Why is the for-profit higher education sector small?

In a post on the for-profit Phoenix University, John Quiggin argues that:

The unimpressive performance of Phoenix and Edison, along with the complete failure of other for-profit initiatives and the absence of any significant success stories in the for-profit sector over many centuries and many different countries and institutional environments suggests that the for-profit model is fundamentally defective as a way of providing education.

Why is this so? The obvious reason is that educational institutions must build up reputations over decades, since the consequences of cutting corners take decades to emerge. This makes no sense in terms of profit maximization and individual incentives, so it requires a professional/academic ethos which at least in part, overrides narrow forms of individual rationality. Such an ethos cannot survive in a for-profit firm.

I don’t know the Edison story, but Phoenix itself has been pretty successful – 300,000 students and a fairly good stock market performance, though the index of listed for-profits published annually by the Chronicle of Higher Education shows the sector trending down since its 2004 peak, but still well above where it was when it started in 2000. Phoenix says its graduation rate is 50-60%, which is probably comparable to the similar client group (mature age students) in Australia, for whom the <a href="http://www.dest.gov.au/sectors/higher_education/publications_resources/statistics/higher_education_attrition_rates_1994_2002.htm#The_findings_in_more_detail