Peer Group, Distance and tuition fees: when widening university participation is still better

We study the effects of introducing a new university in a two-city model where individuals with heterogeneous innate ability choose whether to attend university. When attending university, they benefit from a peer group effect given by the average ability they share with the university. However, attendance implies the payment of a tuition fee and, for commuting individuals, mobility costs. We consider a two-city setting, and we compare a scenario with only one university with another one with one university for each city. We show that in the two-university system, there exists a symmetric Nash Equilibrium for every mobility cost and (at least) two asymmetric Nash Equilibria only for sufficiently low mobility costs. In the latter scenario, we are able to characterise the existence of two equilibria for extremely high and extremely low tuition fees. In the former, both universities exhibit the same average ability that is in turn lower than the one arising in a monopolistic system. In the asymmetric scenario, the "top" ("bottom") university instead has a higher (lower) peer group than the monopolistic one, regardless of the tuition fees. We further show that the introduction of a new university is always welfare improving.