An analysis of tuition and enrollment in higher education : measuring price elasticity

The hierarchical nature of higher education, in which schools compete in small enclaves for the best students, and competition for higher rankings among private, non-profit liberal arts colleges has prompted some schools to drastically increase their tuition in order to correspond with the price changes of rival institutions. Since top liberal arts schools operate with sizable excess demand for enrollment spots, significant tuition alterations generally do not affect the quantity of enrolled students at these schools. However, the extent to which increases in tuition affect the quality of enrolled students has not been thoroughly examined. This study directly analyzes the sensitivity of student quality to a change in tuition. This analysis includes the development of a theoretical model that relates student quality to price by maximizing the educational reputation of a non-profit, liberal arts college subject to its tuition revenue minus its cost of operation. This model is used to derive an equation for the price elasticity of student quality and then is tested empirically by measuring the effect of tuition changes on student quality. The results show a more significant negative relationship between full tuition and student quality for lower ranked schools.