Market Power and Price Discrimination in the US Market for Higher Education

Published in: The RAND Journal of Economics, Volume 50, Issue 1, pages 201-225 (Spring 2019). doi: 10.1111/1756-2171.12267

Posted on RAND.org on February 15, 2019

by Dennis N Epple, Richard Romano, Sinan Sarpca, Holger Sieg, Melanie A. Zaber

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We estimate an equilibrium model of private and state college competition that generates realistic pricing patterns for private colleges using a large national data set from the National Postsecondary Student Aid Study (NPSAS). Our analysis distinguishes between tuition variation that reflects efficient pricing to students who generate beneficial peer externalities and variation that reflects arguably inefficient exercise of market power. Our findings indicate substantial exercise of market power and, importantly, sizable variation in this power along the college quality hierarchy and among students with different characteristics. Finally, we conduct policy analysis to examine the consequences of increased availability of quality public colleges in a state.

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