Price and quality

On Wednesday, I discussed the market for taxis in Düsseldorf. I explained how, as a result of the recession, the demand for taxi rides has fallen significantly recently while the supply of taxis has increased.

Every student of economics knows what happens in competitive markets when demand falls and supply increases: the price of the product falls to bring demand and supply back into line with each other.

Yet that is not what happens in the market for taxis. Instead, fares are fixed by law. If this were not the case, taxi drivers would compete on price and, as fares fell, more customers would be encouraged to take taxi rides.

In the absence of price competition, the number of taxi rides is determined by the "short end" of the market — in this case demand, which is lower than desired supply at the fare-levels fixed by law. (Taxi drivers would love to drive more often but they can't force customers to use their services.)

Such price-fixing is common in professions such as law, accountancy and medicine. It is often combined with strict qualifications to restrict the number of people who can enter the profession and so maintain quality.

But the same restrictions don't exist in the market for business English training (or, more generally, communication skills training). There are no legally enforced standards for trainers. Nor are there fixed price levels.

This point was part of a panel discussion on Wednesday at the Sprachen & Beruf conference in Düsseldorf. The title of the discussion was: "Efficiency despite cost pressures: how can companies train successfully in times of economic crisis?"

As a result of the recession, companies are desperately trying to cut costs. Reducing spending on staff training — and, specifically, language and communication training — is seen as an easy way of saving money.

As demand falls, training organizations compete more intensively for firms' budgets. And, unlike the taxi drivers, they can also compete on price.

This suits the many companies who choose their language and communication training mainly on the basis of price, with only minimum quality criteria. The increased power of purchasing departments — at the expense of HR departments — only reinforces this trend.

The advantage of this price competition is that, unlike in the market for taxis, more training takes place than it would if prices didn't fall. But there is a huge disadvantage, too: training quality standards are often reduced, which may be more damaging to the companies in the long run.