Tuition too high? Blame competition

Abstract

We develop a feedback theory that includes reinforcing and balancing feedback effects that emerge when colleges compete for reputation, applicants, and tuition revenue. The feedback theory is replicated in a formal duopoly model consisting of two competing colleges. An independent ranking entity determines the relative order of the colleges. College applicants choose between the two colleges based on the rankings and the financial aid offered by the colleges. Contrary to the conventional wisdom that competition lowers prices and benefits consumers, our simulations show that competition between academic institutions for resources and reputation leads to tuition escalation that negatively affects students and their families. Four of the five scenarios -- rankings, a capital campaign, facilities improvements, and an excellence campaign -- increase college tuition, institutional debt, and expenditures per student; only the scenario of ignoring the rankings decreases these measures. By referring to the feedback structure of academic competition, the article makes several recommendations for controlling tuition inflation. This article contributes to the literature on the economics of higher education and illustrates the value of feedback economics in developing economic theory.