Competition and selectivity in the higher education market

The importance of college education, the unrelenting rise in net tuition costs and the questionable quality of some degree programs has led to heightened public scrutiny of the higher education sector. There is political pressure in many countries to increase access in a manner that does not require a large and growing student debt burden. Top ranked schools in the U.S. with large endowments and high tuition fees have been cast in unfavorable light, and yet expanding access could diminish the selectivity that makes their degrees highly valued. At the same time innovations in digital learning have enabled scalability in education that has previously not been feasible, presenting a potential disruption in traditional higher education.

This paper explores these issues in a vertically differentiated model of higher education. Top ranked institutions offer a high quality of education where value added is gained through peer effects and limiting enrollment. The value added leads to alumni giving, or more generally, external funding through endowments. Lower ranked institutions on the other hand, offer lower quality, have open admissions and are tuition driven. Students differ in their ability to benefit from educational services.  We describe how institutions set tuition and compete for students.

Interestingly, we show that increases in external funding or endowment income lead high-quality institutions to raise tuition prices, spilling over to softer competition and higher tuition prices overall in the higher education sector. Moreover, the entry of large scale online degree programs does not necessarily imply a decrease in tuition at top ranked schools. The impact of such entry depends on how these new entrants into higher education are priced. The paper provide supportive empirical evidence to our model of competition in higher education, and specifically shows that shocks to endowment income affect top ranked university tuition fees as predicted