Inflection Point: Price Competition in Higher Education?

Screen shot of FAFSA websiteSome people who are concerned about rising college costs blame the universities themselves, though evidence suggests this is not accurate, at least for public institutions replacing lost state support with tuition dollars. While evidence also suggests that the financial investment is still “worth it” for most students, rising college costs and student debt levels are concerns.

Still, many who blame the public institutions don’t seem to have a fully coherent argument, when you look at supply-side competition.  For example, the National Center on Education Statistics points to about 4,700 higher education institutions in the US, and the Colorado Department of Higher Education identifies 470 institutions (including technical institutes) in Colorado alone.  That is a lot of suppliers of higher education services.

When I used to teach classes in Regulatory Policy, we looked at Federal Trade Commission decisions about industry concentration, where they examine whether supply side monopolies or oligopolies might have pricing power. Should Office Depot be allowed to buy Office Max, for example?  But, it does not necessarily take a large number of suppliers to create a market-like situation, where prices are reasonably competitive – for example, there are 4 main makers of refrigerators, yet we don’t often argue that the cost of refrigerators is “too high.”

Higher education is not a true marketplace, but there are many choices for students, and hence competition.  For a believer in the virtues of the free market, it is hard to see the argument that colleges have pricing power, absent a conspiracy theory.  And, there are now so many newer, often for-profit providers, like University of Phoenix, Walden, Capella and Strayer that, somewhat ironically, eat up enormous amounts of federally-backed student loans, who can charge whatever the market will bear for tuition.  There is no monopoly or oligopoly in higher education, and to the extent that public institutions still educate a majority of students, their tuitions are also constrained by political processes via legislatures and boards, who want to keep tuition as low as possible.

So, if students have choices, there is real supply side competition that includes many for-profit providers, most students gain economically by going to college, and aid is reasonably available to help low-income students, what is the theory that suggests that prices are too high?


Categories: Commentary

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