I. Introduction
Numerous services give outputs that rely somewhat on the
customers as inputs. The prices paid by customers are not usually related to
the true yields such as:
1. In the
production process of colleges and universities, the students serve as inputs
while human capital as outputs. Some types of students may have impact on the
yield attained by other students. Universities do not plainly charge for human
capital, rather they require tuition which is connected to student’s enrollment
in classes.
2. Spectators
in sports events take in not only the game but also the experience of being in
the crowd. Partially the attributes of the individual spectators such as
knowledge of the sport, enthusiasm and so forth, will determine the total
yield. However, event organizers merely sell tickets and do not charge for
total experience.
3. Health
care providers charge fees with respect to the intermediate services supplied
and not based on the successful results, which is partially dependent on the
patients’ attributes.
4. For
law firms, results depend partly on the quality of the client’s case. With the
exception of the contingency fee agreements of some claimants’ lawyers, legal
fees to clients are not charged according to results but on the intermediate
services provided.
This pattern – customers act as inputs (as well as receiver
of outputs), levies are not connected to the true outcomes, and the presence of
other customers have an influence on the results to any given customers – does
not conform to the typical microeconomics scenario where in outputs are
explicitly priced and the presence of a customer does not affect the yield
received by another.
The concerns of the paper are:
1. If
there exist pricing schemes that can achieve efficient allocation of resources
2. If a
competitive industry can attain efficient prices
3. If the
presence of externalities such as the customers influencing the output,
complicates the pricing problems.
II. A Model of
Higher Education
Colleges provide educational services to pupils and assign
tuitions, and they contend for students through price and non-price average.
The presence of some student may be advantageous to a university, and those
pupils may be provided special discounts like scholarships.
Simple production process of higher educational services
(human capital) is specified and a set of prices that would distribute students
efficiently is developed. The general model would treat pupils clearly as
inputs into the educational process and also as the receivers of its outcomes.
A. The
Technology
The assumption is society has available to it several
educational technologies relating multiple inputs and outputs.[1]
Since the human capital is an output, the marginal change in
the function of the amount of overall resources used in technology or university
with respect to the aggregate amount of human capital studying in the
university is greater than or equal to zero. [2]
In addition since students are inputs the marginal change in
the function of the amount of overall resources used in technology or university
with respect to number of students of a certain type enrolled in the university
can never be equal to zero. [3]
However it is expected that universities would typically operate in the region
in which the said marginal change will just be less than zero.[4]
The technological specification assumes that the diverse
types of human capital are the only outputs, and apart from the students, only
one general input is necessary for production. It is initially assumed that the
pupils are the only recipients of the human capital – thus universities do not
generate additional results that are socially valuable but unmarketable or if
not incapable of being sold at prices at par with the marginal cost. An
additional assumption is that students are only concerned on the acquisition of
human capital and any fee (tuition) rate that they may pay.
Constant returns to scale are assumed so that there will be
further observation of the occurrence wherein some of the noticeable
externalities in the educational process would produce competitive pricing
mismatched to production efficiency and social optimality.
B. Optimality
The optimal allocation of a particular type of student with
respect to the general input is similar for all universities each type of
student attends. Furthermore, at each university the production of each type of
human capital should achieve the level wherein its marginal cost is equal to
unity. Lastly, the marginal cost of raising an extra unit of human capital
should be equivalent to its marginal product.
The only spending of the university would be the amount of
general resources. In theory, the university can only sell places to pupils who
are inclined to enroll to that college and cannot straightforwardly sell human
capital.
C. Prices
(Tuitions) and Competition
It is assumed that if a certain university takes in
particular type of students and produces definite units of human capital
(measured in dollars), then each pupil is entitled to an explicit value (which
is a fraction of the units of human capital over the number of students) for
attending that school.
Theoretically, pupils are apathetic on the attributes of
universities they are enrolled in. If a particular university attempts to
charge a student at a higher rate or provide him/ her lower level of human
capital, that pupil will rather go to another university which would satisfy
him/her more, thus supporting the notion of optimal allocation.
As mentioned earlier, direct charging of universities for
human capital is not permitted, thus they earn their revenues by imposing a
positive price on one set of inputs into the production process.
