Does HELP kill price competition?

In The Australian this morning, Bruce Chapman returns to one of the few topics on which we disagree: whether there can be price competition under an income-contingent loan scheme.

“Price competition is not on because the behavioural responses are close to nothing,” Professor Chapman said. “Governments should set the fee where they think it’s fair.”

We need to be careful here in distinguishing different circumstances.

I think Bruce is largely right for the school leaver market and the yes/no decision as to whether to go to uni. This has been confirmed again by recent British experience. Despite a near tripling of average fees, demand from 18 year olds is at near-record levels.

But that is not the same as saying that prospective students do not take price into account in comparing similar programs. The figure below compares MBA costs at different unis in the Melbourne and Sydney markets (Melbourne’s MBA is very expensive, but its pricing structure is so confusing that I have not included it on annualised basis). There are fairly predictable patterns based on reputation and prestige. But Deakin, RMIT, UTS and UWS get themselves into the market by charging more affordable fees.

MBA fees

It has to be true that HELP fosters higher fees. As with any loan system, it increases the number of people with enough capital to buy. But that does not mean that particular institutions will not compete on price. Strict price control is unlikely to be desirable, because it puts less-prestigious unis at a competitive disadvantage and limits scope for product innovation.

To me the policy question is whether supporting the very high fee courses with HELP is sensible investment in human capital, or whether it is just supporting largely wasteful status competition between universities.

  1. Hi Andrew: Perhaps your argument with Bruce is about apples and oranges. Bruce’s comments seem to be about HECS HELP (typically the first, undergraduate degree), whilst you seem to be looking more at FEE HELP (typically an additional postgraduate qualification). On the other hand, if you are looking at HELP overall, I think that is wrong, there are quite different behaviours at the HECS and FEE levels. HECS provides only limited price competition, FEE much more so.
    As for student demand: the more elite universities clearly make a conscious decision to limit supply for reasons other than real student demand. Consider Australia and the UK (both operate forms of subsidised HE systems mixing both supply and demand-driven mechanisms). In the last 8 years enrolments in elite universities have risen more slowly than national averages:
    UK HE overall (2004/2005-2010/2011) – 10.9% increase in HE enrolments
    Russell Group (same period) – 4.2% increase
    AUS HE overall (2004-2011) – 32.0% increase
    Go8 (same period) – 20.1% increase
    (data sources: Australia – Dept of Ed HE student tables, UK – HESA student statistics)
    It won’t surprise you to hear that at the undergraduate level I believe there should be price uniformity, equality of access and need-based financial support. Though we are kidding ourselves if we don’t factor in social and cultural capital as determinants of which students enrol in the more prestigious universities. The day a Federal government can quantitatively demonstrate equality of educational opportunity from birth is the day they can start arguing for unlimited competition in the HE market.

  2. Tim – I think Bruce might be using the apple of low price sensitivity on the yes/no attend decision among school leavers to draw an orange conclusion on whether or not institutions would compete on price in undergraduate markets if given the chance.

    I am 99.9% confident that price differences would quickly emerge, and 95% confident of genuine price competition, even if some it is mediated as in the US by ‘scholarships’.

    Maybe postgrads are more price sensitive – with greater financial understanding and more immediate repyament obligations – but we already have a FEE-HELP finance undergraduate market in which prices differ significantly for degrees leading to similar qualifications, and we had one in the public universities until Labor closed it down.

  3. Of course there is a different policy/normative question about whether we should deregulate. I expect to conduct a Grattan project on this issue.

    One interesting issue is that the fees sandstone unis can charge show that their places are worth considerably more than what they can charge for them. At the moment, students in Commonwealth-supported places capture that additional value. While I don’t like the idea of subsidising higher fees via HELP, it’s not clear that unis capturing some of that value and spending it on research would be such a bad alternative outcome.

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