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Capitalism in Higher Education April 11, 2010

Posted by federalist in Education, Markets.
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Our most prestigious colleges and universities are … simply corporations operated to exploit their pricing power for the financial benefit of their senior faculty and staff, and to build monuments to their alumni.

That’s Andrew Manshel in his explanatory essay, “Why Top Colleges Squeeze You Dry,” following a theme I first covered two years ago in my post on “Runaway Higher Education.” He provides an extraordinarily revealing explanation of how this market works based on his two years as CFO at Barnard College:

[A]t the beginning of my tenure as an elite school’s chief financial officer, I was surprised to learn from my colleagues that tuition and fees were not set by analyzing budget projections. Instead they were set by looking at a chart of the prior year’s tuition charges at comparable schools and then trying to predict their increases for the next year. The goal was to maintain the college’s position in the pecking order of total charges. I learned that the most prestigious and desirable institutions have a good deal of information about the shape of the demand curve for the families seeking to obtain elite higher education for their offspring. These schools have the capacity to estimate with some precision how many applicants will go elsewhere for each additional dollar they charge in tuition and fees. Each sets its tuition so as to produce a targeted “yield”—the percentage of accepted students who actually enroll there. If in any year we over- or under-estimated the price changes made by the other schools, and we had moved up or down in rank, we corrected the following year by raising or lowering tuition by more or less to compensate. We essentially followed the price leadership of the wealthiest, most prestigious institutions.

The results of this market pricing power are straightforward. First, and most significantly—given that 60% to 75% of college costs go to salary and benefits—is handsome compensation for senior faculty and administrators.

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