An Education in Price Discrimination
colleges charge more to those most willing to pay
many colleges hire expensive consulting firms to help them manage a complex process of marketing, admissions, and pricing. The firms design social media campaigns and produce the flood of glossy brochures that pours through the U.S. postal system every year. They take the wealth of detailed financial information that parents are required to disclose on the Free Application for Federal Student Aid, or FAFSA, and feed it into the same kinds of complex algorithms that airlines use to constantly change the price of seats in the months, weeks, and days before a flight.
The real market tuition price in the big middle of the higher education sector is probably about $25,000, not the $50,000 or $60,000 you might have heard. Applying to college there isn’t like being vetted to join an exclusive social club. Nobody is really judging your worthiness for financial aid. College is just another service with a price.
Colleges engage in price discrimination. They try to charge full tuition to parents who are willing to pay and give financial aid to those less willing to pay.
Price discrimination is widespread in today’s economy. When I taught economics to high school seniors, I used the catch-phrase “price discrimination explains everything.” Because whenever a student had a question about a business practice, the answer often turned out to be that the practice allowed the firm to segment the market into those willing to pay high prices and those willing only to pay low prices. Airlines charging lower ticket prices to flyers who book long in advance or who fly standby is a classic example. Stores offering coupons are another. Cable TV bundling is yet another.
Often, price discrimination causes those who can afford it to pay the most. Business travelers typically find it impractical to fly standby or to book far in advance, so they tend to bear the brunt of price discrimination in air travel.
But what Carey points out about colleges is that the wealthiest parents often are not the ones willing to pay the most. They are shrewd about the game colleges are playing, and they hold out for big discounts. Instead, it is the upwardly-mobile student whose parents are not aware of the steep discounts that are available who ends up paying closer to full tuition.
Re: “price discrimination explains everything.”
Consumers rarely ask, What explains price discrimination? They take it for granted that airlines, colleges, and auto dealers engage in price discrimination. This is striking because people have a presumption that discrimination is unethical in many other economic contexts. Norms against discrimination in markets can't be reduced entirely to concerns about disparate impact.
College is the exception. Airlines have zero PR about the virtues of ticket price discrimination, whilst colleges proclaim that differential tuition is crucial to social justice. "Access" and "ability to pay" have no currency in the airline industry, but take center stage in rhetorics of differential tuition, taxpayer subsidies, and student loans.
Kevin Carey has noticed that the patterns of differential tuition don't match the rhetoric. Deeper questions arise.
A question in empirical economics of college pricing: What mechanisms explain real-existing differential tuition?
A question in normative economics of college finance: If college is a "transformative" investment, with a pot of gold at the end of the rainbow, then why are subsidies necessary at all? If the promises of college mission statements were reliable, then open credit markets would finance "access" for worthy students, at market interest rates.
Consider the special case of admissions and differential tuition at a selective college.
Admissions are a matching game, in which each side—the college and the student—must choose and be chosen. A match of admission (by the college) and acceptance (by the student) yields a matriculant.
A subset of matriculants pay tuition and thus are also *customers* of the college.
Matriculants interact, form relationships, and constitute a peer group on campus. Thus they are also *inputs* to one another’s education-and-experience on campus.
Matriculants at residential colleges inhabit *a total institution,* which encompasses academics, counseling, communal meals, “residential life,” participation in governance, part-time employment ("work-study"), athletics, clubs, leisure organizations, friendship, service, worship, and community.
In a nutshell, matriculation at selective, residential college is a matching game in which selection effects produce emergent treatment effects through peer-formation in a total institution on campus. Colleges charge differential tuition in an attempt to "compose a class" that maximizes selection-and-treatment effects, subject to a budget constraint.
Vagary of yield occurs because applicants may decline offers of admission in the matching game. Vagary of yield substantially limits the accuracy and the precision of the endeavor to compose a class.
Actuarial (statistical) judgment is generally more accurate and efficient than clinical judgment. Standardized admissions tests (SAT/ACT) and high-school GPA (adjusted for curriculum difficulty) are somewhat accurate predictors of an applicant’s academic performance, conditional on matriculation.
Clinical judgment in admissions involves idiosyncratic bias & inconsistency, and favors affluent or sophisticated families, who know how to work the system.
Admissions officers at selective colleges rely increasingly on clinical judgment of an applicant’s promise. When admissions officers assess applicants, they purport to judge the whole person. They are the gods of gatekeeping.
By contrast, Admissions officers at selective colleges rely increasingly on actuarial judgment in forecasting yield or acceptances by students. They are the geeks of price discrimination.
Enrollment algorithms predict, ever more accurately, an applicant’s maximum willingness to pay tuition, and thereby reduce consumer surplus and increase producer surplus (the college's net revenue).
Gods of gatekeeping and geeks of differential tuition are usually two different animals in the admissions office.