Saturday, May 18, 2013

Price discrimination in education

The average tuition discount rate for college freshmen is now 45%. So even though the sticker prices are very high for many schools, the actual amount that students are paying is only slightly more than half of that.

Colleges price discriminate, which means that they charge different prices to different students. They do that because they are like hotels and airlines--they have very high fixed costs by very low variable costs. They may not do it all that well, but the cost structure pretty much guarantees that they have to try.

I recall that many years ago I tried to explain to the director of financial aid at the college I taught at for many years the idea that what he saw as financial aid was actually a pricing strategy that economists called price discrimination. He was outraged at the very idea that he was doing something called "price discrimination." I realized then that the college would always be struggling to get students when they had no clue as to what they were doing in granting aid. (The school I taught at, I am told, has a tuition discount rate substantially higher than 45%. I am out of the loop so I do not know if the people currently in charge of admissions and financial aid have figured out that they are pricing like hotels and airlines.)

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