I guess most of us know that Ross Gittins is more suburban accountant than economist. But this weekend’s columns has plumbed new depths when he describes the higher education industry in Australia as an oligopoly. That would be the one with 37 public universities, 2 private universities and some 140 higher education providers which will be eligible to participate in the new deregulated world of higher education in Australia.
If he had bothered to google it, he would have found out that an oligopoly consists of a small number of essentially identical firms and where the most common measure is the market share of the top 4 firms.
The thing is that we already have a test about how competitive the market for domestic students will be. That is is how competitive the market is for international students (something which Andrew Norton has pointed out). There is a large difference in the fees charged to international students across Australian universities, attesting to the underlying competitive nature of the sector.
I do have one concern with the opening up of the market and that is that the old sandstone universities have effectively been gifted huge advantages in terms of real estate location, reputation, bequests, etc. For this reason, these universities will be able to charge much higher fees and unless there is some limit to the debt that students can be incurred under the HELP arrangement, excessive risks may be transferred to the taxpayer. I canvassed Henry Ergas’ solution in my weekend column – force the universities to share in the risk of non-repayment after a certain point. There are other possibilities.
There is one other irony to recent developments and that is the return of CPI indexation of tuition subsidies, something which the sector fought so hard to alter. But CPI indexation is being imposed all over the place (future hospitals funding, private health rebate, age pension) to the point that the CPI is the new black.
(By the way, I am not in favour of HELP debts being paid by estates (it is meant to a concessional loan) nor in the higher interest rate being imposed on existing debts.)
Here is Gittins’ fairy tale:
The greatest economic puzzle in the budget is Tony Abbott’s intention to ”deregulate” university fees in 2016. There’s a lot more to it than many people imagine.
Punters who make no profession of understanding economics think fees will skyrocket. Advocates of the change, who think they know more than the punters, say increases will be constrained by competitive pressure.
The more economics you know, the less certain you can be about how things will turn out. But you can make a pretty persuasive case that, for once, the punters may be closer to the truth than the advocates.
Abbott and his education minister, Christopher Pyne, plan two main changes: the deregulation of fees and changes to the HECS loan scheme. I’ll leave the loan changes for another day and focus on the fee changes.
At the same time as it permits unis to set their own fees for undergraduate courses, the government will cut its contribution towards the cost of courses by an amount that averages 20 per cent.
It will then reduce the annual indexation of its contribution, switching to the consumer price index, which doesn’t rise as fast as the unis’ wages and other costs.
So the government’s primary motivation is clearly to shift more of the cost of universities from itself and onto students. The 20 per cent cut will give universities an immediate and pressing reason to use their new freedom to increase the fees they charge, and the less-generous indexation will maintain the pressure for further increases.
Even so, the man who recommended that unis be allowed to set their own fees, Andrew Norton, is confident the initial increase will be no more than $6000 a year, taking annual fees to between $12,000 and $16,000, depending on the course.
The government is confident its various changes will increase competition between the unis, leading to greater diversity, innovation and quality, and giving us ”a world-leading higher education and resource system”.
The simple model of how markets work taught in introductory economics courses leaves may people with excessive faith in the ability of market competition to foster increased efficiency, constrain price increases and ensure customers get high quality.
Its promises are based on a host of limiting assumptions, which usually don’t apply. It assumes a very large number of small firms selling a homogeneous product to buyers with ”perfect knowledge” of the quality and other characteristics of what they’re buying.
In the tertiary education ”market”, however, we have a relatively small number of large and larger organisations, selling differentiated products of uncertain quality. We have oligopoly rather than ”perfect competition”.
We know oligopolists compete, but usually try to avoid competing on price rather than marketing. They have a degree of pricing power and their competition takes the form of rivalry – focusing on the behaviour of competitors rather than the needs of customers.
It’s misleading to describe giving unis freedom to set their own fees as ”deregulation”. Indeed, it’s silly to imagine higher education is anything like a market. Its ”firms” are owned by the state governments and highly regulated by the federal government. All its courses still have to be accredited by the feds which, they claim, guarantees that quality standards won’t fall.
Even the unis’ freedom to raise their fees – which the next government could reverse – comes with a string attached: fees charged to local students may not exceed those charged to overseas students.
There’s no profit motive. And, as any academic will tell you, unis are highly inefficient, bureaucratic organisations dominated by administrators. The safest prediction is that giving unis greater revenue-raising ability will lead to them employing more administrators.
How can uni fees be regarded as a ”price” in the textbook sense when people are lent the money to pay the price under a concessional loan they won’t have to repay for years?
In effect, universities have a government-regulated monopoly over a product that gives young people access to the country’s highly paid jobs. What will they do when the price jumps – abandon all ambition? Demand seems highly ”price inelastic” – unresponsive to price changes.
Our unis are protected from import competition by the high fees other countries charge foreign students. Within Australia, unis enjoy a degree of geographic monopoly. Sydney and Melbourne unis don’t really compete for students. Living costs can be high if you move to a regional uni.
The sandstone unis will be able to charge a premium that reflects their higher status, more central locations and lovely campuses. In a normal market, other unis would charge less than the big boys.
The simple model assumes consumers ensure prices reflect differences in quality. But where it’s hard to judge the quality of a product before you try it, many people reverse the causation and assume the higher the price, the higher the quality. This gives lower-quality producers an incentive to charge high prices.
In the early noughties, the Howard government allowed unis to raise their fees by 25 per cent. One small uni decided not to do so. It found its applications from new students actually fell. So the following year it put its fees up like all the others and its applications recovered.
In Britain, the Cameron government allowed unis to raise the £3000 annual fee they charged local students up to a limit represented by the £9000 fee charged to foreign students. Almost all of them took the opportunity to raise their fees to the maximum allowed.
Applications dropped by 9 per cent in the first year, but rose in subsequent years.
On the basis of all this, my guess is the sandstone unis will raise their fees a long way and the less reputed unis won’t be far behind them.
Their notion of competition will be to make sure no one imagines a lesser fee than the big boys is a sign of their lesser quality.