Price-Increasing Competition: Evidence from Higher Education

Abstract

In monopolistically competitive industries, increased competition may lead to price divergence as some firms raise prices to differentiate their higher quality products. We test for priceincreasing competition in higher education using the expansion of for-profit institutions. We observe two-year nonprofits competing directly with for-profits on price. However, we find evidence of price-increasing competition among public schools. As for-profits offering four-year degrees expand, four year public schools raise their paid prices; the largest increases occur at the lowest quality institutions, those that would gain the most by sending a quality signal. This increase in paid price allows the public schools to segment the market and capture the more price-inelastic students.