Deregulation and Customer Relationship in Higher Education

Abstract

This paper analyzes the impact of deregulation policies in higher education on requirements for student input. Requirements decline if universities can choose the level of tuition fees (autonomous fees). If regulations keep tuition fees artificially low (regulated fees) or allow low ability students into higher education, universities increase requirements to deter undesired students. In a duopoly with regulated fees two ex-ante identical universities have identical requirements. Autonomous fee setting induces product differentiation. One university chooses high requirements and low tuition fees, the competitor low requirements and high fees. The paper provides explanations for price-cost ratios in American universities, the differences in the industrial organization of higher education in the US and Europe respectively and the existence of profitable private universities with relatively low academic standards.