Transformations  in
Business & Economics

EXTERNALITY, PRODUCT DIFFERENTIATION AND SOCIAL WELFARE IN THE EDUCATION MARKET
Junlong Chen, Xinran Xie, Jiali Liu, Rui Liu

ABSTRACT. Mixed ownership is an important direction of education development under the wave of privatization. This paper sets up three duopoly models (PP, SS, and PS) in the education market, and examines the equilibrium profit, consumer surplus, and social welfare under different capital structures. Next, we try to determine the optimal market mode in terms of maximal social welfare, followed by the analysis of the effects of product differentiation and externality. The research results are as follows. In the PP model, the improvement of product differentiation helps enhance profit, consumer surplus, and social welfare. In the SS model, the growth of product differentiation and externality will lower profit, and improve the consumer surplus and social welfare. In the PS model, the increase of externality will suppress the profit and consumer surplus but has a complex relationship with social welfare. The boundaries between the three models can be determined based on the maximal social welfare. If the private educational institution surpasses a certain level of efficiency, the PP model leads to greater social welfare than the SS model. If the state-owned educational institution surpasses a certain level of efficiency, the PS model produces more social welfare than the PP model. Finally, positive externality and product differentiation greatly affect boundary efficiency levels.

KEYWORDS:  duopoly model, externality, product differentiation, social welfare, education market.

JEL classification:  L11, L13, L51.

⁵Acknowledgment:  The research is supported by the National Social Science Fund of China (Grant number: 19CJL029). Corresponding author: Jiali Liu, E-mail: liujiali@jlu.edu.cn