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| Abigail Rose Lindner |
| Worcester Polytechnic Institute |
It’s not news that college tuition has been on the rise for years - decades, even. Adjusting for inflation, tuition, fees, room, and board for a full-time student at a four-year college increased 180% from 1980 to 2019 (McGurran, 2023). What is behind this tuition inflation? Economists Pavlov and Katsamakas (2023) design a model to test one hypothesis: Competition is driving tuition increases.
Economic theory and common sense affirm to us that competition lowers prices and improves quality. In the United States, United Kingdom, and other countries, various antitrust laws exist to limit market power and break up monopolies so as to promote competition. However, this dictum may not apply in all circumstances. One community seems to operate counter to this “competition lowers prices” paradigm: academia.
This was the observation of economists Oleg Pavlov and Evangelos Katsamakas, whose 2020 study on declining college enrollments and institutional efforts to offset resultant revenue losses and/or attract new students (Pavlov and Katsamakas, 2020) was featured in the Fall/Winter 2020 edition of OR/MS Tomorrow.
The Feedback Loops of Higher Education
In their 2020 study, Pavlov and Katsamakas (2020) deduced that, for colleges to survive despite decreasing enrollments, adjustments to faculty population, class size, and facility quality would be insufficient in the long-term and sometimes even in the short-term. In their most recent 2023 study, they explored explanations for tuition inflation among U.S. universities (Pavlov and Katsamakas, 2023).
Their conclusion: Increasing competition between universities can explain increasing tuition.
The study takes a system dynamics approach, in which the behaviour of a complex system is interpreted using internal feedback loops and other tools. They start by highlighting the feedback effects of academic competition, which often takes the form of new facility construction and non-academic amenities provision. These are stoked in no small part, they argue, by college rankings, which have, over the years, played an increasingly important role in the higher education landscape. (I myself perused the U.S. News and World Report when I was deciding on an undergraduate program back in 2018.)
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| Figure 7: Published tuition, fees, room, and board for private nonprofit four-year institutions compared to the CPI data. For both time series, the base year is 1972. Data source: College Board, Trends in College Pricing 2021, https://research.collegeboard.org/media/xlsx/trends-college-price |
New buildings and amenities require significant financial investment not only in the construction stages, but also in post-construction maintenance. Universities take risks by embarking on facility expansion and improvement projects. However, the researchers note, they also take risks if they do not attempt such projects. Figure 9 illustrates the forces and circumstances at play between two generic, peer institutions, College A and College B, that are caught in the feedback loop of higher education competition. In this graph, loops R1 and R2 form the success-to-the-successful structure and loops B1 and B2 form the positional competition structure.
What do these terms mean? Along loops R1 and R2, we start with College A having an advantage over College B. Because of this advantage, College A receives more resources than College B, which translates to greater results for College A compared to College B and, consequently, a better reputation. As the reputation of College A improves, College B will struggle, with the resources they receive, to match results and similarly boost their reputation. Thus, due to the initial advantage of College A, College B remains at a positional disadvantage, assuming that all else stays the same.
Now, along loops B1 and B2, we have the addition of College B initiating activities to enhance their reputation and better compete against College A, assuming that College A has an advantage at the beginning. If the advantage of College A is so great that College B has very little chance of catching up, additional investments on their part are unnecessary and the self-reinforcing loop R1 keeps College A at #1. However, should College B’s activity propel them closer to College A’s rank, College A will have to invest in more activities themselves if they wish to maintain or regain their advantage.
Theoretically, this back-and-forth continues ad nauseam: College A has a higher reputation. College B initiates activities to meet or surpass College A. College A responds by taking action to reposition themselves as superior. College B invests more into activities that promote their reputation. And on and on. They are engaged in seemingly interminable positional competition, in which the activity taken by one is moderated by their position relative to their competitors.
What happens if one of the colleges decides to not answer the positional competition challenge? Say that, in this example, College B runs with the status quo. Then College B will fall farther and farther behind College A in results, reputation, and, consequently, enrollment. College B’s financial situation will deteriorate and, eventually, they may be forced to close their doors. In my corner of the world (Massachusetts, U.S.A.), several colleges have closed or merged with larger ones in the last few years due to dwindling enrollment and lost tuition revenue (Higher Ed Dive Team, 2023; Larkin, 2017).
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| Figure 8: Average tuition increases in all the scenarios except S2, when one of the colleges dropped out of the positional competition |
The Model
Testing this hypothesis about the feedback loops of the higher education sector, Pavlov and Katsamakas (2023) create a duopoly of two teaching-focused colleges, A and B, that are competing for reputation, applicants, and tuition money, with the simplifying assumption that the competition is over facilities only. The applicant population in this model selects between the colleges on the basis of financial aid package received and rankings.
With College A starting at a slightly better position than College B, the researchers run the model through five scenarios. In the first scenario, the competition between the schools is introduced in the form of rankings at Year 5 of the simulation. In the remaining scenarios, College A stays their existing course while College B attempts different policies or receives different inputs: ignoring rankings (Scenario 2), raising external funds (Scenario 3), undertaking aggressive facilities buildup (Scenario 4), or a combination of the last two (Scenario 5).
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| Figure 9: The four major feedback loops in the higher education sector. The reinforcing loops R1 and R2 result in the success-to-the-successful dynamics. The positional competition between academic institutions is described by the balancing loops B1 and B2. |
Comparing the scenarios, what do we find? First, in all scenarios except for the second, in which College B ignores rankings and thus, in essence, drops out of the competition, average tuition increases for both colleges (see 8). The researchers also compared the average institutional debt and the average per-student expenditures across the scenarios, finding that the former varies while the latter follows a pattern similar to the changes in average tuition.
Altogether, the simulations of this two-college model demonstrate that competition for resources and reputation greatly impacts rising tuition in the United States and that the proposed feedback model provides a viable explanation for this tuition inflation.
Read the original paper: Tuition too high? Blame competition
References
Higher Ed Dive Team, 2023. A look at trends in college consolidation since 2016. URL: https://www.highereddive.com/news/ how-many-colleges-and-universities-have-closed-since-2016/539379/.
Larkin, M., 2017. Why Wheelock College wants to merge with Boston University. URL: https://www.wbur.org/news/2017/08/ 31/why-a-merger-wheelock-bu.
McGurran, B., 2023. College tuition inflation: Compare the cost of college over time. URL: https://www.forbes.com/advisor/ student-loans/college-tuition-inflation/.
Pavlov, O.V., Katsamakas, E., 2020. Will colleges survive the storm of declining enrollments? a computational mode. PLoS One 15. URL: https://doi.org/10.1371/journal.pone.0236872.
Pavlov, O.V., Katsamakas, E., 2023. Tuition too high? blame competition. Journal of Economic Behavior & Organization 213, 409–431. URL: https://doi.org/10.1016/j.jebo.2023.07.030.
Acknowledgments: We would like to thank Kara Combs for taking the time to review this article. Photo credit to Keira Burton for the header and Dany Kurniawan for the footer photos