Colleges: the new Cartels

It’s not a mystery that college is expensive in the United States; and that private institutions are priced higher than all others. But have you ever paid attention to the way prices of private institutions rise? It seems as though when one university raises their price, the others follow suit. In many ways, these colleges operate like cartel oligopolies. Characteristics of cartels include: monopolistic behavior and maximizing on profit through implicit collusion; and when you think about it, that is exactly what private colleges do.

 

In today’s economy, students and their families look for the best education. Measured by test scores, gpa etc. students pray and hope they will be accepted into the selective private institution of their choice. In reality, they are smart to do so since the economic return on private institutions is large. The problem is that private institutions know this as well. The demand for these schools is so high that top institutions have their hand choice of kids and also the ability to increase their sticker price whenever they choose. In this way, private institutions behave exactly like a drug cartel would: capitalizing on their demand and maximizing profit.

 

However, not everyone shares this mindset. Many rationalize the increased sticker price from private colleges and argue that they are valid. Unlike state colleges and universities, private institutions do not receive tax dollars or federal funding. Private colleges keep costs rising in order to fund the difference. Others argue that today, kids have expectations higher than they did in the past. Things that were once luxuries like Internet and air conditioning are now requirements and colleges must update in order to continue attracting prospective students. There are even some economists who argue the most logical argument of them all: inflation. Universities, like all business, are subject to inflation. Food, water, fuel etc. increase for them like it does for everyone else; therefore tuition must rise. Although these arguments make sense, none of them account for why there is never a decrease in tuition price.

 

I believe that for private institutions, it is easy to convince the board of trustees, etc. to raise prices especially to account for inflation, external sources etc. However, trying to convince all decision-making parties to lower prices based on economic shifts is not so easy. Why lower tuition costs when there are thousands of applicants prying at the door for a spot in that private institution?  The reality is: despite economic issues and causes for tuition raises, the rising demand for college has tolerated increasing prices and that exceed economic forces. Private colleges and universities continue to behave like a cartel simply because they can. If people are willing to pay it, then why not continue to use implicit collusion to drive funds? If people continue to allow these tuition raises then they cannot expect a change in tuition anytime soon. The future availability of the “American Dream” is not the fault of the Universities. They are a business, and just like any other business, they capitalize on profit. It is however, the fault of those who continue to support this cartel-like business.

Inelasticity in relation to college tuition

The pure joy I felt after receiving my first college acceptance letter was a feeling I will never forget. It seemed all of my hard work paid off until I looked at the price tag for the university I applied too. $62,000 per year was listed on the schools website. That’s more money than both of my parents make in a year. How can colleges expect students fresh out of high school to pay for this kind of education. The schools I applied to are fantastic colleges that have been around for over 100 years, but unfortunately most of them carry a steep price tag. How is it that college tuition for prestigious universities have been increasing?

The demand for such prestigious colleges generally seems to be highly inelastic. Schooling in general is usually inelastic because the price gets higher but the schooling or education stays the same. As time went on upper level education has steadily increased in price creating mountains of debt for students. The problem in many of the universities is quality of education has not increase only the price has. The government has increased the demand for higher-level schools, but the supply has not been able to match the demands.

I believe another issue society has burdened the teenager with is the idea of “ivy greatness”. Who knows what colleges really look for in students, but I believe society has put the idea in my head that the Ivy education is the best education. I’ve grown up thinking “the ivy’s are the best” and if you don’t go to one you won’t be successful. This in fact isn’t true, its more up to the individual than the school. With prices, being so outrageous to attend Ivy’s is it even worth to attend if you’re going to be in debt for 15 years? While reading the Forbes article “The Reason Why College is so Expensive is Actually Dead Obvious” I discovered universities roughly cost the same amount anywhere you go. Some colleges give out more aid than others equaling the tuition of a college that doesn’t give out as much. The supply of education is inelastic in comparison to the price, but the government doesn’t take control of this.

In almost all of Europe all education is free. That is pretty incredible. All of my cousins in Croatia and Slovenia do not have to pay for a college education. Many colleges might be better in the United States, but why can’t the government reduce the prices to be a bit more affordable so middle class can have a high education too. My parents have been hit hard by the recession, but I’m not the poorest of the poor so getting complete aid for college is pretty tricky. Almost finishing high school, I’ve come to terms with the fact I don’t have to go to an Ivy League $200,000 program in order to succeed. As for tuition increasing in the future, I believe it certainly will. Tuition seems to rise along with inflation and age. I feel poorly for my brother, he’s 13 and his college education might be over 70 grand a year. How could an education possibly be so expensive. It’s pretty tragic so many people with outstanding potential wouldn’t be able to get a higher education because of money.