A look at the competitiveness of higher education

I am sometimes asked whether there is something about higher education that I wish regulators, legislators and the general public better understood. My answer is always the same: I wish they understood the competitive and dynamic environment we operate in. In many respects, higher education is one of the most competitive industries in the United States. Yet there is virtually no acknowledgment of that reality in the rapidly escalating demands for greater regulation.

Higher education is a complex enterprise with an extraordinarily diverse array of institutions — from community colleges to globally renowned research universities. Depending on what is included, there are between 4,500 and 5,000 institutions of higher education in the United States. That includes public, nonprofit and for-profit providers. The institutions range in size from a few hundred students to nearly 100,000. Many are secular, while others are sectarian and serve a wide range of religious dominations. In just Rice University’s cohort of national research universities, there are between 200 and 400 participants, far more than in most sectors of the economy where there is national competition.

{mosads}At the same time, higher education as a whole is now in a period of extraordinary change, driven by technology, globalization, changing finances and, yes, public and political criticism. That feeds the impetus to impose more regulation. But before even more costly rules and requirements are imposed, lawmakers and regulatory agencies should assess the potential impact of such actions. Regulation is increasingly expensive; by some estimates it costs some universities tens of millions of dollars a year, money that could perhaps better be deployed to provide additional financial aid to students or education and research support.

I remember from my law school courses on regulation and antitrust law that, in general, efficiently functioning markets can be relied on to achieve most optimal results, but that market imperfections and market power can lead to abuses and inefficiencies. It is in those latter cases that regulation is needed to protect individuals, the economy and a range of societal interests. The inquiry begins with the questions: Is there a competitive market? Do any of the participants exercise too much market power? Are there external consequences that consumers and providers will fail to take into account?

The thousands of higher-education institutions in this country compete freely and indeed fiercely on a national, and indeed international, basis for students, faculty and resources. Pricing varies substantially, both nominally — the “list price” for tuition — and net — tuition discounted by financial aid. In many cases, students are able to use competitive offers to negotiate tuition reductions. While entry barriers to this particular segment can be high, alternatives are readily available and, with the emerging new higher education technologies, rapidly increasing.

Barriers to consolidation, such as mergers, acquisitions and divestments, are part of the reason for this fractured and highly competitive industry structure. Neither the public nor the nonprofit education sector lends itself easily to such transactions. They are not unheard of, but they remain rare, in part because of the importance of institutional loyalty among groups such as alumni. Thus, unlike most other major sectors of the economy, there are more rather than fewer competitors than there were decades ago.

Information about these institutions is readily available, both from the institutions themselves and from third parties and, increasingly, consumers. Indeed, within the service sector, particularly the complex professional service sector, there are few areas where so much information is available. Compare, for example, the difficulty of getting competitive information about hospitals or insurance companies.

All this should create skepticism about the need for more regulation, and raise questions about the trade-off between the associated costs and benefits. Don’t get me wrong: Significant regulation of many aspects of higher education is warranted. Higher education benefits substantially from government support and it should be held accountable for the good and proper use of that support. Some activities, particularly in the area of research, pose significant dangers and warrant careful safety regulation. Institutions on their own would be unlikely to produce some kinds of data, such as crime statistics. There is also value in standardizing information in important areas such as graduation rates and employment outcomes, but little value in introducing new ratings or ranking systems, which tend to impose one set of criteria for a diverse market.

And while concerns about higher tuition and student debt are legitimate, the solution won’t lie in increasing regulatory efforts to control the cost of going to college. While it is true that the markets are somewhat distorted by programs such as government-supported loans, these programs also serve to make the best education available for those who could not otherwise afford it, creating the most powerful engine of opportunity in our country. But unlike the health sector, to which higher education is often compared, most consumers pay large amounts of their own resources for a college education, and many pay the full price, greatly limiting the distortion created by government programs, at least in those educational institutions where this is true. New approaches are, however, required for institutions where default rates are high. Universities themselves have taken on an increasing share of the cost of making higher education opportunities available to those who cannot afford them, and in many cases the biggest subsidies are provided by those institutions. In this varied environment, price controls, which have rarely worked well in other parts of the economy, likely will have costly consequences here as well.

Regulation, while essential, has costs: the immediate costs of compliance, the costs of regulatory overreach and mistakes, the costs of the suppression of market competition and the drain on resources that would otherwise go into education and innovation. American higher education is the envy of the world, and for good reason: the valuable contributions to both individual and national success. There is nonetheless a lot that can be improved, and I believe that the current period of disruption — largely from competitive forces — will make higher education even better. But just once, I would like to see a government regulator begin the conversation with: “Recognizing that higher education is one of the most competitive and valuable sectors of our economy, what actions can we take to … “

Leebron is president of Rice University and former dean of Columbia Law School.