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Market of Education

Tuition will increase by 7 percent next year at DePaul. I asked myself: What was the reason for it? Is it because of inflation in the USA or other economic factors? Who will benefit from it? What is the nature of the market of education? Can economic theories be applied toward education?

According to economic theory, the educational market and scarcity of resources dictate the way of the universities behave. The educational market is the place where universities sell education and students buy it. The educational market has limited resources, but humans have unlimited wants. Universities compete with each other for profit and for prestige. In order to obtain these goals, educational institutions compete for the limited number of outstanding students. Students with high GPA are means of prestige of the university. On the other hand, as means of profit, students are the main customers of the university. In both cases, there is a scarcity of qualified students. No matter how big the profit of the universities and how many outstanding students educational institutions possess, universities demand more profit and more prestige.

For the “happiness” of the buyers and the sellers of education, the market with scarce resources needs to be operated when the demand and supply lines cross each other. Constant income and the taste of students are assumptions for constructing the demand line. The demand line is a relationship between enrollment and tuition which students are ready to give for education. Higher tuition leads to a lower level of enrollment. Constant technology and prices of all university expenditures are assumptions for constructing the supply line. The supply line for this market is a relationship between enrollment and tuition which educational institutions take from the students. Higher tuition leads to higher enrollment which universities want to provide. The point where the quantity of education demanded in the market equals the quantity of education supplied is the point where the supply and demand lines cross each other(see appendix). Therefore, at this point, students and universities are “happy”.

Is the theory of market, scarcity, demand and supply unpracticable toward educational world? How does DePaul set prices? From DePaul University’s Memorandum of Tuition Pricing Committee published on November 29, 1988 states:
This pricing philosophy of DePaul emphasizes . . . the market
considerations, and the impact on student ability to pay. . .
DePaul pricing patterns is at the at the middle of Illinois private institution.
. . DePaul did not gain any ground on its nearest competitors.
This means a significant room for an increase in the undergraduate tuition price without reaching the ranks of the price elite.
The committee recommends that institutional financial aid be increased to limit the impact of the tuition increase on low-income students. (1-4)

Indeed, this part of the document tells that the educational market is the guideline for tuition-setting. Moreover, for a person with some background in economics, it tells about the oligopolistic nature of this market with its price-discrimination.

What are the conditions for oligopoly? The main condition for oligopoly are firms in the market. Are there few universities in the market? A lot of students who live and want to live in Chicago area choose schools in this city. I consider that UIC, Loyola, and DePaul are only three schools with approximately the same prestige and programs of study in Chicago. Indeed, most of the students and parents of students asked by me say that Loyola and DePaul are of the same category of prestige. One of the indicators that these schools are of the same rank is the similar admission requirement. In addition, there is a price and non-price competition among the universities. The universities compete with each other for profit, prestige, and government and private funds. I think that DePaul’s admission that they did not gain any ground on its nearest competitors means that there is probably a competition between these 3 schools and its nearest competitor is Loyola.

The possibility of illegal collusion characterizes this market among educational institutions. In his book, Liberal Art Colleges, David Breneman writes: ”Sharp tuition increases, and the growing public outcry about them, no doubt contributed to the decision of the Department of Justice to launch in 1989 an unprecedented antitrust investigation of the pricing and related policies of more than 50 colleges and universities”(34). Private universities can have revenues from higher tuition and higher enrollment. UIC is a public school, and, therefore, it cannot have as much revenue from the tuition changes as private colleges. Therefore, there is a possibility of collusion between DePaul and Loyola Universities, since both of them are private, on the same category of prestige, are located in Chicago, and both raised their tuition. Consequently, tuition changes at Loyola effect DePaul more than tuition changes at Truman College or at the University of Chicago. If there will be an investigation and the government finds the agreement, managers of these universities can go to jail for the agreement that the antitrust laws in the USA prohibit.

The relation between tuition and grants is crucial, since these days a percentage of students receiving financial aid have increased dramatically. Since usually tuition increases each year, let us review changes in tuition and financial aid for the past two years. In the DePaul University Magazine, from the “Statements of Changes in Fund Balances,” on page 19, I calculated that the difference between tuition and fees 1992 and 1993 is $9,056,000 and the difference between all gifts and grants 1992 and 1993 is $4,311,000. Indeed, as tuition increases, the grants increase, but not as quickly as tuition. The financial aid adviser, Mickle Lindsey told me that grants usually increase as much as tuition, especially for needy students with a high GPA.