Suppose human capital can be sold directly by universities,
this would entail their hiring of students as inputs. Given that the student
market is competitive, the universities would need to pay pupils a certain
amount as salary, their opportunity cost. In addition, the more appealing
pupils can be considered more productive inputs, thus in a wage paying setting,
they would receive higher salary, in order that their net costs of receiving
human capital would be less – in other words they might receive (greater)
scholarships.
III. Implication,
Limitations and Extensions
A. Implications
1. Various
types of students may be charged tuitions differently at the same university.
2. Various
types of students may obtain different amounts of human capital at the same
university.
3. Various
types of students’ net gains may vary and will rely on their marginal
productivities.
4. Same
type students may be given different amount of human capital from various
universities.
5. Universities
may use a range of technologies, accept different type of students, offer
different level of human capital, and charge different tuitions.
The tuition and human capital bundle offered by university
to a given student type will have to meet the condition of the uniform net gain
across all students of that certain type.
Scholarships are a typical form of price discrimination.
Regrettably it is unknown whether such scholarships stood for different net
tuition levels for various types of students or a conservative form of price
discrimination by universities among same types of student.
Students coming from top universities seem to earn higher
salary than their counterpart from lower-rate universities (Taubman and Wales,
1974). The higher wages may be an indication of the much superior amount of
human capital offered by higher rate institutions, but it also may otherwise be
a reflection of the universities’ screening on a various set of personal
attributes. However, top-quality educational institutions do not seem to impose
suitably higher tuitions that would be proportionate with the greater levels of
human capital being offered.
The universities appeared definitely committed to the
principle of levying uniform tuition across a wide array of various disciplines
within their schools of arts and sciences. Informal empiricism may lead to the
suspection that the marginal costs and even the human capital offered per
student may vary considerably. On the other hand, universities tend to impose
different fees across different schools or even programs within the same
college.
Moreover tuitions across the variety of private universities
demonstrate an unexpected small degree of variation, taking into account the
broad range of university technologies and of student types – this is evident
for tuitions at graduate professional schools. It was observed that despite the
significant discrepancy in the types of students or human capital produced,
tuitions at private law schools and private business school only varies
moderately.
B. Limitations
1. Profit
maximization and resource constraints
- Universities
are assumed to be profit optimizer and are subjected to the common types of
resource constraints
- However,
universities do not usually cover all their expenses through tuitions and other
miscellaneous fees
- Also,
it is difficult to determine what is actually being maximized, and who is
behind the optimizing
2. Capital
market imperfections
- It is
implicitly assumed that student would face no difficulty in paying for the
attainment of their human capital
- Due to
a set of asymmetric information issues with regards to the borrowing of
individuals to fund their own schooling, thus various types of pupils may not
be able to procure human capital in the best quantities or qualities.
3. Informational
asymmetries in the educational market
- It is
explicitly assumed that universities are fully familiar of student types, and
students are wholly informed of their own types and regard human capital that
would be supplied by various universities.
- Given
incomplete information, problems due to asymmetric information such as adverse
selection, moral hazard or agent-principal, arise.
4. Technology
- Technology
of constant returns to scale and the lack of significant product segregation among
universities are assumed.
- If the
increasing returns to scale are combined with unique individual universities’
characteristics, the usual issue of Chamberlinian monopolistic competition
(with the likelihood of either too much or too little variety offered) can
occur.
5. Other
outputs
- Standard
externality issue occurs when additional outputs that cannot be sold at prices
equal to marginal cost are produced by universities.
IV. Conclusions
In some cases, customers serve inputs into the production
process while acting as recipients as well. Instead of being charged for
outputs, customers are levied fees that are fundamentally linked to their role
as inputs. Moreover some customer types often affect the outputs obtained by
other customers. These aspects are in conflict with the standard microeconomics
scenario that depicts customers as purchasing explicitly priced yields and one
customer’s existence not affecting the output attained by others.
Taking into account the various forms of market
imperfections would potentially lead to uncertainty on the conclusion of the
study, however same would be true for any other market under the same
imperfections.
Source:
Michael Rothschild
and Lawrence White, “The Analytics of the Pricing of Higher Education and Other
Services in Which the Customers Are Inputs”,
Journal of Political Economy, Vol. 103, No. 3, (June 1995), pp. 537-586.
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