I. Introduction
From 1989 to 1991 the Departments of Justice (DOJ) looked
into several private, exclusive colleges for price fixing. The investigation
eventually concentrated on the Overlap group of 23 colleges which is about half
of the most exclusive colleges in the United States.[1]
Even though the Overlap group denied the price-fixing accusation, in 1991 they
discontinued their regular spring meetings which dealt with calculations of
pupils’ neediness, and stopped gathering ever since. The eradication of the
Overlap meeting offers a rare chance to test if the need-based support is
mainly a charitable movement or a way to internalize externalities among
pupils, in which colleges produce students’ desired environments rather than
the conditions pupils would actually undergo if they acted individualistically.
A lot of students would like his college to keep a policy of providing aid
grounded on the need for others while excluding him from the policy, but by
having this, the college’s student body and ability to attract donations are
affected.
One of the goals, therefore, is determined if the same pupil
would prefer a need-based aid regime, knowing there are no exemptions or a
regime wherein all pupils get the exemptions he desires for himself.
II. An Economist’s View of the Antitrust Case – Part One: A
Review of Theory
The antitrust case against the Overlap colleges stressed the
economic logic of both the district and appeal courts.
A. The Market for College Education
For economists, students act as both the consumer (by using
up the good and services) and producers (by investing in human capital) of
college education. Such role is hard to distinguish.
To some extent colleges differ in their
technology for producing education. Extremely selective colleges have
technology wherein students must have comparable preparation and skill so that
they can interact and facilitate each other's education. On the other hand,
less selective colleges use a technology wherein pupil dealings are not that
vital, still well-prepared and competent students are important since they act
as role models and raise the college's attractiveness to draw in good faculty.
Having students acting merely as
consumers of education, colleges would plainly provide tuition, goods and
services bundles, and pupils would just select among those packages until the
market for college consumption cleared. Likewise, if students are employed by
colleges as inputs into the production of education, then colleges would just
provide salaries and pupils would, choose among them. Since pupils must consume
and produce at the same college, colleges' packages, and salaries should concurrently
clear the markets for pupils serving as consumers and as producers.
The students are expected to produce
offers of comparable value at various colleges, albeit the packages may differ
in terms of composition. On one hand, due to education production technology
that works best when students are mixed with peers with equal producing value,
several colleges end up having pupils who are somewhat homogeneous in their
values as producers, and as a result, such colleges supply their entire
students with the same bundles. On the other hand, colleges using other
production technologies wind up with pupils who are heterogeneous in their
value as producers and as a result, provide very heterogeneous salaries. Since
their valued pupils will be given roughly the same goods and services as their
other students (who contribute less as producers), the “wages” of quality
pupils must vary from those of their peers so to clear the market.
Meanwhile, for the following
discussion, students are classified by their value as producers and not by
their characteristics that may augment their value.
B. Merit Aid
Up to now the study has been looking at the notional tuition
and notional wage the college would be willing to enroll a student as a
consumer and be willing to pay to each pupil as a producer, respectively.
Colleges that are highly selective bear high notional tuition but also have
students serving as important producers who have high market wages. Because
these colleges have to stringently allocate admission, their list tuition (the
amount that college call “tuition” will be referred to as “list tuition) is
conspicuously way below the notional tuition that would clear the market for
likely consumers of their education. Their list tuition nets out a major
portion of the wage they offer their students. The colleges are able to impose
list in equilibrium by taking in only pupils having high market wages.
In order to maintain its market equilibrium, merit
scholarships are the discounts that individual students must have from each
college’s list tuition. A series of list
tuitions and merit scholarships are market clearing if their net is equivalent
to the differences of notional tuitions and wages.[2]
However, there is greater possibility for notional wages to
appear as merit scholarships at colleges that do not have admission to
guarantee that their pupils are comparatively homogeneous. At relatively
non-selective colleges, notional and list tuition are the same and important
pupils can be encouraged to enroll only through high merit scholarships. At
selective colleges with somewhat homogeneous students, setting tuition for
those who did not contribute to the production process and then giving every
enrollee an equivalent merit scholarship would be pointless. Lastly, highly selective
colleges charging list tuition at a level that contains their usual student’s
wage have the difference of notional tuition and notional wages for their
student to be often negative.
