Pricing Higher Education

1. Pricing Higher Education Brooke Burnette,Briannaboub, Faybeyon Robinson, Jamall Thompson

2. Higher Education • Post-Secondary Education • Occurs at Universities, Academies, Colleges, seminaries, and institutes of technology • All but community colleges are included

3. Why Higher Education? • Relevant to us as students • Understand how our tuition is determined • Low concentration • Over 7000 higher education institutions overall • 2,774 4-year degree-granting institutions • $370.6bn in Annual Revenue • Approximately $0.0 in profit

4. Industry Structure Background Competition Organization Major companies

5. Background Universities provide educational services to students, charge a price in the form of tuition, and produce human capital output ~1.4 million students earn a Bachelor’s Degree each year from a 4-year institution ~ 1.6 million people are employed by the higher education industry

6. Tuition Prices Have Been Steadily Rising

7. Competition • Highly competitive due to low concentration • Competition is hierarchical and not balanced • Colleges can be broken down into tiers based on endowments and prestige

8. Competition Upper levels: barriers to entry in the form of access to funding Lower levels: competitive pressures in the form of price discounting

9. How Colleges Compete

10. Government Funding

11. Government Funding

12. Organization: Example Inputs Internally Supplied Externally Supplied Professors Food Housing Textbooks Computers Higher Education Institutions

13. Major Companies • Low concentration, no major players • IBISworld lists top four: • Account for only 8.8% of total market share • University of California • State University of New York • University of Pennsylvania • Harvard University

14. University of California 4.8% market share. $29.7B in revenue in 2012. Tuition increased 7.6%/year on average. $6B in revenue came from it’s medical centers. Public institution. 10 campuses over California.

15. State University of New York Public institution. 64 campuses, and 465,000 students. 52% attends community colleges. Comprised mostly of New York State Residents. 2.5% market share.

16. University of Pennsylvania Private Institution Located in Philadelphia, Pennsylvania. 25,000 full/part-time students. 4,000 academic staff. 1 of 2 private universities with a vet school. Majority of income derives from its hospitals and physician practices.

17. Harvard University Private institution. Located in Cambridge, Massachusetts. Oldest university in the US. Roughly 20,000 enrolled students. $31B endowment. Endowment accounts for 35% of revenue.

18. Pricing Strategies

19. How Tuition is Determined • Sticker price or baseline tuition determined by calculations of: • Projected enrollment • Required resources (faculty, etc.) • Available funding (state and federal, endowments) • Grants and contracts • However, not every student pays the same price…

21. First Degree Price Discrimination • Charge each student the maximum amount they are willing to pay for education • Capture as much of consumer surplus as possible • In pricing higher education, this is shown by financial aid offerings

22. Financial Aid Calculations FAFSA CSS Profile

23. Example of Aid Package - Cornell

26. Tuition “coupons” • How to attract students not eligible for financial aid (determined by need) • “Merit” scholarships available • Act as a “coupon” to attract customers – in this case students – to “shop” somewhere they normally wouldn’t, or enroll in a college they otherwise may not have chosen • Often the only way for some colleges to sustain enrollment

27. Pricing High – Premium Pricing • Universities compare their prices to other similar institutions in the same state or surrounding states • Anticipate behavior of other universities – influences tuition prices • Tend to overestimate reputation and quality – price higher • If one university does not price as high as another, fear of being seen as lower-quality institution • All price high!

28. US News Top 20 Colleges

29. US News Bottom 20 Colleges

30. But…how selective are they? Top 5 Bottom 5

33. How Colleges Compete

37. Competitive Pricing Tacit collusion: Circumstance where two companies agree upon a certain strategy without putting it in writing or spelling out the strategy explicitly Universities compare their prices to other similar institutions in the same state or surrounding states Note: This is legal!

39. Public School Pricing Receive funding from state governments Two-tier pricing system (in-state and out-of-state) Diversity of prices between schools Each state often has one main “flagship” school

40. Discrimination Based on Residency Third Degree Price Discrimination – Tuition rates vary for different consumer segments depending on in-state or out-of-state status. Some collegesoffer students a discounted rate if the student is a resident of the respective state.

43. Two-Part Tariffs • The practice of selling one product or service as a mandatory addition to the purchase of an additional product or service • Examples: • Mandatory student fees • Mandatory campus residency

44. “Fees”

45. Freshman Residency Requirement In addition to tuition, some institutions require students to live on campus during their Freshman year or longer.

48. Confusion Pricing – Stanford University Example • Stanford University Freshmen have the option to live in any of the 10 dormitories or any 3 of the apartments or suites • After this is done, students then need to choose a meal plan, healthcare coverage, gym memberships, transportation options, etc. • Allows Stanford University to get close to 1st degree price discrimination

49. Meal Plans

50. Health Coverage