Sunday, June 24, 2012

Are Public Universities Like UVA Charging Monopoly Prices?

Actual Monopolist.  See United States v. Standard Oil, 221 U.S. 1 (1911).

Not a Monopolist

Earlier this week Peter Morici, an economist at the University of Maryland, opined that public universities like the University of Virginia are exercising monopoly power to drive up prices, thereby depriving numerous students of access to a high quality education.   As he puts it:

"High-quality universities have become too expensive and increasingly inaccessible because their presidents and other top leaders have failed to recognize and address the challenges and opportunities posed to their institutions by new technologies. . . . Too many well qualified applicants [for admission] are turned away, because the US population has grown much more rapidly that the residential model of higher education can accommodate. Monopoly power permits these institutions to unnecessarily run up costs, charge unconscionable tuition and afford faculty cosseted lives, whose teaching and research is becoming increasingly less relevant and responsive to our society’s needs."

Morici goes on to argue that schools should make better use of new technology to reduce the cost of providing a college education.

As a result, he said, the Board of Visitors at the University of Virginia got it right when it demanded that Teresa Sullivan, pictured above, resign.

While Morici's argument is directed to the situation at UVA, it has implications for many other public institutions of higher education as well.  Moreover, Morici's claim that UVA and similar public institutions are exercising monopoly power and gouging their citizens or, for that matter, out-of-state students, does not withstand cursory analysis.  On the contrary, every indication is that the University of Virginia, like some other Virginia universities, is providing a high quality education at a reasonable price (or lower).

1.  Schools like UVA seem to be doing something right.  As previously reported on this blog, the school received over 28,000 applications for admission to the undergraduate program, with an entering class of about 3,500, last year, a record.  Thousands of these applications came from out-of-state and around the world, despite the fact that UVA's out-ot-state tuition is over $38,000 per year.  Each of these applications is voluntary; no one compells anyone to apply to or attend UVA.  UVA is not the only public university experiencing record applications.  For instance, for the seventh year in a row, William and Mary received a record number of applications --- 13,600 applications for an entering undergraduate class of just under 1500.

2.   To be sure, the mere fact that consumers are purchasing a product voluntarily does not thereby exclude the possibility that they are purchasing from a monopolist.  There is, however, no indication that UVA is exercising monopoly power, unlike John D. Rockefeller, founder of the Standard Oil Company, pictured above.  As the Supreme Court explained in Standard Oil v. United States, 221 U.S. 1 (1911), the hallmark of monopoly and the exercise of monopoly power is output reduction and pricing above the cost of production.  However, in the past four decades, UVA has quadrupled its output, from just over 5,000 students in 1960 to over 20,000 students in 2010.  Recently, the school announced that it is increasing its enrollment further, adding 1,500 students over the next five years.   Moreover, the school's "sticker price" is $12,224 in tuition and fees per Virginia resident., far less than the actual cost of educating a UVA student.    (The state of Virginia provides a subsidy of over $8,000 per in-state student at UVA, and UVA's endowment and annual giving provide further support as well, thereby allowing UVA to charge prices that are below cost.)   A firm  that is increasing output and charging consumers less than its costs of production is not exercising monopoly power.

3.  Indeed, the "sticker price" at UVA overstates the actual cost of attendance for many students.  For instance, under the school's "Access UVA" program, students from families earning $75,000 or less pay a price of zero to attend UVA, that is, receive a UVA education (including room and board) for free.  Morici does not mention Access UVA and similar programs in place at other public universities when he claims that high tuition is depriving students access to college.

4.  Of course, out-of-state students pay much higher tuition and fees than in-state students, as noted above.  But here again, it is difficult to attribute this higher price to market power.   Like other nationally-prominent universities, UVA participates in a highly competitive market for out of state students.  An out-of-state student who can gain admittance to UVA can likely gain admittance to many other top quality schools, such as Notre Dame, Boston College, Emory, Georgetown, William and Mary, Cornell or the University of Pennsylvania, just to name a few.  An institution with so many competitors is hardly a "monopolist." 

5.   If UVA really is exercising monopoly power, then that exercise creates a market opportunity for other institutions, including for-profit online universities.  Such institutions could enter the market and attract customers who might otherwise attend UVA by charging lower tuition for a high quality product.  Indeed, such institutions, such as the University of Phoenix, already exist.  If more reliance on online education is the answer, then applications to UVA, William and Mary and other Virginia schools will begin to fall, as students forsake these schools for the likes of the University of Phoenix.  So far, the opposite seems to be occuring, thereby further contradicting Morici's argument.