In the fourth chapter, Sclar examines three case studies to explore the misconception of competition in the privatization of public services. Fundamental to the argument for the privatization of public services is the belief that the competitive pressures of the market forces private service providers to behave more efficiently. Public contracting, however, the author notes, usually takes place in monopolistic or oligopolistic economies, characterized by little to no competition. Private contracting can shift a competitive market to a monopolistic or oligopolistic market through long-term contracts. Public officials should be aware of the significance not only of how the market for a particular service is structured prior to privatization, but also of how privatization may shape the state and the dynamics of that market in the future.

First Sclar examines contracting in a monopoly market, analyzing the case of fire fighting in Scottsdale, Arizona. Sclar chooses this example because nearly every important study advocating...privatization of municipal services refers to Scottsdale, but few have followed its example (72). Since its incorporation in 1951, Scottsdale has contracted its fire services to Rural/Metro. The contract is renewed annually on a cost plus profit basis; it is not open for public bidding. Sclar points out that while Rural/Metro may be as efficient as other providers it is not the competitive nature of the private market that stimulates that efficiency. Not only is it a closed contract, there are no alternative suppliers and there are legitimate barriers to entry as a result of Scottsdales long term relationship with Rural/Metro. Furthermore, Rural/Metro relied on labor cost savings, such as volunteer and on-call firefighters, to keep down costs. Compared to equivalent public fire service providers, Sclar notes, Rural/Metro has lower cost but also lower quality. Sclar foreshadows that Rural/Metro will not be able to maintain its competitive edge as population density increases because its cost savings strategy would become infeasible. Sclar also suggests that existing publicly provided services could achieve the same levels of efficiency if they restructure.

Sclar explores the following two examples of contracting in an oligopoly market:

1. In the first example, Denver policy makers attempted to keep the contracting of existing public transit competitive by privatizing in phases and limiting the market share of individual providers to fifty percent. Three national bus companies won the contracts by offering exceedingly low prices for the first contract term and then rapidly inflating charges to the actual costs after being awarded the contract. Quickly the five providers who were not awarded contracts were squeezed out of the market, and future competition foreclosed. The Regional Transit Authority was distracted by the debate over privatizing the remaining portions of the public transit and therefore unable to devote time to internal restructuring.
2. The second oligopoly example examines school busing in New York City. The nature of the business of transporting children requires consistent reliable service. In the name of consistency the private contracts are awarded to the same companies every year; there is no competition. While Mayor Guiliani tried to reform this market and instill competition, the size and complexity of the business and the public value of ensuring safe reliable transportation to school aged children, eliminated the entry of new competitors. Sclar notes that one way to insert competition into this market might be for the public sector to develop its own fleet of school buses that could compete with the private contractors.

Sclar concludes that benefits derived from competition in the contracting of public services are often imagined ones rather than real ones. Public decision makers must shoulder two costly burdens: costs associated with establishing an ongoing competitive market and costs associated with being participants and guarantors of that market. Sclar concludes that public decision makers should not work towards privatization in the name of competition when they could be considering restructuring or reorganizing their own management. As the three case studies illustrate the market solution has limited practical applications; competition does not always result from privatization.