An Education in Price Discriminationcolleges charge more to those most willing to pay
Arnold Kling
Kevin Carey writes,
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.
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