Saturday, April 26, 2003

Colleges get price discrimination 

The debate raging around campus of late is differential tuition. Proposals range from an extra $15 for upper division credits to a surcharge for the business school's courses that could cost a full-time student an additional $750 a year. A fellow economist in my department has been commenting on the discuss list, and of course to economists differential tuition makes sense because it tends to make things more efficient.

But we typically teach in economics that we charge different prices for courses to different groups because the demand for courses by the two groups differ. We call it "price discrimination". The one in higher demand (and less elastic, for you other economists reading this) should get the higher price. We tend to justify differential tuition in terms of costs, but this strikes me as the argument that sports teams raise prices because player salaries rose. It's wrong because it's not a marginal cost (at least not if you view ticket pricing as an annual event rather than pricing for renewable season tickets -- if you do the latter, the problem's trickier, but that's getting far afield.) My friends in astronomy may want to charge differentials for tuition to support their expensive equipment, but they will only be able to do that if astronomy degrees are sufficiently attractive and their prospective majors see few good substitutes around campus or elsewhere.

As I teach to my principles of economics students, all scarce goods get rationed somehow. If you decide not to use price as the rationing mechanism, then something else fills the bill. It can be first-come, first-served, or class ranking or credits completed. It can be a tie-in sale (you only get this class if you're a major). You can ration by grades; many high-demand programs impose high GPA minima for entrance to the majors. In times of tight budgets like we're having here, it's not at all surprising that we would hear of plans to convert from non-price to price rationing.

There's also a nice catch to this. If you ask for lab fees, say, for your chemistry course, the fees are not included in the calculation for need-based financial aid. But differential tuition is counted, so it leads to offsetting increases in aid packages and no net-cost change at the point you make decisions on how many courses to take (you will have more loans to pay off later perhaps, but how sensitive are students to that change? Hard to say.)

Lastly, we find campus estimates are always based on existing students simply accepting changes in relative prices of classes without reaction. The argument against differential tuition is usually that it induces some students to choose degrees by price. Well of course they do; that's why I've spent six months shopping for the best place to send my son this fall. (He will not be going to SCSU.) Financial aid packages are just another form of price discrimination. (I recall a story of an economist whose son was accepted to an elite eastern school; father went to the admissions office to negotiate price, since "we all know it's price discrimination". He was shown the door.) People respond to incentives, as Steven Landsburg teaches, and students are going to change majors because of prices. How much is the empirical question of elasticity. Economics is a good substitute for a business degree, and we're not in the business school. So if they raise their price, I say that's meat on my plate ... if only the administration would give me knife and fork. (Which they should, lest they think it a good idea to give the business school more money to teach fewer students.)

I write the last to see if David is still reading.

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