Wednesday, November 12, 2014

Can Price Discrimination Against Students Survive Competition?

In an earlier post, Can Price Discrimination Survive Competition, we showed that airline price discrimination was dramatically reduced following entry by Southwest.

Twenty-five years ago, the Ivy League Schools were sued by the Justice Department (my old employer) for conspiring to fix out-of-pocket costs faced by students:

The suit claimed that the Overlap members compared family contributions for financial aid applicants admitted to more than one of their schools and eliminated sizable differences to make the family contributions comparable. 
``Students and their families are entitled to the full benefits of price competition when they choose a college,`` Thornburgh said at a Department of Justice news conference announcing the suit and consent decree. ``This collegiate cartel denied them the right to compare prices and discounts among schools, just as they would in shopping for any other service.`` 
``The defendants conspired to eliminate cost competition as a factor in choosing a college,`` Thornburgh said. ``The choice of whether to consider price when picking a school belongs to parents and students, not the college or university.``

The collusion was necessary to maintain the price discrimination scheme.  Without it, the scheme probably would have collapsed:

Schools had defended the sharing of scholarship information as a way to prevent bidding wars for top students. Peter Smith, a spokesman for the Association of American Universities, said on Wednesday: ``If that`s right, I suppose you`ll get some of that (bidding) now. But I don`t have a feel for how many kids that may involve.``
Daniel Steiner, vice present and general counsel of Harvard, said he was concerned that Wednesday`s action might lead to student financial awards in excess of need. ``We have already seen in other parts of the U.S. too much evidence of bidding contests for students,`` he said.
So the Ivy's said it was OK to fix prices as long as the proceeds of the conspiracy were used for good.  

2 comments:

  1. When talking about price discrimination, the best example I can think of is kosher products. Kosher chicken, in the New York Metropolitan area is sold in Kosher Meat Markets, Super Markets and Warehouse stores, such as Costco.

    Before supermarkets starting selling kosher chicken, customers paid a premium price at the butcher. However when the supermarkets started selling kosher chicken in their stores, butchers felt forced to match the price to stay competitive. Costco, sells chicken in bulk for more than $2.00 less a pound, but you have to be a member to get the price. Stop & Shop is notorious for selling it for almost $2.00 a pound over the average butcher prices ($5.99 a pound butcher price - $7.99 Stop & Shop price) because they believe the convenience of purchasing the chicken with your other grocery shopping will capture customers not willing to drive somewhere else for a better price.

    Of course this is all legal. When I owned a women’s expensive dress store, I sold specialty bras for fancy gowns for almost 400% market up. The bras were available online for less money, but I felt that my fitting the bra and making sure it worked with the dress, the service, was worth the price and so did my customers. Even if my customer’s pointed out they could get it online for less, I would not change the price.

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  2. Price discrimination is a game played in different venues and many companies have made fortunes in their ability to mine data and find out whom to market a product or service to at the best price possible to maximize revenue for the organization. For example, individuals who travel by airplane can be shocked by the difference one pays for each seat on an airplane. Depending on how one books and selects the seat, the price can vary by hundreds of dollars. Yet, almost every seat on the plane is almost always sold. This takes tremendous marketing intelligence to find the proper mix of pricing, and when some seats should be discounted, and by how much.

    An older form of price discrimination that has existed for decades and the data that drive it has not changed dramatically, is the cost of a college education. In the market for higher education, price discrimination manifests itself by discounting tuition through scholarships, grants, and loan opportunities, commonly described as financial aid (Lawson and Zerkle, 2006). Universities can meet quotas for a diverse student population by manipulating the net cost for each category of student. Colleges will state the percentage of students who receive some form of financial aid, but the distribution of the amount is not equal. Federal Application for Federal Student Aid forms (FAFSA) is the primary tool for colleges to measure the financial need, or what the family contribution can be towards the cost of education. Families are required to fill the form out annually, and then schools evaluate the amount that the student and his or her family should pay. This allows the college or university to maximize revenue by only giving enough to get the student to enroll, or stay for the education.

    George Waldner, the President of York College, has challenged this notion and in a 2011 Forbes article he said “York College of Pennsylvania does things differently. First, we don’t operate on a high-tuition and high-discount model. Expensive schools charge $30,000 to $40,000 a year for tuition and discount as much as 50%. We charge just over $14,000 a year, and our discount rate is roughly 14%. What you see is what you will pay (Waldner, 2011).” The current tuition for 2015/2016 is listed on their website to be $18,240 for the year.

    While the York College of PA seems like a logical approach to combating price discrimination, it is reminiscent of JC Penney’s “Fair and Square” everyday pricing that was short-lived when the company returned to coupons and discounting to attract customers (Kim, 2013). Consumers are looking for deals: whether they are putting a child through college, or sitting on an airplane, they accept that not everyone pays the same price, so maybe the old adage “let the buyer beware” is a waste-of- time.

    Regards,
    Karen Whelpley




    Work Cited
    Kim, S. (June 5, 2013). J.C. Penney Returns to Coupons and Marks Up Prices. Web. (March 4, 2015). Retrieved from: http://abcnews.go.com/Business/jc-penney-admits-marking-prices-order-customers-discounted/story?id=19323843

    Lawson, R. & Zerkle, A. (2006). Price Discrimination in College Tuition: An Empirical Case Study. Journal of Economics and Finance Education. 5(1)


    Waldner, G. (June 10, 2011). How Colleges Discriminate With Price, And Why They Must Stop. Web. (March 4, 2015). Retrieved from: http://www.forbes.com/2011/06/10/college-price-tuition-discrimination.html

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