Non-Profits and Price-Fixing: The Case of the Ivy League

Abstract

A number of private colleges and universities have chosen not to compete for students by offering merit-based financial aid. In addition, until 1990 many of these schools jointly calculated a student's financial need. I theoretically and empirically analyze the effects of different financial aid policies on prices paid by students and tuition revenues earned by schools. I model university decision-makers as choosing prices for needy and non-needy students and the quality of the school to maximize a utility function subject to a non-profit constraint. While schools are altruistic in the sense that they derive utility by admitting (qualified) needy students, utility increases with a reduction in price competition for these students. The effect of jointly determining the price charged to needy students is to increase tuition and the average price paid by students receiving aid, while the effect on average tuition revenue earned per student is ambiguous. Using data from the Department of Education and from Peterson's Guides, I find that the adoption of a need-only policy significantly increases the price paid by non-needy students (tuition). The evidence also suggests that students who would qualify for merit-based aid pay higher prices at need-only schools. In addition, a need-only policy substantially increases earnings from tuition; schools that adopt a need-only policy earn an additional $1,400 per student annually. Explicitly coordinating on financial aid awards achieves broadly the same effects as does tacit collusion.

JEL Classification: L1, L2, L3, L4