Sunday, February 7, 2010

College Tuition and Price Discrimination

To listen to the public statements of university officials, you would think that colleges offer scholarships and reduced tuition to needy students because of their idealistic views about equality of opportunity. While for some university administrators this may be a consideration, we must also realize that colleges have strong incentives to price-discriminate, much as airlines and hotels do. Notice that a college scholarship can be thought of as a selective price reduction, given to some customers but not to others. A college would like to charge high prices to students who are eager to come and lower prices to those who are not likely to come unless they get a price break.

A story in the Wall Street Journal of April 1, 1996 is headlined "Colleges Manipulate Financial-Aid Offers, Shortchanging Many". The subhead is "Early admittees and others are eager so schools figure they'll pay more".
The story begins by describing the experience of an applicant to Johns Hopkins, who told the admissions people that he planned to be a pre-med major. According to the story, he got a smaller scholarship than he would have received if he had said he planned to major in the liberal arts. The story reports that the school used a formula for administering financial aid that gave less aid to "students that are statistically more likely to enroll, so that less aid is needed to entice them." The story compares these techniques to the "yield management" techniques used to price and fill airline seats and hotel rooms.

The story reports that at Carnegie-Mellon and other schools, "eager freshmen accepted through the early-admissions program than comparable students who apply later." An admissions department bureaucrat at Carnegie-Mellon is quoted as saying "If finances are a concern, you shouldn't be applying any place early decision". (I know his quotation doesn't quite parse, but it is probably an acceptable expression in the dialect of English (known as deanish) that is spoken by university administrators.)

According to the story, about 60% of the nation's 1500 private four-year colleges use statistical analysis "in some form" to dole out aid. An admissions bureaucrat at another school, whose job title is "Dean of Enrollment Management" says "Maximizing revenue is the buzzword of educational administrators these days."

The story reports that at Carnegie-Mellon, after students receive their financial aid offers in the spring, they are invited to fax the school any better offers that they receive from other colleges. Carnegie sets aside more than $250,000 for them in what is known as the "Reaction Program" which generally meets competing offers for desirable students. Students who choose early admission don't qualify for the Reaction Program, since they must agree to withdraw all other applications on acceptance of early admission.

http://zia.hss.cmu.edu/miller/eep/news/tuition.html

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