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:

The GM Tale

Earlier this week General Motors, the new post-bankruptcy GM, issued it’s Initial Public Offering.  Initial signs are very encouraging in several ways, which I’ll describe.  But first let’s take  a note.  Only 20 months, less than two years, The conservatives and tea party types were howling for GM to go bankrupt and for the government to not step in – just let it and Chrysler die along with what would probably have been nearly a million good U.S. jobs and the State of Michigan. Let’s revisit those events for a moment below the fold:

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Where’d my job go dude?

One of the greatest untold economic stories of the last 2-3 decades (there are so many) is how the economy (both US and global) has consolidated.  In industry after industry, there’s just not the level of competition or entry or innovation that we formerly had.  This is significant for many reasons.

One, historically the Great American Job Machine came from innovation, entreneurship, and new businesses.  As a practicing corporate planner and later as corporate strategic planning consultant I witnessed the phenomenon.  In the 1980’s and even early 1990’s, the route to success in business was make a better product, innovate, find new customers, adopt new technology to control costs, improve efficiency. All the textbook stuff.  That has long ago shifted.  That approach is old-school (showing my gray hair now).  Now business and corporate success comes from playing a financial gin game: buy companies, sell companies, cut employees and hollow-it-out, don’t get involved in the core business, and most of all:  eliminate competitors.  Use patents, use special government favors & legislation, illegal threats, buy your competitors, whatever.  Just eliminate the competitors. Then raise prices. Then eliminate consumer options and choice.  Eventually consumers become the “property” of your company (much like serfs).

Second, since the reality is that most industries are no longer competitive, it also means that macro-economic policies from the Classical-New Classical-Supply Side-Monetarist-Rational Expectations-Libertarian schools won’t work.  They all assume that all markets are competitive.  But they aren’t in reality!

In the real world, true radical innovation and invention (the stuff that really advances our living standards and productivity) rarely comes from large organizations and corporations.  They have too much to lose from upsetting the status quo.  The modern, large, hierarchical organization is actually designed and intended to squash innovation, despite all the consultant hype and buzz about “networks” and “learning organizations” (puh-leeze!).  I mean, if a large hierarchical, command-and-control organization brought innovation and invention, then wouldn’t we have a stereotype of Army Generals as the most creative inventive types around instead of our mythology of the mad scientist or the wild works-in-his-garage inventor?

Anyway, for more on this topic (and much better written) try Who Broke America’s Job Machine by Lynn and Longman in Washington Monthly.  Also, for the curious, there’s wealth of surprising info on how even your favorite little local business or product has become an oligopoly at Oligopoly Watch, although this nice little blog doesn’t seem to have been updated since 2009.