Chapter 25: Promote Competition Based on Value, Not Reputation

In most areas of human economic endeavor, competition manifests itself in lower prices. If company A has competition from companies B, C, and D in selling a good or service, the competition will lead A to lower prices to fend off loss of sales to B, C, and D. In higher education, however, it seems as if competition leads to higher prices, as schools seemingly “compete” to spend greater sums of money. There seems to be an academic “arms race” resulting in vast increases in spending on, for example, luxurious student recreational facilities, expensive superstar professors, or football coaches.

Schools largely compete on reputation, quintessentially measured by the U.S. News & World Report college rankings. Spending more money can lead to higher rankings. To get more money, schools raise tuition rates and engage in incessant searches for grants and gifts. Since third parties fund a large portion of the bills, students are relatively insensitive to price. Very little college advertising speaks of being “the low cost alternative” or the “best bang for the buck,” unlike with, say, automobile advertising.

A fundamental problem is the lack of information—quality and value are related to results, and colleges are secretive and sometimes even ignorant about their success in educating students or preparing them for a vocational future. A second problem is that third-party funding and the non-profit nature of most institutions dull the incentives for colleges to try to minimize the price of their services. The FAFSA form enables colleges to price discriminate, choosing sticker prices higher than they would be in the absence of such information.

The most critical element in any solution is the obtaining of value-added measures of what students gain from college, both in terms of knowledge and in terms of other attributes, such as critical learning skills. This requires nudging colleges to provide more information in a useful fashion. It requires that true cost to the student be made available accurately and early. It might depend on changing compensation systems for key employees to emphasize the value-cost relationship, rewarding officials who manage to keep costs down.

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