Cartels fix prices. They make things more expensive. That is what OPEC did to gas prices in the 1970s. Recently, a group of elite colleges (the 568 Group) has been charged with acting like a cartel to fix prices students pay by unfairly limiting the amount of financial aid they could receive. It turns out, though, these institutions already charge lower prices to lower-income students than do other colleges and universities because they have far more resources available to do so. Other institutions will only have the capacity to lower prices for lower-income students when provided the appropriate resources to afford it.
To support this position, I collected data from net price calculators from a random sample of institutions in the 568 Group and public flagship universities. I compared the net price at these institutions for dependent students from families with different levels of their expected family contribution, which is based on their level of income and assets.
The results show that the pricing profile at public flagship institutions is rather flat. Lower-income/asset students, who have a lower EFC, pay somewhat less than other students, but not a lot less. And higher-income/asset students pay no more once they hit the lower average sticker price of roughly $27,000.
The profile at the 568 Group institutions is much steeper. It starts with much lower net prices for lower-income/asset families, but then rises to a much higher level for students with greater resources, reaching a peak of roughly $73,000 (the full cost of attendance) in 2019-20.
In the end, students from families earning less than roughly $100,000, with typical assets for that level of income, pay less at the 568 Group institutions than at public institutions. One could argue that these institutions use their cartel to increase prices for higher-income students, but why would they not also do so for lower-income students?
The reason rests in textbook economics. In general, economists favor competition, which requires firms to charge the price set by the marketplace based on supply and demand. If a firm tried selling a good for more than its competitors, no one would buy it from that firm. When competition is “imperfect,” firms can charge prices higher than in a competitive setting and earn higher profits. The more market power a firm has—meaning the less competition they face—the more they can charge. In many such instances, antitrust policy is warranted to prevent consumers from paying prices that are too high.
This standard case tends not to apply to the higher education sector, however. Colleges and universities charge different students different prices for the same educational product. They know the family finances of applicants from financial aid forms and effectively charge a higher net price to those able to pay more. Students from families with limited resources are charged lower net prices because they receive larger financial aid awards.
Colleges and universities could use their price-setting ability to increase their profits, but, crucially, they are nonprofit institutions with an educational mission. In practice, they use their price-setting power to charge higher prices to higher-income students and use the additional funds to offer greater financial aid to lower-income students, charging them less.
Elite institutions can charge higher-income students even more and lower-income students even less because they have the market power and large endowments to do so. There is less competition between elite institutions, including those in the 568 Group, because there are fewer of them. With high demand, higher-income students are willing to pay a lot to attend them, enabling the institutions to provide greater subsidies to lower-income students. These colleges’ extensive endowment funds allow for additional opportunities to charge affordable prices to lower-income students.
Presumably, other institutions would act similarly to satisfy a broader educational mission, but they do not have the resources to do so. In the more competitive environment in which they operate, they cannot charge students with greater financial resources much more because a competitor will charge them less. Caps on tuition set by public institutions, which are only binding for higher-income students, exacerbate the problem. There is insufficient internal funding to provide greater subsidies to lower-income students. The state could provide additional, direct funding to public institutions for this purpose, but in practice that support is too small to accomplish that goal.
A fundamental policy goal to promote economic opportunity is to provide greater access to college for lower-income students. Members of the 568 Group have found a pricing system that helps accomplish this (although increasing enrollments of these students should be an ongoing priority). But elsewhere, some source of funding needs to be made available to other colleges and universities that will allow them to lower prices for these students. In the past, I have argued that doubling the value of the Pell Grant would be beneficial. Antitrust policy, though, targeted at a select group of institutions, is just a distraction that will not help accomplish this goal.