taker
    Price taker
    Price taker
    Non-Price competition
    No
    Yes
    Yes
    Yes
    Figure 1 - Table On Characteristics Of Market Structures

    As shown later under the geographic results, it emerges that certain centers seem to cluster near to each other, I further researched to identify why this might be the case. Hotelling’s Law might be appropriate to explain the market structure phenomenon. It states that there is an ‘undue tendency for competitors to imitate each other in quality of goods, in location, and in other essential ways’ (Hotelling, 1929, p. 41).

     

    Hotelling’s law is considered the opposite of product differentiation and is an observation that states firms in many markets usually locate close together and produce their goods and serviceswith minimal differentiation (Ahlin & Ahlin, 2013). In Hotelling’s Law, the assumption is that two competing firms each locate at one end of the same street and sell identical products, with same pricing and customers evenly dispersed. Since everything is homogenous, convenience will become the only factor that which firm will attract the most customers. Hence, both firms will move closer to the midpoint of the street to maximize the amount of customers they can attract and eventually both firms will be located in the midpoint of the street with high proximity and having customers evenly dispersed again (Ridley, 2012). This is where the Nash Equilibrium is achieved. Nash Equilibrium occurs when no participant can gain advantage by a unilateral change of strategy if the strategies of the others remain unchanged (Chang, 2015).

     

    Seemingly Hotelling’s Law illustrates a perfect competitive market, meaning if one firm increases the price of its products, the other firm will capture the entire market. However in reality, this is not the case as Hotelling stated that ‘some buy from one seller, some from another, in spite of moderate differences of price’ (Hotelling, 1929, p. 41). This is further supported when firms actually differentiate their products to reduce the intensity of price competition “retailers with greater ability to differentiate their products are more likely to strategically cluster.” (Picone, Ridley, & Zandbergen, 2009, p. 1) Showing the nature of an oligopolistic market (Weyl, 2011).

     

    Operating as an oligopolistic market suggests that firms might collude. Any forms of collusive behavior in a market could be at risk of being prosecuted under the Competition Ordinance (Competition Commission, 2015, p.

     

    Competition Ordinance: Where the Commission considers collusion in contravention of the First Conduct Rule has occurred, they will take action against undertakings that engaged in collusion (Competition Commission, 2015, p. 4). The First Conduct Rule prohibits businesses from making any decisions that the effect is to harm competition in Hong Kong (Competition Commission, 2015).

    Findings

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  • Market share

    A total of 50 surveys were sent out with a response rate of 70%. The 35 samples received represent students from three schools in Hong Kong: Elsa High School, Yew Chung International School and Victoria Shanghai Academy. The results suggest NTK has the largest estimated market share at 34.3%, followed by ITS with 28.6% and HKExcel with 22.9% (Figure 1). These results imply the international school tuition center market is dominated by NTK, ITS and HKExcel with CR3 = 85.8%. Further analysis will focus on the largest three firms only to identify which market structure best represents the industry.

    Figure 2 - Market Share Of The Intrnational School Tuition Industry

    In Figure 1, “Others” represent both international school tuition centers operating at a smaller scale with a total market share of only 8.57%.

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  • Pricing

    To determine market structures, price rigidity is another important factor. Figure 3 shows the price charged per session for the same courses in the dominating firms (Appendix C). Data shows 1 on 1 tuition is the most expensive across all three centers, as student will receive highest personal attention with the smallest class size.

    Figure 3 - Prices Charged By The Dominant Firms IB/SAT/GCE AL Courses

    Figure 2 shows NTK charging the highest prices ($920 - $1400), followed by ITS ($356 - $720) and HKExcel ($300 - $550). The data does not suggest significant price competition between the three firms since NTK charges nearly twice the price of ITS and HKExcel who do seem to have similar prices. However, NTK uses creative pricing such as early bird benefits (NTK Academic Group, 2015) and loyalty bonuses, where differing discounts are given to students depending on their monthly spending at NTK (NTK Academic Group, 2016). This suggests the published prices of NTK can be different from the actual prices that consumers are paying.

     

    Since all the three firms offer courses for the same curricula, it shows that these three firms do not solely rely on price competition because if they do, the assumption becomes HKExcel will receive the largest proportion of market shares since the prices of their subject courses are the lowest and hence will attract all the customers. The fact which NTK charges significantly higher prices than ITS and HKExcel but remains as the firm with the largest market shares in the industry shows that firms hugely depend on non-price competition as well, which will be analyzed in the price and non-price factors section.

