Tag Archives: price discrimination

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.