Price Discrimination can be seen anywhere and one of the most general examples we can see in the airlines. The airlines charge customers with varying prices widely depending on the type of class selected that is the economy, business or first class. The price is discriminating on the basis of class. When the customer booked the flight, whether it is a round trip part booking, the duration of the passenger stay in the destination before flight returning and various other factors, the price would still descriminate (Morrison). The question is that why there is any discrimination? As all the passengers are cohabiting the same airplane so why some passengers have to pay more and some have to pay less?
This is the same situation with the Colleges and Higher Education Prices. Colleges and universities also discriminate similarly in the case highlighted of the airlines. The colleges discriminate students on the basis of their class as well. There are many international students and local students studying in college (Morrison). Some of us pay higher fees where others are studying on the basis of financial aid. So why there is discrimination among the students. All of them are studying in the same College and in the same class. So why some of the students have to pay more and the others less (Morrison). As we can see in the case of airlines, they offer extra services and facilities to the customers who have paid more and belong to first class. Similar is the case with Colleges that they also provide less services and facilities to the students who have paid less and vice versa (Morrison).
The financial aid policies can be regarded as a pricing discount for the students so those availing it means that they have paid less for the College studies. Whereas the others who pay the full amount without discount are provided more services (Waldner). These elements described show that there exists a monopoly in the discrimination of College prices. So, the question is: How the net tuition (Price) level is chosen to each student and offered on what basis? Are these prices the same or are there significant differences? How does the price discrimination perfect monopoly choses the price that each customer is to be offered? Yes, I agree that Colleges disriminate Prices.
The term Price discrimination is the selling practice of the same service or good with various prices to different customers. When the market is imperfectly competitive than price discrimination occurs (Professorbainbridge.com). This happens when the product is sold by the producers reflecting the price where the buyer is willing to pay. An example can be that if you have your own business, you would sell your goods to those customers who are willing to pay higher prices. But in order to do so you have to check the worth of the customers and have to read their minds (Waldner). The case of price discrimination is the consumers are inferred by the seller to pay a certain price willingly by different means (Waldner).
Another common example of this discrimination of price can be seen when you watch a movie. It can be seen that different people pay different prices for tickets. Some pay high whereas some pay less. Rich people pay more and the students pay less. This is because students on average have a disposable income that is less so that is why the prices are discriminated to bring it to the level of the students. As we can see that is why students are getting discount as their willingness to pay high price for the ticket is less as compared to the rich citizens (Waldner). The cinema charges more to those customer who are affluent and give them special seats as they have paid more. So, we can see that price discrimination is everywhere. The more a person pays the more facilities and benefits he can avail (Waldner).
The main problem with price discrimination is that the seller doesn’t know how much the buyer is willing to pay. So the seller must find various ways to figure out this information. In the example of a movie theater, the seller (Cinema) infers the pay willingness with the help of the students status and demographics (Ho & Sita). Also, the seller needs to create such situations which prevents every customer to pay the same. The main aim of any business is to earn profits and it can only be possible if there is a price discrimination (Ho & Sita). If all the consumers pay the same than the margin of profit is less. So, in order to avoid this the sellers infer the information of finding the status of students. Another thing to avoid by the seller is that of arbitrage (Ho & Sita).
When we can see the example of Colleges, they also price discriminate. The prices of the fees of college are listed in the website. So, how come there are students that pay less and those who pay more. The discrimination in College prices means that one student is studying with the help of financial aid. It means that these students have got special discount in the prices. Whereas, the other students without financial aid pay the highest Price. The scholarship and financial aid students are given subsidies and discounts as they are unable to afford the full tuition fees. So, this create price discrimination among the students and in Colleges (Ho & Sita).
The Colleges also follow the same process as we can see in the example of movie theater above. Colleges also infer and reap out the information of each of the students by making the student fill out detailed financial information during the college process of application (Waldner).
Colleges are aware that each student have different family background and status. Some of them are unable to pay full fees whereas some of them can afford full fees. So, they discriminate the prices so that each tuition fees package is individualized (Dynarski). In this way the Colleges ensures that not every student pay the least price. Another thing arises is that there is no concept of arbitrage in the college education. As it is not a movie ticket which can be sold at a higher level, the college fees cannot be resold to the other. So, it eliminates the risk of arbitrage for the students (Ho & Sita). It can be seen that many of the top universities of the world might cost less than a degree a student obtains from the college of local state. In 2012, we can see that Harvard had given a financial aid of around $ 12,000 to its students whose families have been earning less than $ 65,000 annually. These students have to pay zero fees as they were studying in scholarship. Whereas the other Harvard students have to pay full fees. However, gaining admission in Harvard is difficult, only 6% students got admission there (Dynarski).
This can be regarded as a positive development as the discrimination in prices makes the higher education affordable for significant number of students. President Obama have threatened the Universities and colleges to reduce price discrimination otherwise He will cut of the financial funding of the universities (Dynarski). Those policies that hampers the school’s ability to discriminate prices controls the increase in the prices of tuition fees. So, the lower income students are unable to get access to these colleges as they cannot afford (Dynarski). The graph indicates that the prices sticker of the Four year nonprofit institutions increased to around 60% in the years between 1994 to 2014.
One of the ultimate example of price discrimination is paying for the College. Colleges tailor their tuition fees according to the status of each student. As the Colleges are not getting good at this prices of price discrimination, they are charging higher sticker prices for those who are Elite so that the less unfortunate students can get access to higher education (Becker). So, we can say that financial aid and price discrimination is positive as it gives the unfortunate and low income students the chance to receive higher education (Dynarski).
In short, we can say that the discrimination in price can lead to increased profits for the seller. In the case of a nonprofit institution, these profits are reinvested in the College itself in the form of financial aid and scholarships to the needy students. There are certain reforms that are needed in the Higher education (Becker). As the increase in the ticker prices is more likely to backfire. This can reduce the schools generosity to give financial aid making the low income individuals unable to access College (Waldner). Thus, we can say that the Price discrimination in colleges essentially means charging different prices from each student for the same level of service.
Becker, Gary S. The economics of discrimination. University of Chicago press, 2010.
Dynarski, Susan. “The behavioral and distributional implications of aid for college.” American Economic Review 92.2 (2002): 279-285.
Ho, Ben, and Sita Slavov. ‘Higher College Tuition Costs Don’t Actually Spell Disaster For Students – US News’. US News & World Report. N.p., 2014. Web. 8 Dec. 2014.
Morrison, Richard. “Price Fixing Among Elite Colleges and Universities.” The University of Chicago Law Review (1992): 807-835.
Professorbainbridge.com,. ‘Price Discrimination, Financial Aid, And Higher Education – Professorbainbridge.Com’. N.p., 2014. Web. 8 Dec. 2014.
Research.stlouisfed.org,. ‘Page One Economics – St. Louis Fed’. N.p., 2014. Web. 8 Dec. 2014.
Rothschild, Michael, and Lawrence J. White. “The analytics of the pricing of higher education and other services in which the customers are inputs.” Journal of Political Economy (1995): 573-586.
Waldner, George. ‘How Colleges Discriminate With Price, And Why They Must Stop’. Forbes. N.p., 2011. Web. 8 Dec. 2014.