The Competitive Use of Price Discrimination by Colleges

Abstract

In this paper we present a model of colleges as single-product, price-discriminating, output-maximizing firms. Our model predicts that an increase in tuition sticker price, combined with an increase in institutional financial aid grants, will lead to increases in both net revenue and enrollment. Our overall conjecture is that colleges in recent years have made more and better use of price-discrimination as a response to increasing competitive pressure. Based on simple econometric tests, we conclude that the 1991-95 period of increasing sticker price, aid, enrollment and net revenue is consistent with our model.Firm; Firms; Price Discrimination; Tuition