C. Banning Merit Scholarship
On account of merit scholarships, valuable pupils are drawn
in less selective colleges, where they’d atypical compared to the other
students. A common principle is that merit scholarships are crucial in keeping
equilibrium among heterogeneous students within colleges, while list tuition and
college admissions procedures preserve equilibrium between colleges. The
disparities among student’s merit scholarships have a significant role in
letting nonselective colleges to effectively attract highly valuable pupils; in
contrast, it has little effect on highly selective colleges.
There would be significant effects if a college having
non-selective admissions opted to use merit scholarship to manage a
heterogeneous student population. On the other hand, little change would occur,
if a college having highly selective admissions offered wide ranging tuition
subsidies and provide small merit scholarship to deal with the small variations
among its pupils.
D. Needy Students
Given a perfect capital markets for investing in human
capital, underprivileged students would make optimal investments. Meanwhile,
imperfect capital markets may induce disadvantaged pupils to make suboptimal
investments in their educations while cause society to experience slower
growth owing to their decisions impact
on other students’ human capital acquisition. Pupils who are under investing
are unlikely to be optimized as producers and they would also provide a college
too small incentive to supply education quality, and too much incentive to
decrease cost. Thus the aid for underprivileged pupils can raise and encourage
efficient human capital investments.
III. An Economist’s View of the Antitrust Case – Part Two:
Financial Aid and the Overlap Procedures
A. Financial Aid
When a student applies for financial aid, a major measure is
his Expected Family Contribution (EFC) which attempts to identify how much a
family allot for a student’s college education on the basis of income, assets,
other family members’ college expenses, and other expenditures like health care
costs. EFC together with the expenses of attending a particular college the
student goes through are used by the federal government in regulating federal
scholarships such as Pell grants and the amount of federally guaranteed loans
for which a student qualifies.
EFCs show what the students need but they do not decide what
intuitional scholarship the student would be getting. Also, a college may
decide to provide scholarship to a pupil, but the amount would be at the
college’s discretion. Many colleges consider a student’s EFCs (the willingness
of the family to pay their EFCs) in their admission decisions so that they are
not bombarded with scholarship requests for admitted students who can’t afford
the costs.
Worthy of notice is the federal government’s promotion of
the use of need-based policies by mandating that any student receiving one
dollar of federal support must only get need-based support. As a result,
colleges that make extensive use of merit aid regardless having needy student
population will be taxed.
Colleges in the Overlap group and some outside the group
willingly committed themselves in offering each admitted student a guarantee
that he would be able to afford the cost of attending if his family settled
it’s EFC, he was eager to work for a modest salary, and he was willing to take
out modest loans. Colleges that made this pledge supplied an aid package to
every pupil that settled the entire gap between the cost of attending and his
EFC. Finally, these colleges committed
themselves to provide grants based on the student’s needs – more grants to
those who are gravely needy since they have lower capacity for work compared to
less needy students.
B. The Ostensible Purpose of the Overlap Group
Note that such commitments caused the students’ needs to be
the colleges’ financial obligations.
Some of differences in the Overlap group’s calculation of
EFC with that of the federal government can be due to the fact those colleges’
voluntary obligations generated rules which could be worked around by
financially convoluted parents. Students enrolled in selective private colleges
are suspiciously from families having a high degree of financial sophistication
wherein a significant fraction of their income is gained from capital. In
contrast to wage and salary earnings, capital income is flexible and easy to
conceal for a short period such as the time when children are in college.
Therefore, for the calculation, Overlap colleges decided not to automatically
allow capital income losses, contrasting that of the federal calculation which
enabled it due to federal tax purposes. Basically, these colleges are against
the increase of their financial obligation owing to parent who uses tax
shelters to mask their income.
The last difference between Overlap and federal calculations
was that the former’s formula “respected” other colleges’ charge to older
siblings.[3] This reduces the risk exposure of colleges,
which would have been otherwise open to extensive variation in their obligation
to each student.
Meetings held by colleges in the Overlap group allowed the
sharing of ideas regarding what established modest amount of work and loans,
given that aid bundles did vary in composition among Overlap colleges. Also,
students could and did use greater aid packages as a strategic advantage to
acquire more grants from competing colleges.
Although the Overlap meeting offered no enforcement
mechanism to restrain any deviant colleges, it would make it hard for colleges
to pursue one policy while claiming to pursue another without the deception
becoming noticeable.
