Oligopoly and the Costs of Higher Education – Journals Edition

There are many reasons why costs in higher education have been rising faster than inflation for many decades.  A fundamental reason is because education is so labor-intensive and (so far) has been resistant to improved productivity via capital investment or technology.  This is called Baumol’s Cost Disease.

But there are other reasons too.  One is that historically higher education has been a non-profit industry but it is like healthcare in that much, if not all, of the costs are paid for by a third-party such as government instead of the consuming customer themselves.  There’s another similarity to healthcare in that in both it’s the seller, the doctor or the professor/university, that tells the consumer, the patient or student, what specifically they need to consume.  The consuming customer, the student or patient, doesn’t have all the information to know what they need.  This 3-way or 4-way transaction arrangement isn’t the standard buyer-seller arrangement of micro-economic texts about markets.  When a 3-way arrangement exists where there’s a seller, a consumer and a separate payor, conditions are ripe for abuse.  Basically, the seller tells the consumer to buy more at higher prices.  The consumer doesn’t object because somebody else is paying.

Historically, the arrangements never got out of hand because doctors in healthcare and universities in higher education were non-profit “professionals”.  But when for-profit entities entered, the dynamics shifted.  Higher education still consists of a a strong majority of non-profit institutions.  But they are surrounded by a several supplier industries that are very definitely profit-maximizers such as book publishers.  Publishers have long pursued a process of competing on features and making textbooks more expensive because the person who selected the book, the professor, didn’t have to pay.  Students paid through their student loans and they didn’t have much choice.

Eliminating choice is the key to higher profits.  That’s why monopolies and oligopolies make economic profits while firms in pure price competition don’t.

Now courtesy of a lecture by Hal Abelson at the Educause 2011 conference, passed our way by George Siemens at elearnspace.org, we see why prices of academic journals have risen so much that many libraries can’t afford them.  It’s the trend towards concentration and oligopoly.  The government could do something about it via antitrust enforcement, but for several decades antitrust enforcement has been weak except for blatant conspiratorial price-fixing.  This image below (from this article – .pdf) demonstrates: