Cartels set prices. They make things more expensive. That’s what OPEC did to gas prices in the 1970s. Recently, a group of elite colleges (the 568 Group) have been accused of acting as a cartel to fix the prices students pay. unfairly limiting the amount of financial assistance they could receive. It turns out, however, that these institutions already charge lower prices to low-income students than other colleges and universities because they have so many more resources to do so. Other institutions will only have the ability to lower prices for low-income students if they have the appropriate resources to afford it.
To support this position, I collected data from net price calculators from a random sample of institutions in the 568 group and public flagship universities. I compared the net price at these institutions for dependent students from families with different levels of their expected family contribution, which is based on their level of income and wealth.
The results show that the pricing profile of public flagship institutions is rather flat. Low-income/working students, who have a lower EFC, pay a little less than other students, but not much less. And high-income/active students don’t pay anymore once they reach the lower average price of around $27,000.
The profile of the Group’s 568 establishments is much more accentuated. This starts with much lower net prices for low-income/working families, but then rises to a much higher level for students with more resources, peaking at around $73,000 (the total cost of attendance).
In the end, students from families earning less than approximately $100,000, with typical assets for this level of income, pay less in the 568 establishments of the Group than in public establishments. It could be argued that these institutions are using their cartel to raise prices for high-income students, but why wouldn’t they do it for low-income students as well?
The reason lies in the economy of textbooks. In general, economists favor competition, which forces companies to charge the price set by the market based on supply and demand. If a company tried to sell a good for more than its competitors, no one would buy it from that company. When competition is “imperfect”, companies can charge higher prices than under competition and earn higher profits. The more power a company has in the market, i.e. the less competition it faces, the more it can charge. In many cases, antitrust policy is justified to prevent consumers from paying too high prices.
However, this typical case does not generally apply to the higher education sector. Colleges and universities charge different students different prices for the same educational product. They know applicants’ family finances from financial aid forms and effectively charge a higher net price to those who are able to pay more. Students from families with limited resources are charged lower net prices because they receive greater financial aid.
Colleges and universities could use their ability to set prices to increase their profits, but, above all, they are nonprofit institutions with an educational mission. In practice, they use their pricing power to charge higher prices to higher-income students and use the extra funds to provide more financial aid to lower-income students, charging them less.
Elite institutions can charge high-income students even more and low-income students even less because they have the market power and large endowments to do so. There is less competition between elite institutions, including those in the 568 cluster, as there are fewer of them. With high demand, high-income students are willing to pay dearly to attend, allowing institutions to provide larger grants to low-income students. The extensive endowment funds of these colleges provide additional opportunities to charge affordable fees to low-income students.
Presumably, other institutions would act in the same way to satisfy a broader educational mission, but they do not have the resources to do so. In the more competitive environment they operate in, they cannot charge students with greater financial resources much more because a competitor will charge them less. Tuition fee caps set by public institutions, which are only binding on high-income students, exacerbate the problem. Internal funding is insufficient to provide larger grants to low-income students. The state could provide additional direct funding to public institutions for this purpose, but in practice this support is too low to achieve this goal.
A fundamental policy goal to promote economic opportunity is to provide greater access to college education for low-income students. Members of Group 568 have found a pricing system that helps accomplish this (although increasing enrollment of these students should be an ongoing priority). But elsewhere, a source of funding needs to be made available to other colleges and universities that will enable them to lower prices for these students. In the past, I have argued that doubling the value of the Pell Grant would be beneficial. Antitrust policy, however, targeting a select group of institutions is just a distraction that will not help achieve this goal.