Colleges are concerned that without the Overlap calculation
and meeting, their pledge to fully accommodate the needs would be taken
advantage by cleverer parents who are less poor, and their judgment over how to
interpret confusing parental data would in the end make the formula of need too
subjective that a college could alter its policy while claiming not to have
done so, thereby easily allowing free-riding. They proposed that if
need-determined aid became less feasible due to the subterfuges, they may
probably a call for the abandonment of their full coverage of need, their
policies of taking in individual without consideration of need, and their
varied student populations.
IV. An Economist’s View of the Antitrust Case – Part Three:
DOJ’s Allegation
DOJ’s allegation was that the Overlap meeting enabled
involved colleges to increase list tuition and to gain higher tuition revenue.
The first of the many reasons behind DOJ’s allegation was
the fact that DOJ relied on theory for firms in which consumers do not produce
and employees do not consume, without modifying the theory in terms of higher
education. Second, it relied on standard arguments regarding price fixing and
price discrimination without making adjustments for higher education. This caused
practical problems for DOJ. Under standard assumptions, arrangements to let
people’s fees to rely on their need would form price fixing and price
discrimination. As a result, federal polices would be the key anticompetitive
force in higher education. The federal government would act as the main
organizer of need calculations, and would punish colleges that disregard a
student’s need and in lieu grant merit aid, and fixes the tuition paid by tens
of thousands of Pell Grant receivers. Federal policy is anchored on the notion
that underprivileged students are extremely price-sensitive when they invest in
education, and that decreasing such sensitivity would rectify their
cost-benefit computations, wherein these adjustments rationalize any probable
distortions to their human capital investments. The twofold argument is that
underprivileged students’ extreme price sensitivity will resolve unwarranted
cost- and quality- decreasing incentives that their conduct would otherwise
provide colleges, and that these rectifications explain any plausible
distortions to colleges’ cost and quality choices. If DOJ were to admit the
validity of these arguments, then it would also have to admit that need-based
support does not directly amount to price fixing and price discrimination. On
the other hand, if it were to be refuted by the DOJ, then it must denounce the
Overlap group. The DOJ’s attempts to get away from such binds are through
giving support to need-based aid while claiming that the Overlap meetings were
pointless for administrating need-based aid; and making only ephemeral appeals
to conventional wisdom with regards to price fixing and price
discrimination.
Lastly, it is difficult to restructure DOJ’s logic since DOJ
argued that the Overlap meeting established per se price fixing, for instance
there are two firms regularly meeting and agreeing on prices and in such cases,
DOJ is not obligated to prove that the firms use certain methods to increase
prices or to expose any impacts on price.
A. The Allegation that the Overlap Procedures Helped the
Colleges Collude on List Tuition
The most direct allegation by the DOJ was that the Overlap
meeting aided in the colleges’ collusion on list tuition. If DOJ was right then
the meeting’s effect is expected to be seen on the level of its list tuition,
and that tuition announcements are made after Overlap meeting. In addition, if non-Overlap colleges did not
actively conspire but did seek for price leadership from the Overlap group,
then it is expected to witness tuition announcements from non-Overlap colleges
after the meeting.
B. The Allegation that the Overlap Meeting Allowed Colleges to
Obtain Excessive Tuition Revenue
The primary allegation was that the Overlap meeting let the
colleges gain more tuition revenue. DOJ suspected that the colleges were taking
in students too cheaply – this implies that Overlap meeting permitted the
colleges to offer students too little need-based policy and too little merit
aid. Therefore, removal of meeting would
cause colleges’ admissions and aid polices to be more costly.
Moreover, the DOJ also argued that the eradication of the
meeting would not alter the colleges’ student population’s neediness. But this
would logically obliged the colleges to have rent, so to put an end to their
meeting, maintain their policies, and just impose lower fees to students. It
was also assumed that the colleges would choose their aid policies with no
sensitivity to its price.
C. The Allegation that the Overlap Meeting Gave too Little
Need-Based Aid to Needy Students
DOJ suspected that the Overlap calculation as well as the
meeting that implemented it permitted the colleges to offer lesser need-based
aids to underprivileged individuals.
