Psychology, market pressures, and pricing decisions in higher education: the case of the US private sector

Abstract

We examine listed tuition and institutional aid practices within the US private sector, a sector where market pressures are relatively strong and consequently influence organizational behavior. We present a conceptual framework that highlights three psychological aspects of pricing—the price-quality heuristic, ego-expressive aspects of aid, and the silver lining effect—that can influence the attractiveness of specific pricing strategies to prospective students. We review relevant literature from psychology, marketing, and behavioral economics to illustrate that these three psychological aspects should be especially important in higher education. Furthermore, we identify pricing strategies that could position colleges and universities advantageously within market-based competition due to these aspects. The key elements of the strategy include high listed tuition, widespread institutional aid awards, and aid awards that are framed in a manner that confers distinction upon the recipient. We use data from a range of sources to describe the nuanced ways in which these pricing strategies are used within the US private sector. Our empirical analysis reveals that many schools, especially those in the middle of the prestige hierarchy, provide institutional aid to all or almost all of their incoming students, which allows them to set listed tuition prices well above the demonstrated willingness to pay of students. We also present evidence that aid awards are named in a manner that exaggerates the distinction conferred by the award. Our conclusion highlights implications of our work for students, organizations, policymakers, and future research.