Higher Education As An Associative Good

Abstract:     
Education, and particularly higher education, has an important characteristic that distinguishes it from most other goods and services: it is an "associative" good. The essential characteristic of an associative good is that, when choosing which producer to patronize, a consumer is interested not just in the quality and price of the firm's products, but also in the personal characteristics of the firm's other customers. When choosing among undergraduate colleges, for example, a student is interested not just -- or even primarily -- in the colleges' faculty, curriculum, and facilities, but also in the intellectual aptitude, previous accomplishments, sociability, athletic prowess, wealth, and family connections of the colleges' other students. The reason is obvious: these and other attributes of a student's classmates have a strong influence on the quality of the student's educational and social experience, the relationships (including marriage) that the student will have later in life, and the student's personal and professional reputation.

Markets for associative goods do not function like markets for other goods and services. This is especially true when the producing firms are all nonprofit or governmental, as is the case in the upper reaches of higher education. Most importantly, when nonprofit firms produce associative goods, there is a particularly strong tendency for customers to become stratified across firms according to their personal characteristics. Those customers who are most desirable as fellow customers will tend to cluster at one firm, the next most desirable at another, and so on down.

This essay surveys the implications of the associative character of higher education for the ownership and control structure of universities, both past and future, for the efficiency and equity of markets for higher education, for the market power of elite universities, and for collusive behavior and antitrust policy.

Working Paper Series