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  • Price and non price factors

    From the 35 samples received, students who are attending the largest three firms are asked why they have chosen the tuition center.

     

    Results show the majority of the students choose NTK because of reputation. NTK was established in 1996 (NTK Academic Group, 2015), it is one of the earliest international school tuition centers in Hong Kong. Since NTK has a long history, 34% of the surveyed students associate it with good reputation.

    Figure 4 Reasons Choosing NTK

    ITS is mainly associated with peers’ referral and the quality of tutors because it is a partner with Pearson and therefore particularly attached to the Edexcel Exam Board. Also, ITS is the only tuition center in HK that can offer public exams, this helps to create credibility. Moreover, the interviewee from ITS mentioned “we only want the best tutors” and put emphasis on academic excellence. This demonstrates the tutors at ITS have high quality standard and hence there is a high percentage of peers’ referrals.

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  • Figure 5 - Reasons Choosing ITS

    43% of the surveyed students specified they choose HKExcel because it focuses on the IB Diploma curriculum. Despite HKExcel also offers A-level and SAT courses, the interviewee from HKExcel emphasized they are “IB strategists”. They also offer additional programs called “IB Capture 7 programme”. Their targeted customers are mainly IB students.

    Figure 6- Reasons Choosing HKExcel

    Hotelling’s law

    Since HKExcel and NTK use non-price competition and are both located in Causeway Bay, Hotelling’s Law seems to be applicable to this industry. A major characteristic in Hotelling’s law is convenience. More customers can be attracted with higher convenience.

    Figure 7 - Mapes Showing An Of Causeway Bay
    Figure 8 - Maps Showing An Area Of Sheung Wan
    Figure 8 - Maps Showing An Area Of Sheung Wan

    NTK, HKExcel and ITS are located in various parts of Hong Kong. However, upon further research, I found that other centers seem to be located very close (figure 7 and 8); showing high proximity. They are located so close to each other suggests Hotelling’ Law may apply here. This indicates they are seeing each other as equally competitors and according to Hotelling’s Law it indicates there is likely to be an oligopolistic nature in the industry. The reason that centers tend to be clustered together means they do not want to lose any customers that are closer to the other centers. If centers are closer to each other, then they can be attracting other than the convenience of where they are. However, it must also be noticed that in reality, the extent of strategic clustering might have overstated location (Picone, Ridley, & Zandbergen, 2009, p. 1). Hong Kong is a city that is densely populated (Yeh, 2011) and the rent is among the highest in the world due to land scarcity (InterNations, 2015). Therefore, while it may seem on the surface that Hotelling’s law applies here, it is possible that the clustering of centers has other explanations such as the rental prices, limited location options and convenience to the MTR line rather than clustering together.

    MTR line

    In order to discover if there are other explanations for the clustering of centers, I further investigated the geographical areas of the tuition centers locations. It appears that many tuition centers are located very close to the MTR line, which is the most convenient transportation in Hong Kong (Information Service Department, 2015). Hence, areas around MTR stations always have the highest population in a district. This implies firms also use this as a strategy to establish convenience.

     

    Using NTK, ITS and HKExcel as examples, it takes less than five minutes walk from the tuition centers to their closest MTR stations (figure 9). Even though Hotelling’s Law also mentioned the importance of convenience, it is not related to the distances of transportation locations. Locating near MTR lines shows firms do consider convenience as one of the most important non-price factors as it is a place with higher population and hence can increase the probability of more customers visiting their centers. Since many tuition centers have already taken into the account of the importance of convenience, so it will not be a characteristic that differentiates between them, it actually becomes a necessary element for them to locate near MTR stations. This explains why the majority of surveyed students did not choose convenience as the reason for tuition centers.

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  • Figure 9 - Maps Showing The Distance Between The Tuition Center And The Closest MTR Station For NTK,HKExcel And ITS

    Price elasticity of demand

    Surveyed students are asked if they will continue to attend the current tuition center if the tuition fee increases by 10%, 20% and 30% respectively, to find out the price responsiveness in this industry. These percentage changes are chosen for consistency. PED is calculated using the equation below:

     

    PED = \(\frac{\%\ change\ in\ quantity\ demanded\ of\ a\ product}{\%\ change\ in\ price\ of\ a\ product}\)

     

    Results are shown in table 2:

    Percentage Change in Price (Δ % P)

    Percentage Change in Quantity Demanded (Δ%QD)

    PED
    10%
    -0.571
    20%
    -1.14
    30%
    -1.42
    Figure 10 - Table On Survey Results On The Price Responosiveness In The Industry
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