A large portion of the DOJ case was devoted to proving that
the Overlap formula provided pupils higher EFCs than their federal EFCs.[4]
Furthermore, colleges were not required to present grants to cover any share of
the gap between a student’s cost of attending and his federal EFC, and DOJ did
not chase after colleges that made no pledge in guaranteeing the gap. If
colleges decided to provide grants equivalent to any percentage of the
mentioned gap, then it generates a claim for underprivileged pupils that is not
available under federal financial aid policy. Definitely, DOJ would not have attempted
to stop colleges from doing self-imposed commitments unless the pledge covered
the whole gap. In addition, given
greater competition, colleges are expected to cover smaller percentage of the
gap as they attempt to evade being flooded by underprivileged and lower quality
students.
On one hand, the DOJ
claims that after Overlap arrangements, colleges are required to give more
money to needy students; on the other hand, colleges claim that after Overlap
meeting, they would be obligated to give more money to non-needy students and
lesser to the needy.
D. The Allegation that the Overlap Meeting Let Colleges Give
Too Little Merit Aid
Lastly, DOJ alleged that the Overlap meeting provided the
colleges opportunity to distribute less merit aid.
Supposed that the Overlap meetings were efficient in having
colleges’ aid-giving behaviors to perfectly correspond to their declared
polices and that no-merit-aid policies would have deteriorated without the
Overlap arrangements. Theory implies
that this deterioration would increase merit aid relatively within the Overlap
colleges, however the striking rise in the mean amount of merit aid would not
be in equilibrium. The DOJ’s claim that students attending highly selective
colleges would be given much more merit aid was likely because of too literal
application of theories on simple firms.
V. Did the Overlap Procedures Maximize Colleges’ Objectives or
Students’ Welfare?
The exclusion of the Overlap meeting produces a rare
opportunity to recognize the core objectives.
A. Banning Merit Aid
Although Overlap colleges, given that they are highly
selective, could only hope to save a small amount on grants through banning
merit aid, still, they may have been able to save up on a lot of administrative
effort and have made connivance on list tuition easier, if they participated
in such collusion.
Banning merit aid
might also help colleges maintain education production technologies wherein
contact among pupils of rather similar qualities is important. Without the ban,
individual students could not be expected to internalize the impacts of their
merit aid on their own education since he would gladly acquire more aid if he
could, and prevents other students from receiving merit aid.
If forced to make a choice, a student may go for banning
merit aid that makes him acquire a smaller value of aid but also assures him a
group of peers wherein they have similar abilities.
B. Need-Based Aid that Maximizes Colleges’ Welfare at the
Expense of Better-Off Students
If colleges have substantial market power, then the
need-determined aid may be pure redistribution – it may fulfill societal goals
such as assisting the underprivileged students make optimal investments in
human capital, although there are no unusual benefits for privileged pupils at
the college. In this case, the people who manage colleges get utility from
helping needy pupils or accomplishing social objectives, and they are likely to
use all the possible rent that could be earned from this benevolent activity.
However, under such scenario, colleges could not unilaterally participate in
redistribution since pupils who do not value the charity, would at all times
accept the proposition of a college that did not participate in charity.
Competing colleges rely on collusions on the redistribution formula (and charge
privileged students more) in order to participate in redistribution. Collusion
would be somewhat difficult to sustain, however if such could be maintained,
then the colleges could gain rent provided they are willing to spend it on
charity for underprivileged students.
C. Need-Based Aid that Maximizes Students’ Welfare
Suppose need-based aid maximizes student’s wellbeing, albeit
individual pupils would like to desert such aid while keeping everyone else to
it, then a college offering assistance based on need fulfill social objectives
and has unusual benefits for the admitted students. Furthermore, need-based aid
draws in capable and varied applicants and allows a college to yield a student
body that is more significant than privileged students. Such aid may also attract contributions from
private donors who desire to improve college access.
This regime would need some coordination in order to be
maintained, since each student would like to either cheat the aid system, or
defect from the regime. If every pupil were to defect, need-based aid systems
and packages only attainable thru this regime would seize to exist.
Coordination makes it difficult for a student to imply the sense of being
poorer than he truly is and make it hard for officer to deviate from the
formula he’s supposed to follow. It also keeps colleges from pretending that it
is delivering a particular policy when in fact they’re following a different
one. This helps in assuring colleges that their policies will gain rewards in
relation to their admissions pool and bequests.
