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Tuesday, July 14, 2015

Variable Pricing of Education

A lot of services are being sold today in such a way that different consumers of those services pay different price for the same. The most visible example of this is airlines, which vary their pricing based on a host of factors like how early you book, how much is demand, how convenient the time is, and also things like whether you agree to sit in the middle seat, or you have to have a window seat, and so on. Even goods have dynamic pricing. You would expect to pay differently for wooden clothes in winter and summer, what with all those beginning of season sales and end of season sales. The price of the same good could be different in the neighborhood shop and an exclusive store in a posh mall, and could be very different if purchased online.

Does it make sense to consider variable pricing in education sector. Different students paying different tuition for the courses that they take based on some factors which we don't yet know. Of course, not. Are you nuts. This is crazy. How can two students pay different tuition for the same course. Variable pricing is ok in the commercial world but education is a noble profession, we must treat everyone equally. I can hear the sound of strong dissent.

But medical care is also considered a noble profession. Does everyone going to a hospital pay the same amount. Most hospitals today would have variable pricing for services. The services would be cheaper for those who come from economically weak backgrounds, and costlier for those who come from richer backgrounds. It is assumed that people who are short on money would not want to afford a Deluxe room in a hospital. So those who go for an expensive room are assumed to be rich and are charged higher for all services, not just the room. And people who are willing to stay in a ward with several other patients, will be charged less for all services. Good hospitals would ensure that medical care to all patients is roughly the same. It is only the "comfort" part which is different, and all patients can self select what level of comfort do they want knowing fully well that higher comfort does not just mean a bit more money for the room, but a lot more money for all tests, doctor's fee and so on. And we have accepted variable pricing because every individual can self select the pricing level at which s/he wants that service, knowing fully well that at least in theory and generally in practice too, the core part of the service will remain the same irrespective of which level of "comfort" one selects. It is also understood by people that without this voluntary cross subsidy, the cost of health care for economically weak would be much higher and that is not a desirable thing from the societal point of view. (Of course, I may add that the "comfort" is not restricted to type of room. Some hospitals would allow richer patients to have less waiting time, appointments, etc. Some hospitals would have a well known doctor do more appointments of richer patients, and smaller number of patients in the ward, which one could argue is differentiation in core service.)

Can we have a similar implementation of variable pricing in education. The core service includes lectures, tutorials, labs, library access, internet, and so on. That would be identically provided to everyone. But non-core services can be chosen by students. And based on what they choose as non-core services, their costs would vary. For example, a university could have several different types of hostel rooms. If you choose to live in an Air-conditioned single room, that would be taken to mean that you belong to financially well off class, and charged higher not just for the AC room, but for every thing else in the university. And if you choose to live in a shared non-AC room, it would be assumed that you belong to financially weak class, and charged less for everything. Just like medical care, there is self selection or in a sense, self declaration of income class. And students and parents know what costs are associated with each declaration. They also know that the core service will be same for everyone. And like in medical care, this could provide a model of subsidizing the financially weak students by charging the financially well off students a higher amount, thereby enabling a lot more students to access costly quality education.

This could possibly work, but the problem is that there aren't very many non-core services provided by the universities which are essential for students to subscribe. If we look at hostel as an example, universities may not have sufficient range of hostel rooms (and thus may not be able to offer sufficiently many price points). It may not even have sufficient rooms, and students may be forced to live off campus, and in that case, it becomes very difficult to find out what kind of accommodation has each student opted for.

By now, I am sure, people are saying, education is unique. It can't be run on the airline model. There can't be variable pricing in education. But, is that really true. in fact, we already have variable pricing model operational in most universities. Let me explain how.

Most universities offer scholarships to those students who are performing very well. Most universities are also offering scholarships to those students who come from financially weaker sections of the society. So we do have merit based scholarships, as well as means based scholarships. And a scholarship is nothing but an instrument of variable pricing. Universities look at all sorts of information to determine whether you really come from a financially weak background. They will look at self-declaration, pay slips of the employer, the tuition that you paid in the school before this one, ownership of certain assets by the family (do you live in your own house, or a rented one, what kind of smartphone you own, do you own a car), etc. But since this is not based on purely self-declaration and based on factors in which some fudging is possible, expanding the variable pricing is likely to face opposition from those who end up on the wrong side of variable pricing.

Currently, one would find that the variability in pricing of educational services through the instrument of scholarships is fairly limited. We either have small reductions to many people, or have significant reductions to a very small set of people. In order to really bring in the benefit of variable pricing in terms of reducing the cost to poorer students and getting them subsidized from students who can afford, we would have to have several levels of pricing, with a significant difference between the maximum and minimum tuition. And before any variable pricing is adopted, communicating it to all stake holders and taking them into confidence becomes extremely important. Otherwise, a mention of very high fees, even if that fees is not paid by most students can become a mental block for people to apply to this university.

Let me also point out another kind of variable pricing, which is very prevalent. Charging higher for the popular programs is quite common across the world, including in India. So MBA fees within the same university will be typically higher than under-graduate programs. Within the under-graduate programs, engineering programs or professional courses in general may be priced higher compared with 3-year programs in science, commerce, humanities, etc. And that difference is not dictated by the difference in cost to the university but difference in willingness to pay by the student.

There is also a difference between price charged to in-state students and out-of-state students. The argument is that there is support available from the state taxpayers (or at least, state would have provided cheap/free land), and therefore, residents of the state should be offered discounted pricing.

Another type of differential pricing which is very common in Indian institutions is the higher price of students admitted under certain categories, for example, "Foreign Students", "Non-Resident Indians", "Sponsored students", "Management quota" and so on. We have had Free seats or Merit seats, and Paid seats or Non-merit seats. (Free seats were just reduced pricing, not free. And Non-merit only meant poorer rank, not that anyone who had failed in 12th class could get admission.)

So, we are actually, quite used to variable pricing of educational services in the country. After all, the coaching classes have a variable pricing for their services.

And finally, there is an entirely new unchartered territory of dynamic pricing, along with unbundling of services of a university. Could we have separate tuition for each course based on the popularity of that course. If you register for this course early, then you pay less, while a last minute registration pays a lot more, particularly when the seats are limited. I don't even want to think of these possibilities. I am afraid that there will be unintended consequences that we haven't thought about.

3 comments:

Prashant Saxena said...

The last point about dynamic pricing - where the tuition fees of a semester is decided by the courses a student registers for - is already in practice in some South African universities. It is a horrible system, to say the least.
A lot of students aren't able to take the electives that they want to take but take the electives that they can afford. It is probable that some profit making universities won't allow students to audit any course they want since it defeats the purpose of dynamic pricing. As a result, many engineering students graduate with poor mathematical and technical skills while having have taken some 'useless' courses in humanities and management to fulfil their credit requirements.

Sajith said...

See from http://dupress.com/articles/reimagining-higher-education/
In California, a new law allows Long Beach University to pilot dynamic pricing per credit, which increases the cost per credit for high-demand courses.58 Dynamic pricing helps universities balance supply and demand for different courses, in effect giving them a means of increasing funding for popular degrees and, in turn, access to them.

Rajan Bhatia said...

Actually what you say should be the rule of the game.For how long can the state continue subsidising the institutions and particularly if a family can afford it why not?Is 'nt the same happening in give it up campaign for LPG.
If there are takers for management quota why not?May be 5% seats can be given to them which can be supernumery.Ultimately the expansion and quality management needs to be factored into for which state cannot be the only contributor.