The folly of higher education price control, part #3

The Group of Eight’s higher education reform proposal (pdf) proposes a relaxation, but not abolition, of price control.

Instead of the current more-or-less picked out of the air maximum student charges, they propose a Productivity Commission study of the ‘actual and relative teaching costs by broad field of education’. Based on the ‘indicative cost’ determined by the Productivity Commission, universities could set fees up to a maximum of 25% more than that number. The only rationale given is to ‘avoid exploitative pricing’.

This is a rather curious admission. In Australia, the only universities for whom an even remotely plausible argument could be made that they have the power to price in an ‘exploitative’ way are, er, the members of the Group of Eight. Are they saying that they cannot be trusted not to exploit students, and must be constrained by regulation? There aren’t many interest groups that will own up to that.

I would have thought that with the portable scholarship (aka voucher) proposal in the Group of Eight package they already had two systems of price control, ie a market to keep sticker prices down and subsidies to further reduce the effective cost to students – though arguably the subsidies will push up fees as students will know they won’t have to pay the full amount.

Over the years, I’ve been tracking the prices of business courses for international students listed in the Good Universities Guide to see how the market works. I need to do a lot more work, such as looking at the prices in the context of enrolment patterns. But there are certainly signs of a market operating, with real price decreases as well as increases between years.

My research also shows wide variation in price, with the most expensive (the University of Melbourne) being more than twice the cost of the cheapest (the University of the Sunshine Coast). But can this be considered exploitation? As I argued in my critique of Bruce Chapman’s ideas on price control, if there is a significant premium attached to Melbourne’s brand, it is not clear that price control should allocate that value to the private benefit of the student, rather than letting the university capture some of it for its own purposes. (Disclosure: the U of M is one of my employers.)

Then there is the problem of how the Productivity Commission will go about setting the ‘indicative’ price. There is still some utility price regulation in Australia. Finding the appropriate price level is hard enough for utilities, where regulators have the advantage of a fairly standard product. But in higher education, how should the ‘standard’ be set? There are dozens of different disciplines to be considered – the idea that prices be set by broad field of study overlooks that there are wide cost variations within some broad groups, especially in science.

And what of different student preferences? Some students seem content to download materials, while others want small-group teaching. The strength of a market is that it can cater to these different preferences by pricing accordingly.

The 25% price premium allowed under the Group of Eight plan is – presuming that the Productivity Commission finds indicative costs at or above current per student revenue – going to create more room to offer different kinds of education. But why not more? The Group of Eight would take us from one size fits all to 1.25 sizes fit all.

The price cap is at best a solution to a non-problem – or at least an educational non-problem. Its only possible justification is political; that the political orthodoxy on fees is too powerful to be challenged by more than 25%.

12 thoughts on “The folly of higher education price control, part #3

  1. Andrew
    I have always been amazed at how the price of private university education has gone up in the US. Have you any views on why and does this offer a pointer to what could happen here?

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  2. I think you have hit the nail on the head with the last sentence. Its obviously easier to chip away at things than try and make radical changes all at once — HECS being an obvious example in education.

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  3. JC – That’s a good question. The US College Board keeps track of price increases, and shows considerable inflation in prices over both public and private in the last few decades.

    I have two books on my shelves seeking to explain this trend, and there seem to be many factors at work:

    1) Due to high subsidies, for many students higher education is still priced at well below its value, so they are not highly price resistant (a problem alluded to in my post).

    2) US universities are sophisticated price discriminators, allowing them to charge a higher sticker price to students willing to pay it, while using student aid to secure enrolments from those who are not.

    3) At least some of the increase in charges has flowed back to students, through better facilities and (slightly) more academic staff per student. Given (1), students buy better services which cost more.

    4) Labour costs are a high % of total university costs, and given the reliance of universities on a highly-educated workforce we would expect costs to have increased above inflation.

    5) However, even given (4) costs have risen a lot (average 3% per year in real terms). Money is diverted into research and other university activities – which they can get away with because of (1) and (2).

    Consistent with (5), for-profit private unis are a lot cheaper than not-for-profit private unis.

    But is it ‘exploitation’? The most powerful brands turn away the vast majority of those who apply, so these applicants must consider the price to be worth it.

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  4. Andrew, I agree but I’m not sure that’s how the plebs define ‘exploitation’. If they did, they would concede that any voluntary employment relationship (or any other voluntary contract – eg for petrol!) could not be consistered exploitative.
    I guess a price cap could make it profitable for universities with sustained market power to expand supply more than if they had an unfettered power to raise prices (ie MR=MC at a higher level of output).

