Elite University Education a Giffen Good??
September 11th, 2009From Bloomberg (ht Aviad): Princeton and Harvard Raise Prices as Economy Burns
Life on top means not having to lower your prices.
…the cost of a year as an undergraduate at Harvard and Princeton has risen through boom and bust. Tuition and fees at Harvard jumped 67.8 percent over the decade; at Princeton, they increased 43.4 percent.
That hasn’t dented demand. Freshman applications at Harvard…rose by 60.9 percent over the last 10 years. At Princeton…demand rose by 47.7 percent.
“It would appear that an undergraduate degree at a place like Princeton is actually a Giffen good…” [said Jay Diamond]
Well, not exactly. By definition, a Giffen good is one for which consumption rises with rising prices. That’s not really characteristic of the market for a university education. The reality is that the demand for spots at elite universities has exceeded the supply by various multiples for years. Moreover, foreign demand for elite US colleges and universities has exploded over the past few decades. If anything then, the stylized facts presented in the Bloomberg article simply suggest that tuitions have been set at below market-clearing prices. For this reason, elite private universities still enjoy a fair amount of pricing power.
But increasing tuition through the recession is not unique to Harvard and Princeton (see Why College Costs Rise, Even through a Recession).
If you have paid a college tuition bill recently, perhaps the sticker shock has abated and your children have been good enough to friend you on Facebook so you can see what they are doing on your dime.
What probably still lingers, however, is the desire to ask some pointed questions of the people who are doing the educating. Where does all that money go? And why can’t the price tag fall for a change?
Earlier this year, the National Association of Independent Colleges and Universities announced with some pride that the average increase in tuition and fees at private institutions this school year would be the smallest in 37 years — 4.3 percent, just a little higher than inflation.
Is this where we are supposed to stand up and cheer?
As I have argued on this blog, the market for a college education is, without a doubt, subject to the forces of supply and demand (see Enrollment Drops at Private Colleges and More on University Enrollment and Affordability). It’s just that there are anywhere from three to five times as many applicants at the “traditionally” elite universities as there are spots. Because elite private universities are oversubscribed several-fold, they are less likely to feel the impact of the recession on the demand side (although they have certainly felt the haircuts to their endowments).
For private universities without the strong brand recognition (or the endowments) of the more storied programs, the reality is likely to be quite a bit different. Private universities without well-established brand names will be forced to make a stronger case for their value proposition vis-a-vis the public alternative (see The Future of US Higher Education).