VI. Empirical Strategy and Identification Issues
The first test would be on where discontinuation of the
meeting led to the financial aids of Overlap colleges to be more akin to those
of highly selective colleges that never engaged in the meeting. Second would be
on whether the discontinuation of the meeting led to the more gradual increase
of tuition (as compared to before) at Overlap colleges. Finally, test is on
whether need-based aid is merely redistribution or a method of internalizing
externalities. Unfortunately, such tests
are biased toward finding that need-based aid is pure redistribution, since
pupils who might be expected to respond to the regime transformation through
altering their revealed preferences are unlikely to have fully realized the
regime change. In a nutshell, people are likely to respond to how the regime
change impacts them personally but under-react to the regime modifications’
more general effects.
A. Empirical Strategy
There are three sections of results: effects on financial
aid, on tuition, on students’ revealed preferences. The sections have
fundamentally analogous empirical strategy. It is a difference-in-differences
approach that depends on two sources of variation:
1. The
variation overtime that stems from the antitrust action. A change in the trends
of aid, tuition and preferences is expected to be gradual.
2. Only
some highly selective colleges took part in the Overlap group. Overlap colleges
are expected to have altered their behavior much more than non-Overlap colleges
after antitrust action. Also the rather different behaviors of the groups
(Overlap and non-Overlap) prior to the antitrust action are expected to have
converged after the antitrust action.
If markets were competitive prior and subsequent to the
antitrust action, then tuition of colleges that provide alike packages would
inevitably act very similarly. On the contrary, if DOJ was right in suspecting
collusion on tuition during the Overlap meeting, then Overlap colleges would
have chosen (higher) tuition levels that could be backed by non-conspiring
colleges. However it is plausible that non-Overlap colleges would have let the
Overlap groups to be the price leader and would have behaved as if they were
colluding as well.
Moreover, antitrust action significantly raised media
attention to tuition of highly selective colleges. All highly selective private
colleges endured public relations fallout as a result of the examination and
felt pressure to limit tuition hikes due to intense public scrutiny.
B. The Basic Specification
The strategy is helpful in integrating essential disparities
among colleges that are relatively consistent, such as the differences
attributable to location, offerings, size, undergraduates’ living arrangements,
and the institution’s structure.
C. Possibilities for Omitted Variable Bias
Omitted variable or other simultaneity bias could occur if
there are determinants of college behavior which varied inadvertently with the
antitrust action and differed more for Overlap and non-Overlap colleges.
There is probability of bias from the financial markets only
if the changes affect the Overlap colleges more than non-Overlap colleges.
However, this probability is reduced by calculating straightforwardly for
various market indicators.
Meanwhile, it is worth mentioning that Overlap colleges do
enjoy a degree of likeness to other college thus making coordination feasible.
VII. The Effects of Antitrust Action on Financial Aid
While Overlap colleges reasoned that the meeting assisted
them in achieving their objectives of wholly covering need and only allocating
aid based on need, the DOJ argued that meeting was pointless for attaining such
objectives. In order to verify these claims, there is a need for empirical
evidence on college’s policies in grating aid before and after antitrust
action.
The National Postsecondary Student Aid Survey (NPSAS) is the
source of detailed data on pupils’ financial aid bundles and their family
backgrounds and also deals with before and after antitrust action. The NPSAS was also used to analyze the
enrollment of underprivileged students. The Integrated Postsecondary Data
Systems (IPEDS) which encompasses colleges’ racial composition of their whole
freshman class per year is used to observe the enrollment of minority
pupils. The NPSAS is for the
individual-level, while the IPEDS contains institution-level data.
A. The Grant and Aid Functions of Overlap and Control Colleges
For every additional amount in the parent’s income, it appears
that among non-Overlap colleges prior to the antitrust action, a student’s
grant typically drops by a certain amount. But the amount of this decline is
lower compared to the decline in the student’s grant among Overlap colleges.
The Overlap colleges’ grants in comparison to the control group seems to be
more generous for the highly underprivileged and more elastic with regards to
parents’ earnings.
After the antitrust action, control colleges did not seem to
have modified their grant functions, as opposed to the Overlap colleges that
appeared to have adjusted their grant functions to be less elastic as regards
to parents’ income. The decrease of Overlap colleges’ student grant for every
1000 dollars of parent’s income is greater before the antitrust action,
compared to after. In general, Overlap colleges do not seem to have adjusted
their grants to their most underprivileged pupils.
