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Tuition too high? Blame competition

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  • Pavlov, Oleg V.
  • Katsamakas, Evangelos

Abstract

In this article, we develop a feedback theory that includes reinforcing and balancing feedback effects that emerge when colleges compete for reputation, applicants, and tuition revenue. The feedback theory is replicated in a formal duopoly model consisting of two competing colleges. An independent ranking entity determines the relative order of the colleges. College applicants choose between the two colleges based on the rankings and the financial aid offered by the colleges. Contrary to the conventional wisdom that competition lowers prices and benefits consumers, our simulations show that competition between academic institutions for resources and reputation leads to tuition escalation that negatively affects students and their families. Four of the five scenarios – rankings, a capital campaign, facilities improvements, and an excellence campaign – increase college tuition, institutional debt, and expenditures per student; only the scenario of ignoring the rankings decreases these measures. By referring to the feedback structure of academic competition, the article makes several recommendations for controlling tuition inflation. This article contributes to the literature on the economics of higher education and illustrates the value of feedback economics in developing economic theory.

Suggested Citation

  • Pavlov, Oleg V. & Katsamakas, Evangelos, 2023. "Tuition too high? Blame competition," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 409-431.
    • Handle: RePEc:eee:jeborg:v:213:y:2023:i:c:p:409-431
    DOI: 10.1016/j.jebo.2023.07.030
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    Cited by:

    1. Evangelos Katsamakas & Oleg V. Pavlov & Ryan Saklad, 2024. "Artificial intelligence and the transformation of higher education institutions," Papers 2402.08143, arXiv.org.

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    More about this item

    Keywords

    Tuition inflation; Higher education; Feedback economics; Duopoly; System dynamics; Academic competition;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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