Price Discrimination in Higher Education

A blog about business and economics.
Nov. 27 2012 8:24 AM

Price Discrimination in Higher Education

One important point about college tuition prices is that the skyrocketing headline figures can be misleading, since relatively few students actually pay full price. But Kevin Carey counters that precisely because paying full price has become nonstandard, we need to start thinking of this as a market segmentation strategy rather than the traditional concept of charitable financial aid:

Colleges engage in price discrimination via tuition discounting. Full sticker price is the equivalent of what a business passenger pays for a last-minute ticket bought at the airline counter. Over the last decade, colleges have gotten very good at price discrimination, with the aid of expensive consultants who employ the same kinds of algorithms the airlines use. That’s why real-dollar “spending” on institutional aid has almost doubledover the last 10 years. (I put “spending” in quotation marks here because it’s very strange to think of revenue nominally foregone in pursuit of revenue maximization as anexpense; the net result is more money, not less. I’m pretty sure airlines don’t allege in their accounting books that every dollar they charge less than the highest ticket price on a flight constitutes spending.)
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The bottom line is that for many purposes the most important number to look at is total spending per student. If total spending per student is at a manageably low level, then it shouldn't be an enormous fiscal challenge to provide the level of subsidy needed for everyone to be able to easily afford an education. But if per student spending grows faster than average incomes, then the family-level affordability challenge gets more severe every year. And if per student spending grows faster than the overall economy, then the government's ability to afford adequate subsidies gets more questionable every year.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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