The analysis made by economists shows that although the changes in tuition and the number of students enrolled are negatively related, they are inelastic. In other words, many students, especially young adults, continue to attend school even if tuition increases. Student aid, age of the students, job market in the area near the university, inflation, and the level of information between prospective students and the university are important factors which affect the amount of tuition.

According to economic theory, the higher cost of production leads to the higher price of production service. From the Memorandum of Tuition Pricing Committee: “In the long term pricing tuition recommendation, it is needed to convert the current student-based pricing structure to a program /course-based pricing structure as well as increase the housing charges” (1). At DePaul, as well as in other universities, although natural science courses cost more than art and social science courses, the tuition is the same. The possible reasonable explanation to this is that the university sells not the specific courses to students, but the whole package of services. This situation reminds me of the selling of the menu in some restaurants where customers buy menus, not the specific food.

How to deal with this situation? If we assume that this situation is unchangeable for the current students, it is necessary to pick up the best food. According to economic principles, the demand for the certain product depends on the price of the substitute. I do not recommend that art students should study physics, but if an undergraduate has math aptitude he or she may may choose computer science instead of a math major. First, it is a more marketable undergraduate major. Second, although computer science courses cost more to the university, a student pays the same or almost the same price for computer science and math courses. The same principal can be applied to encourage students to go to international conferences, study abroad, and recreational trips sponsored by DePaul. Moreover, those students who like to attend exhibitions, meetings and lectures may attend them at DePaul. I do not think that art objects in the McGaw Hall are good substitutes for exhibitions in the Art Institute. The only advantage is that a student can save time because McGaw is closer to the dormitory than the Art Institute.

Private universities behave as enterprises which have the market power. The more prestigious the university, the more market power it has. Indeed, each university has unique features: location, history, curricular requirements, size, and prestige. According to the theory of price discrimination in the noncompetitive markets, these features allow especially prestigious universities to engage in price discrimination through tuition setting. Since the universities are non-for-profit organizations, their price-discrimination is not identical to the air ticket or magazine subscription price discrimination where the elderly and students receive discounts. In both cases, the firms desire for profit(not generosity) leads to a discount for poor customers. It is better to have some profit for selling than no profit at all.

The conditions for price discrimination are met. Price discrimination occurs when a business firm sells each unit of the commodity separately to consumers and charges the highest price obtainable for each unit of the commodity. In the case of higher education, universities sell courses to each student separately and charges the highest price for the courses and other services to richer students. The conditions are ability to identify different customers and the impossibility for the customers to resell courses. Indeed, a university asks for a statement of family income, and the low-income students cannot resell courses to the richer students.

Does the educational market prove the theory of supply and demand lines? Prestigious, private universities have more applicants than they wish to admit, but they do not admit all students. The second goal of the university screw these lines which are constructed only for profit -maximizing business firms. The tuition discounts called by universities as university grants may only in some cases lead to the increase of profit. The market power of the university as well as the university goals, such as enrollment level and quality of its students, are the main causes for the financial aid in prestigious universities. Outstanding students help to recruit outstanding faculty since a faculty prefers teaching with bright students. Therefore, universities admit and give discounts to the low-income students with high GPAs and test scores, and reject and give no discounts to the middle-class and rich students. I, as a low-income student with a high GPA, benefit from this system. Indeed, the DePaul grant, Pell grant, and ISAC grant cover more than half my tuition. Although grants from the federal and state governments help me, the DePaul grant provides me the biggest amount of money.

The theory of demand and supply is applicable when universities are buyers and the business companies are sellers of utility and technology. The cheaper the technology, the more of them are demanded by universities. Generally, 3 percent inflation in the country may or may not cause the 3 percent increase in tuition. Maybe costs in the specific geographic areas of utility and technology went more or less. Therefore, tuition increased more or less than 3 percent.

Education is always an important topic for people. The two goals, prestige and profit, make the behavior of universities unique and oriented toward the market. Some students face several disadvantages; other students benefit. I think that in order to deal with an organization, it is helpful to know its structure and plans.

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