On what basis do colleges/private schools price a given course assuming class size and direct costs are the same?

My current understanding is in my question on private school behaviour regarding the issues of viewing a university as a profit-maximising organisation (though I have some doubts) and concluding general pricing strategies used in producer theory cannot be applied to private schooling.

How do economists analyse price change in an educational service?

  • $\begingroup$ is there a problem with my answer? $\endgroup$ – Pedro Cavalcante Aug 21 '18 at 18:28
  • 1
    $\begingroup$ @PedroCavalcanteOliveira no there isn't, I upvoted it actually. just that id appreciate a more comprehensive answer. $\endgroup$ – EconJohn Aug 21 '18 at 22:50
  • $\begingroup$ I've added a more comprehensive answer now, hope it's what you were looking for. $\endgroup$ – Pedro Cavalcante Sep 9 '18 at 22:16

Epple and Romano (AER 1998) developed an interesting general equilibrium model with peer effects. It clearly diagnoses school's pricing strategies. The model predicts that competition will lead private schools to give tuition discounts to more able students, and that this will give rise to an equilibrium exhibiting stratification by income and ability between the public and private sectors and to a hierarchy of schools within the private sector. Epple, Figlio and Romano (JPubE 2004) submits this model to the empirical test quite sucessfully.


I came here to answer this question again because I feel like I omitted important points.

Schools don't present your typical production function. They're multi-product firms with several inputs with varying degrees of substitutability and complementarity. Different outputs (such as human capital, student health and socio-emotional skills) aren't necessarily antagonistic, but compete for school resources and there likely are multiple equilibria, given the vast amount of inputs and multiple outputs.

One important feature of a school's production function is that customers are a central aspect of the firm's technology. Students aren't just customers, they're inputs and each one has an unique, time-varying marginal productivity. This implies private schools should charge students different tuitions, in some cases provide full-scholarships or even pay students to attend the school. A good student, through peer effects, can alleviate the school's input demand - especially for teachers and TAs.

So, yeah, you're right. Usual pricing strategies used in "traditional producer theory" aren't exactly appropriate for studying the "industrial organization of schools". Because of (i) the variety of input substitutability and complementarity, (ii) customer-input technology and (iii) the presence of various outputs.

Some schools, for example, focus on the niche market of "conscious" parents and devote more resources to socio-emotional skills. Others go for the classic "we educate geniouses here".

Winston (1996) is a good reference on this topic.

I hope I made things a bit clearer.


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