Breaking down the myth that we need competition to make education policy work

An article published in The Australian today Push for universities to share students‘ discussed some of my views regarding the lessons we have learnt from deregulating the schools sector and the consequential impact on the ‘market’ dynamics of educational institutions (i.e. how universities behave).  One of the myths put forward as a reason for deregulating fees within the higher education sector in Australia is the (misguided) belief that competition in student fees will lead to institutional diversity.  However, when it comes to experience goods in education, student (parent) risk aversion leads to a strong preference for universities (schools) to offer the largest range of subjects possible given available funds.  This leads to the crowding of efficiencies from specialization and potentially sacrifices educational quality if the competition is intense.

The main driver of student (parent) risk aversion is the high switching costs associated with changing misinformed choices.  This happens a lot with experience goods where there is little opportunity to repeatedly test choices.  Choices in education are completely different to consumer purchases of milk or bread for example.  Where a bad choice is low cost and easily rectified.  I’m probably a good example of this.  I originally enrolled at the ANU (Australian National University) to do an Accounting degree but subsequently ended up graduating with a BSc and BA.  (the irony is that I became an accounting CPA anyway..) Consequently, there is a strong incentive for universities (schools) to offer as broader range of subjects as possible to increase the expected likelihood of a good match for students.  Where switching costs within an institution are much lower than switching costs across institutions (there is a strong profit incentive to keep these inter-university switching costs high).

This leads to a lot of inefficient cross-subsidization of low demand subjects/courses.  It also leads to increased similarity of offerings to increase the comparability of choices.  With experience goods, individuals rely heavily on social learning but to be effective there need to be similarly in choices.  So when it comes to experience goods like education, there is a huge market incentive for providing the broadest range of conceptually similar subjects as possible.  There is no incentive to be novel, to innovate or to specialize

A solution discussed in the article is to mandate the reduction in the switching costs between institutions.  Thereby removing the behavioural incentives in the market to over commoditize and over supply low-demand and inefficient subjects/courses.  At the moment in Australia we have 32 universities that offer the same educational experience and are only differentiated by the quality of the student cohort – an outcome very similar to schools in Australia.
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