Price discrimination and rising costs: Is there any relationship?

Abstract

Institutions of higher learning in the US employ price discrimination, a practice that results in different students paying varying prices to attend the same school. Largely due to their ability to access personal financial information through their financial aid departments and the federal student aid program, colleges can tailor tuition rates according to an individual student's financial situation (in addition to other student characteristics). This strategy has been used by colleges throughout the history of higher education to provide needy students with the opportunity to attend college, and help optimize enrollment decisions. While price discrimination enhances welfare by enabling students who would not attend college under a single pricing scheme, it can also be welfare reducing when schools employ strategies to attract full-pay students and limit financially needy students. Additionally, students are not aware of the exact tuition that they will ultimately pay until they are accepted by the college. Although this process enables schools to offer high sticker prices and makes it difficult for potential students to compare colleges by tuition before applying, price discrimination does not appear to be a primary cause of rising college costs. © 2010 Springer Science+Business Media, LLC.