Abstract
The paper presents a price discrimination model of a university operating in two markets, online and traditional education, and attempting to maximize revenue under a minimum profit constraint. Optimality conditions, based on demand elasticities are derived. Using a dataset of 398 southeastern public two and four year higher education institutions we estimate the price elasticity of demand for both online and traditional education. Utilizing a panel framework, we find that online education (e-learning) is highly price elastic and traditional education is price inelastic. Comparison of the empirical elasticities with the model predictions indicates that universities do not behave optimally. Reduction of online tuition and increases in traditional tuition are required to move universities towards the goal of revenue maximization.
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