Price Elasticity

Case Study #2
Price Elasticity in Quality of Students
ECN 202
Edward Rodden

Price Elasticity

While most studies of price elasticity as it relates to colleges comes in the form of the quantity of students that go to college when there is an increase in price, a study of the quality of students was done by Adam C. Wright in a thesis paper done for the University of Richmond in 2008 (Wright, 2008). In his thesis Wright looked at what effects, if any, a tuition increase has at a private, nonprofit, liberal arts college, to the quality of the students that the school attracts. By setting up a model to compare to student quality to tuition increases, Wright was able to measure the price elasticity between the two. Wright's theory was that upper level schools raise tuition to enhance the perception of the quality of the education provided by that institution along with the physical resources available to students. By knowing that tuition hikes at upper level schools will have little effect on that schools ability to draw top notch students, the colleges are able to take that extra revenue and improve the quality of the education provided. Not wanting to lower their actual or perceived quality, private college presidents had little reason to keep their prices down; the worst thing a president could do during this time was to lower tuition relative to that of a less prestigious university (Breneman, 1994). However, the price elasticity of rising tuition compared to student quality at lower level schools, Wright contended, was not necessarily as evident. What Wright did was establish a model of a lower level, private, non-profit schools and compared the effects of tuition increase on incoming student quality. To
Price Elasticity

measure student quality Wright compared average SAT scores and the percent of incoming students who graduated in the top ten percent of their high school class (Wright, 2008). Wright also placed more weight on where students graduated in their high school class as compared to SAT scores due to the fact that schools could adjust their self-reported data in order to increase rank (Wright, 2008). In essence schools could choose not to report exchange students or part-time students, therefore, class standing could be a more durable value. In conclusion, Wright found that an increase in tuition by upper level schools, basically a “follow the price leader” theory did not necessarily have a pronounced effect on the price elasticity of tuition increase to student quality, the effect on lower level schools held a different finding (Wright, 2008). In the lower level schools, tuition increases and its effect on student quality were affected by other factors such as location, quantity of students, or degree offerings. By using the model that Wright established he concluded that the magnitude of the price elasticity between tuition and quality of students at the lower level school did create a negative effect (Fig 1).

Price Elasticity of Tuition Increase to Student Quality

Fig 1

Price Elasticity
References
Breneman, D., (1994). Liberal Arts Colleges: Thriving, Surviving, or Endangered? Brookings Institution. Washington D.C.
Wright, A., (April 28, 2008), An Analysis of Tuition and Enrollment in Higher
Education: Measuring Price Elasticity of Student Quality. Retrieved from
Dspace.lastworks.org/bitstream/handle/10349/658/08ECON-WrightAdam.pdf.