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.
What's the next best solution? Seems there is a lack of understanding of this among parents and students. And not exactly price transparency from the colleges,
For colleges that accept Federal money, either research grants or Fed guaranteed loans to students, (or possibly even tax-exempt status as an educational institution?), they should be required to publish a list of how many students paid how much in tuition, broken down into parental income deciles.
"most willing to pay" is measure, to some extent, of the desperation of lower class workers trying to help their children. It's certainly disgusting, tho not too surprising, to read that middle ranked schools will give bigger tuition breaks to upper middle class kids than the lower middle class kids.
Education loans of students should be done by the schools and by private credit organizations, not by the Federal gov't. All such aid should be ending except for STEM fields.
This is interesting, but not particularly outrageous or scandalous. Universities are behaving like any normal business selling a high priced service. They employ standard pricing tricks or "discrimination" to maximize their revenue.
We should encourage parents + students to be more savvy consumers of higher education. And support free market reforms which will reduce costs and provide more options for the masses.
That might well be part of the problem. I suspect another issue is that price discrimination plays hob with budgeting if you are not really careful to line up spending and revenue expectations. It must be difficult to plan on X-revenue per student when the actual numbers vary all over the place when actual admissions happen. Probably that is one reason why colleges rely so much on donations, but of course that adds another problem if those are lumpy.
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.
What's the next best solution? Seems there is a lack of understanding of this among parents and students. And not exactly price transparency from the colleges,
For colleges that accept Federal money, either research grants or Fed guaranteed loans to students, (or possibly even tax-exempt status as an educational institution?), they should be required to publish a list of how many students paid how much in tuition, broken down into parental income deciles.
"most willing to pay" is measure, to some extent, of the desperation of lower class workers trying to help their children. It's certainly disgusting, tho not too surprising, to read that middle ranked schools will give bigger tuition breaks to upper middle class kids than the lower middle class kids.
Education loans of students should be done by the schools and by private credit organizations, not by the Federal gov't. All such aid should be ending except for STEM fields.
This is interesting, but not particularly outrageous or scandalous. Universities are behaving like any normal business selling a high priced service. They employ standard pricing tricks or "discrimination" to maximize their revenue.
We should encourage parents + students to be more savvy consumers of higher education. And support free market reforms which will reduce costs and provide more options for the masses.
That might well be part of the problem. I suspect another issue is that price discrimination plays hob with budgeting if you are not really careful to line up spending and revenue expectations. It must be difficult to plan on X-revenue per student when the actual numbers vary all over the place when actual admissions happen. Probably that is one reason why colleges rely so much on donations, but of course that adds another problem if those are lumpy.