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  5. Rajat – Though don’t people see the employment relationship differently, because they believe that it is difficult to get another job? In the US, anyone academically capable of Harvard’s courses has hundreds of higher education alternatives, many at one-third or less of the cost – including institutions ranked above any Australian university in the global rankings.

    Similarly, people pay big $$$ for prestige brands across a wide range of goods and services, even though there are perfectly adequate and much cheaper alternatives. Many people may see paying the premium as ridiculous, but few would call it exploitation.

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  6. Andrew, my impression is that the global rankings are typically based on research output, alhough maybe this is not the case. When it comes to undertaking degrees, my impression is that students would be better off completing an undergraduate degree at a good Australian university, even if it is ranked lower than the alternative US university, and then going to the US for grad school. I am not sure to what extent this impression is discipline specific. I am more familiar with economics than I am with other disciplines. It is also not based on any rigorous empirical analysis. But nonetheless, that is my impression.

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  7. Rather than specific price caps, couldn’t the government get the ACCC to monitor higher education prices, based on the proposed Productivity Commission study?

    That’s just an offhand thought – probably good reasons it’s a bad idea.

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  8. Damien – It’s true that the global rankings are based on research, but that’s all part of the ‘brand’. Apart from selectivity of the intake, there are no national measures of the quality of undergraduate education, and of course selectivity tells you how good your classmates might be rather than how good the teaching will be. I haven’t kept up to date with the US research on student satisfaction, but when I wrote my book (2002) it was lowest in the big research universities. There seem to be trade-offs that prospective students need to make.

    However, I think it fairly likely that good undergrad education is more readily available in the US than here. There are institutions that specialise in it, surveys of US academics suggest that teaching is a strong part of the university ethos there than here, and staff:student ratios are better.

    Leopold – That would be better than a cap, but still leaves the question of how an intellectually defensible price would be arrived at. It’s not as if we have a benchmark like say international oil prices (to use as an example another area where the ACCC monitors prices).

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  9. Andrew, I suppose it’s a matter of degree (pun unintended). and value judgments. Any voluntary transaction creates a welfare surplus (the difference between willingness to pay and opportunity cost of supply) and the way in which that surplus is divided between the parties depends on their relative bargaining power (or regulation). This, in turn, is based on the availability of alternatives. And it is important to remember that neoclassical economics treats ‘alternative’ as a subjective notion, not what you or I might consider a reasonable substitute.
    In this respect, a university place is no different from a job. Indeed, it may even be the case that the more rich or successful one is, the fewer (subjective) alternatives one has. If a smart kid really wants to go to Harvard, as opposed to Princeton or Penn State, Harvard can charge her a very high price. (When I went to uni, I really only had a choice of Melbourne, unless I was happy to spend 3 hours a day commuting to Monash.) If a rich person really wants a particular good, the supplier of that good is capable of extracting the bulk of the surplus from the transaction through a high price. Similarly, a worker getting paid a lot more than what another worker would do the same job for is arguably screwing his employer and has no moral right to that wage. Of course, a rich person paying over the nose for a Rothko is less likely to arouse sympathy than an unskilled worker losing $2000 a year from his wage, but the principle is the same.
    Allowing Harvard (or Uni of Melb) to charge uncapped fees is likely to maximise welfare if there is no prospect of increasing supply. However, if the number of places can be easily expanded, the university may find it more profitable to expand places if prices are capped.

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  10. My general impression was that many students who had completed their undergrad degrees from outside the US were somehat better prepared for grad school in economics in the US than many students who had completed their undergrad degrees in the US.

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  11. Damien – I have no information on that. But if true it is probably a selection issue. Only the most academically able and ambitious are likely to travel to the US for further study, whereas the local recruits would be drawn from a wider group.

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  12. I had thought about the uissue of selection bias, but it wasn’t clear to me which way this would go. While it is true that the foreign students bear some costs that domestic students don’t, such as transport, communication with family, distance from family, limitations in the quantity and locations they are allowed to work (in the US this is typically 20 hours of work which must be on campus). On the other hand, many US students probably face higher foregone wages from choosing to go to grad school. Many of them also face distance and communications costs as well, albeit not as severe as many international students. All in all, there is probably some selection bias, but I’m not sure that is enough to explain my impression.

    I don’t think I am alone in haviong the impression that the quality of undergrad economics degrees in good Austyralian universities is typically higher than in good US universities, while the reverse is true for graduate degrees in economics.

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