The College Tuition Pricing Game

I've been reading a book on game theory, and one of the sections dealt with college pricing schemes. The authors rightly, I believe, describe our tuition pricing as an inefficient Nash equilibrium. Nash (he of "A Beautiful Mind" fame) argued that there are equilibrium points in any game. An example of an inefficient equilibrium is our QWERTY keyboard layout. It was initially designed to slow down keystrokes so that typewriters wouldn't jam.

But that problem no longer pertains with modern computers, so why don't we switch to a more efficient layout? Basically, because we've "always" done it this way. It would take more time and effort to retrain the existing typers than you would gain in efficiency from the new layout, so barring some mandate from on high, no individual person has enough incentive to learn the new system.

Well, almost no one. With an inefficient system, there will always be about 2% of the population who are "innovators" willing to try the more efficient approach. But as long as 76% of the population is using QWERTY, the "slippery slope" will lead us to have 98% using the inefficient system.

So how does this apply to college tuition pricing? All of our institutions, as with cell phone companies and other organizations, focus on the list price (tuition, in our case) but not the true "all in" price (what college costs after you include room & board, fees, discount, quality of education, etc.). It takes too much money and effort to educate people out of their focus on the tuition bottom line for any one entity to switch to "all in" pricing that eliminates discounting and all of these other costs. You occasionally see a school try to move outside of the typical pricing models, but most fall back into the usual patterns fairly quickly.

The authors suggest, therefore, that even though this system is inefficient for all parties, it is unlikely to change, and we should just play this "bad" game as well as we can. Namely, we should all maximize our "hidden" costs and minimize our "up front" costs in order to maximize our revenue. So far, JBU hasn't gone completely in that direction, but it seems harder and hardre to resist the "fee-based" tuition model that the state schools have adopted or the "merit award" structures that the elite privates have used. We're clearly on that slippery slope as well.