In examining aid, note that institutional aid does not
translate to total aid, which normally consist of federal aid, (and probably
state aid and private aid as well). The results suggest that Overlap colleges
decreased the total aid by a certain amount for every thousand dollars of
parent’s income, this amount of reduction is rather greater compared to the
decrease among the control colleges. The control colleges did not significantly
modify their aid functions as a reaction to the antitrust action, however,
Overlap colleges decreased the elasticity of their functions without
substantially altering the aid for their highly underprivileged students. After
the antitrust action, aid within Overlap colleges also dropped.
B. Specification Tests
Given that Overlap and control colleges have roughly similar
endowment per pupil, they responded similarly to variations in the financial market.
The financial market and endowments, albeit declared to be important, do not
have an impact on the estimated coefficients.
C. How Overlap Affected Grants and Aid for Students’ with High
SAT Scores
The interpretation for the results focus on verbal SAT
scores since they are substantially more discerning than math scores for
student applicants of highly selective colleges. It is vital to point out that
non-Overlap colleges’ grant and aid functions are more elastic in relation to
parents’ income once the college’s predisposition to provide more grants and
aid to pupils having high SAT scores is taken into consideration.
Prior to the antitrust action, the Overlap colleges seem to
have augmented grants just reasonably for higher SAT scores; afterwards, Overlap
colleges seem to have begun offering rather higher grants consequent to higher
SAT scores – however, they did not achieve the same level as that of
non-Overlap colleges.
Lastly, it seems that before the antitrust actions, the
Overlap colleges did not offer supplementary aid for higher SAT scores. In
addition, it seems that increases in aid for higher SAT scores explain the
majority of the rise in grants for higher SAT scores at Overlap colleges after
the antitrust action. Thus the need calculation evidently became fairly more
generous for higher scoring pupils.
D. The Family Background of Students who Enroll
The findings indicate no statistically significant time
trend in parents’ income at control colleges either before or after antitrust
action. However, Overlap colleges’ parents’ real earned income was dropping
yearly in the period immediately preceding the antitrust action. In particular,
colleges were growingly admitting pupils belonging to lower- and middle-income
families. This was, however, reversed after the antitrust action, that the
Overlap colleges no longer seem to have a trend in the earned income of
parents. (When using the adjusted gross income of parents or the federal
formula of expected family contribution, same results were obtained.)
Considering the effect of antitrust on the share of freshmen
who are black and Hispanic, not all potential black and Hispanic pupils are
needy, but they are disproportionately underprivileged. The overlap colleges
argued that extending the need aid to disadvantaged families is a primary
instrument for raising the share of able black and Hispanic students in their
applicant pools. Before the antitrust action, the Overlap colleges were raising
the representation of minorities (black and Hispanic) somewhat faster compared
to the control colleges. However these increases were seemingly purged after
the antitrust action, when the Overlap and control colleges were both observed
to be augmenting their minority representation at slower rates common to
control colleges prior to the antitrust action.
E. Summary
It seems that the removal of the Overlap meeting had an
effect on financial aid of participating colleges. In general, grants and aids
turned less elastic with regards to parent’s income, somewhat due to privileged
parents and pupils having high SAT scores being found to be “needier”.
Particularly, there is a considerable flexibility in the definition of need to
cover, although small, statistically significant modifications in actual
practice. As a result, trends in Overlap colleges towards less privileged, more
black and more Hispanic student population were likely to be partly reversed.
However it is uncertain as to whether Overlap colleges spend more on financial
support as a consequence of the antitrust action. However they offered more
grants to well-off pupils and provided them approximately the same amount to
the most underprivileged pupils. Nonetheless, without the antitrust action,
they probably would have had more underprivileged students.
Outputs suggest that the changes in the Overlap colleges’
behavior even though small are statistically significant and can eventually
have considerable impact on the colleges’ student composition. The data implies
the impact of Overlap meeting to gradually wear down. Gradualism may probably
be the rationale for the antitrust action to seemingly have no indirect impacts
on financial aid in non-Overlap colleges.
VIII. The Effects of Antitrust Action on Tuition and Tuition
Revenue
The source of data used in this section is from the IPEDS.
A. The Effects of Tuition
Included in the DOJ’s allegations was that the Overlap
colleges conspired on tuition at their meeting. However, preliminary analysis
on available data does not support the notion that meeting was held as a venue
for explicit collusion.
