Why Colleges Engage in Price Discrimination

Colleges should continue to engage in price discrimination so lower income students may continue to obtain higher education.

The relationship between tuition costs and the economy is a complicated one. Since 1978 the cost of college tuition has increased by 1,120%. This rate is four times higher than the consumer price index. The result of this rapid increase has been spun by the government and to the media with a negative undertone without understanding of the full story. The government and media portray the cost of college as unobtainable to the majority of the country. However, what they do not understand is the difference between full list price and average net price and ultimately how this difference explains the expanding cost of college. For example, Harvard’s full price of tuition is $59,800 per year, but the average price paid by students and their families who qualify for financial aid is significantly less at $15,550. Similar to how the government operates progressive income taxes, colleges are following a progressive pricing model. Due to the high number of applicants each year, colleges are able to be selective in choosing who attends. Similar to most businesses, when you have an overwhelming demand, increasing the prices follows suit, or in this situation increasing tuition costs.

Price discrimination occurs when businesses charge consumers different amounts for the same goods and/or services. Colleges are capitalizing on price discrimination, which at first may seem unjust, but ultimately works in favor of the majority consumers. Take an airline company for example. Ticket prices are higher for business travelers than for the average consumer. Without this difference in prices, flying would no longer be affordable to such a wide range of individuals. College tuition works in the same manner. By examining how much each individual student and/or family is able to pay through financial aid applications, the school can tailor the amount of tuition to match. Unfortunately, this means that the wealthy group of students has to pay a higher price in order for less fortunate individuals to attend. Federal taxes work in the same manner, which is ironic considering the majority of the fight against rising tuition costs come from the government itself.

In order for secondary education to be expansive to the majority of the population, price discrimination and tuition increases are part of the price. In the end, the investment is worthwhile as the economic return on college education is positive for both the individual and economy at large. The larger earning potential for individuals as well as lower unemployment rates, the better off the economy is. Before President Obama and the media make another statement regarding their desire to lower tuition prices, they should consider how this decrease will effect the amount of financial aid available to lower income students.

8 thoughts on “Why Colleges Engage in Price Discrimination

  1. Jake Weimar

    Usually if a school does not spend their endowment then they lose it the next year. Giving incentive to try and raise prices continually. Secondary education is in such high demand, it really is a necessity to be successful in most careers.

  2. Craig Friend

    Although at the surface, it appears that price discrimination is unfair as why should any one person pay less than anybody else, it actually makes sense. Compare it to a tax bracket system where those that are more wealthy, pay more in taxes.

  3. Linda Sun

    Good Article. It is interesting and make sense to view the tuition fee discrimination as a tax system which protects the lower income families and social wealth. As a international student, I pay the tuition fee five times than the local students. If it means that I am helping those who have the talent but cannot afford the college tuition, I accept it (though not much happy…).

  4. Jonathan Zimmermann

    As always with your posts, good article.
    I think that the most frightening issue about the increase of the tuition costs is that the actual costs borne by the universities raised at a similar rate (i.e. the profit margin of colleges didn’t significantly increase), and are now extremely high in an international comparison. Having rich people paying a lot of money for university wouldn’t be a major issue if that money was “transferred” to poorer people, but it turns out that most of it is simply “consumed”, which is inefficient.

  5. Chang Tian

    I think your discussion would be even more complete if you add a comparison how much tuition fee has increased for students qualified for a financial aid. If the data shows the changes is still greater than the inflation speed, can we conclude that the government is “suppressing” over higher education?

  6. Chang Tian

    I think considering the changes on the ratio of students that can receive financial aid to the total students, and the how the qualification of the threshold changed is significant when discussing whether one financial aid policy is indeed benefit lower income students.

  7. Chris Pedersen

    I think that your argument is flawed because the cost of attendance for those the average family receiving financial aid has risen as well. The amount people receiving financial aid has not significantly increased in real terms over this period of time. That means that a family that could just afford to send their child to college in 1980 with financial aid would not be able to do so with increased prices. These policy makers are making these comments on behalf of these families not so much on behalf of the families that are choosing to send their children to elite private schools. (Or elite out of state public schools)

  8. Yi Deng

    It is a very point on studying the cost of tuition. I have couple things on my mind. First one is that before we go to college, we have paid nothing for our elementary, middle, and high school institutions. So the university might think,”well, you have saved a lot of money and now you have to pay for this higher level education”. Second one is that the increasing of our tuition is followed by the inflation. As the prices go up, the tuition also goes up.

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