In my last two blog posts, I have argued that college affordability is largely in the hands of higher education consumers. Only when students and families begin to change their behavior on the margin will we begin to see higher education expenditures reigned in. A recent report from educational lender Sallie Mae suggests that this behavioral change is occurring, although only time will tell if it is a long-term trend or a response to the current economic climate.
My emphasis on the demand side of the market should seem a little odd to any serious student of economics. After all, the problem with saying that demand-side factors are most important to the price of a good was pointed out by Alfred Marshall in his 1890 classic Principles of Economics. “We might as reasonably dispute whether it is the upper or the lower blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production,” Marshall argued http://www.econlib.org/library/Marshall/marP30.html#Bk.V,Ch.III)
Now I would never dispute that both sides of a blade of scissors are needed. However, the question for public policy is which blade is easiest to move? Is the higher education market like professional hair-cutting shears, where both blades move at the same time? (http://www.amazon.com/Tweezerman-Spirit-2000-Styling-Shears/dp/B0007CWVLM/ref=sr_1_8?s=hpc&ie=UTF8&qid=1347879931&sr=1-8&keywords=shears)
Or is it like a guillotine-style paper trimmer, where the upper arm slices down on the lower one? (http://www.amazon.com/Swingline-ClassicCut-Guillotine-Paper-Trimmer/dp/B00006IATG)
I argue that the higher education market is more like the guillotine-style trimmer where the upper arm (demand) is all that moves. This is in stark contrast to most markets such as the market for computers. In that market, not only do consumers shop around but producers compete on value. For example, some firms try to get ahead by providing the same computer as a competitor but for a lower price. Other firms compete by providing a higher quality computer for the same price as their rivals. In the market for computers, the actions of consumers and producers lead to lower prices.
In higher education, consumers are no different in that they want high quality relative to price. However, historically there were few good objective measures of quality in higher education and so most consumers care only about relative rankings based on inputs such as SAT scores, student-to-faculty ratios, library expenditures, etc. Thus in the higher education market, colleges and universities largely care only about their relative ranking. (http://centerforcollegeaffordability.org/uploads/Introducing_Bennett_Hypothesis_2.pdf). Any innovation that lowers expenditures, such as on-line instruction, is not used to lower tuition but is instead spent to boost their relative ranking. Institutions are stuck in a zero-sum game created by the nature of the market and what consumers want. Thus the only way to change higher education is to change what higher education consumers want and demand.