Before the antitrust action, both non-Overlap and Overlap
colleges raised their tuition (as well as their total fees) by roughly 4
percent annually. However there are no statistically significant changes in
these increased rates after the antitrust action, although the signs of the
estimates on the correlations between school year and post-antitrust suggest
that there may have been a slower tuition and fee increases among all colleges
after the antitrust action that was too small to be statistically
significant.
In a nutshell, the antitrust action does not have a
substantial impact on rates of tuition increase.
B. The Effects of Tuition Revenue
DOJ alleged that the Overlap meeting was to allow colleges
to give fewer aids to pupils thereby raising the tuition revenue for any given
level of tuition.
Preceding antitrust action, the Overlap and control colleges
were increasing their tuition revenue fairly less fast than their tuition. The
trace of deceleration in the rise of tuition revenue among all colleges was
found to be not statistically significant.
C. What has been “Given” to Allow Aid to Change?
There are three possibilities as to how
to square the result that the antitrust suit affected financial aid at Overlap
colleges but with no modification in their tuition or tuition revenue.
1. The
transfers in the composition of student populations toward better-off pupils
adjusted for the alterations in the management of individual pupils.
2. Colleges
did find funds to raise per-pupil expenses on grants, but the accounting
changes made the grants appear as tuition revenue.
3. Colleges
reduced college-wide subsidies per pupil (in terms of quality of goods and
services, without equivalently reducing tuition).
The per-pupil costs
on grants (like total fees) do not seem to have responded to the antitrust
action. The college-wide subsidies, also did not seem to have responded to the
antitrust action, but they were observed to increase yearly in both Overlap and
control colleges. Thus the evidence indicates that modifications in the
composition of student bodies carried the weight of the variations in the
financial support. The motive to control the composition of their student
population may be why various Overlap colleges backed out from fully need-blind
admissions succeeding the antitrust action.
IX. Is Need-Based Aid Just Redistribution
The antitrust action delivers a remarkable opportunity to
explore the purpose accomplished by need-based aid among selective colleges.
The findings indicate that middle-earning pupils are less
likely to consider an Overlap colleges’ offer following the antitrust action.
Moreover, there is no support for or violation of the essential conditions for
need-based aid being welfare enhancing regardless of the fact that the (insignificant)
increase in the acceptance rates in all Overlap and control colleges were
faster among black and Hispanic private
school student who did not acquire any financial support.
Overall, the
available data do not support the idea that need-based is pure redistribution,
owing to the fact that Overlap colleges offered richer grants to middle-income
aid receivers after the antitrust action but these pupils’ revealed preferences
did not shift towards Overlap colleges.
X. Conclusion
There was an observed evidence that
antitrust suit did have an effect on financial support in Overlap colleges
which led to aid that was increasing less with regards to parent’s income and
relatively more responsive to merit. There was no evidence that the Overlap
colleges colluded to increase tuition and tuition revenue, and save costs on
grants. Students’ revealed preferences prior to and consequent antitrust action
do not verify that need-based aid improves the colleges’ students’ welfare
through internalizing externalities.
Revealed preferences do contravene conditions required for need-based
aid to be pure redistribution.
Source:
Caroline M. Hoxby,
“Benevolent Colluders? The Effects of Anti-trust Action on College Financial
Aid and Tuition” NBER Working Paper 7754,
(June 2000).
[1] Brown University, Columbia
University (Columbia College), Cornell University (endowed colleges), Dartmouth
College, Harvard University, Massachusetts Institute of Technology, Princeton
University, University of Pennsylvania, Yale University, Amherst College,
Barnard College, Bowdoin College, Bryn Mawr College, Colby College, Middlebury
College, Mount Holyoke College, Smith College, Trinity College, Tufts
University, Wellesley College, Wesleyan University, and Williams College.
[2] list tuition – merit scholarship = notional tuition – notional wage
or notional wage = (notional tuition – list
tuition) + merit scholarship
[3] For instance, a pupil was
enrolled to a certain college wherein the tuition is fully paid by the family
(who did not qualify for the aid), and then in the following year the younger
sibling gets into a different college, by this time the family would have been
“poorer” and is likely to qualify for an aid for the second college. Under the
Overlap calculation, the older sibling’s college would not be obliged to
re-compute the need for the first child, thus its original obligation was
respected.
[4] MIT opposed DOJ’s computations.
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