Friday, October 30, 2009

When does competition lead to higher prices?

When firms compete on quality:
Law school tuition has been rising since 1994, reaching as much as $50,000 per year when combined with fees at law schools such as Yale and the University of California at Hastings.
A new report (PDF) by the Government Accountability Office ... says the key reasons for higher costs are competition for higher rankings and "the move to a more hands-on, resource-intensive approach to legal education,” according to Inside Higher Ed and TaxProf Blog.

I suspect that competition would lead to lower prices if students paid their own way. But education is an industry like healthcare and academic journals where the people who consume the product do not pay for it.


  1. $50k per Year - Just like Owen EMBA ;-)

  2. I'm sure things have changed in the x years since I chose between law school and grad school in economics. One factor (a minor factor, but a factor) was that grad students in economics typically got financial support, whereas law school students typically did not.

    If that hasn't changed, then it would still be true that law students are paying all (or most) of the costs of attendance (including the foregone earnings chunk). What, then, can we make of the notion that competition between law schools is not leading to lower prices (tuition)?

    I suspect it's this. Schools need to send quality signals to potential students. Students interpret higher quality as leading to higher lifetime earnings. Higher lifetime earnings justifies the higher tuition (and then some). So law schools are engaged in status competition which increases demand for their products, and thus allows them to raise their prices.

    Now some law schools should be losing in this competition, so we might expect to find a class of "elite" law schools where real tuition is rising, and a class of "non-elite" law schools where real tuition is falling, or growing slowly.

    Becomes an empirical question, right?

  3. I agree with doc. The expected return of graduating (ie. higher income career, lifetime earnings, etc.) is, in my opinion, correlated with the quality of education. From experience from a recent job fair at UTA (state funded Univ.), the better jobs were being offered at TCU (private Univ.) as a recruiter explained to me. There were only so many job positions available and more of the higher paid positions went to the other schools of "higher quality." Now, I know this is an INCREDIBLY small sample to make the generalization of the said correlation, but it happens.

    What drives up the prices from these competitions are the product/quality differences, and the arms race to get better and better. In terms of "product" differences, it could range from having a football team in the NCAA. In terms of "quality" differences, it can be how well that football team is ranked in the NCAA. All of these differences from competitors (Universities) increase the demand for universities and students' willingness-to-pay for those schools of higher product/quality differentiations.