Monopoly rents from graduation

As a recent university graduate, I’m now ready to air my views on what I’ve seen and experienced within various institutions of higher education. First on my list: university monopolies.

A quick primer for those of you unfamiliar with the topic (actually, your days playing Monopoly might be more relevant than you think) or who are a bit rusty:

Characteristics of a monopoly market

  • Me and my honours supervisorOne seller. If instead there are only few sellers (but more than one), then it is an oligopoly.
  • Pricing power lies with the monopolist. They set whatever price they choose, and customers must either pay that price or do without.
  • Rent-generation. Monopolists earn abnormal profit – unless, that is, this is whittled away by a fixed cost (see below).
  • Inefficiency. Further to the above – the monopolist’s profit is surplus taken from consumers. Not all of the surplus, except with some effective price discrimination, but certainly consumers are left worse off than they would have been with a more competitive market. And more importantly, the loss to consumers exceeds the gain to the monopolist – thus the inefficiency.

 

And now, what exactly am I talking about in the context of universities? Here are a few of the areas in which unis have a monopoly:

University Monopolies

  1. Courses taken towards your qualification. Although there’s always the prospect of obtaining credit for subjects completed at other institutions (e.g. on exchange), most universities have some minimum amount of courses that must be completed ‘in house’. Certainly that makes sense – it would be odd if someone could obtain a degree from Harvard having only completed their terminal semester there – but it nonetheless gives the university a monopoly over at least the majority of your education.
  2. Textbooks. Again, not a perfect example, particularly given the efficient secondary markets that arise once a textbook has been used for multiple semesters, but certainly one that will resonate with students. For many courses, to decline buying the prescribed textbook is to risk failure, so the incredibly high prices become an unfortunate but inevitable aspect of student life.
  3. Participation in your graduation ceremony.
  4. Photos of your graduation ceremony.

The last two items on my (certainly incomplete) list prompted me to write this post.

To attend my university graduation, graduands were required to fork out $100. Now, I understand that there are costs associated with graduation – staff labour and gown are the two that spring to mind – but $100 seems far too high to accurately reflect the marginal cost of including me in the ceremony. I have a pretty large melon and as such it took about an extra minute to fit me with a mortarboard, so I’m willing to add that to the labour cost, but even if the stench from my ego was so bad that they had to have the gown specially dry cleaned after I’d worn it, I still can’t come to a figure higher than perhaps $30-40 for my marginal cost. Hence I’m left with the conclusion that the uni is using its monopoly power over graduation attendance to extract rents.

PhotographerAs to the photos: although graduands were free to take their own photos, there was a photographer on stage during the ceremony whose company also had a vast labyrinth set up just outside the graduation hall where smiling students and loaded parents could purchase photo packs. But the cost – wowee, and ouch!

To be fair, they offered a very nice and very professional service, with photographers who obviously knew what they were doing, but boy did you pay for the privilege. To make it matters worse, the photographers presence on the stage lent the whole operation the air of being promoted by the university. Behavioural economics tells us that if this is the case, people will typically adopt the option implicitly suggested by the organisation, rather than taking their own photos.

Quick word on price – a comparison of the prices charged by the photography company with those asked by Officeworks for the same service (in terms of the finished product, at least) dispels any illusions that cost is the issue here. At least, not unless the photographers are being paid extraordinarily good wages.

So this company must be making a motza out of fresh graduates. But the uni isn’t stupid, and can pick and choose which company gets the spoils. So my bet is that the university is charging the company a fairly hefty fee for allowing them to cash in on the monopoly action.

But why is this all so bad?

That’s the million-dollar question, innit? My objections are two-fold.

  • Morally: I’m just not so keen on squeezing students, particularly in a world in which a university education is fast becoming indispensable for earning a decent living. Even if it ends up being the students’ parents who are squeezed (which is pretty likely in the case of graduation photos), it still seems like an organisation taking advantage of an emotionally-charged situation (who can think about cost when your little baby has just graduated?!).
  • Economically: as mentioned above, monopolies are inefficient. I, for example, would have liked some professionally-done photos to remember my graduation, but I was far from willing to pay what was asked. (I was even unwilling to ask my parents to pay, that’s how wildly out of the ballpark I thought they were!)

So to alleviate one source of students’ suffering and to decrease economic inefficiency in the world, universities should relinquish some of their monopoly power. Lowering the price of graduation to better reflect the cost and allowing more competition in the graduation photos market would be two good starting points.

Vocabulary and signalling

Before we start, go and check out this link: Test Your Vocabulary.Daniel's known vocabulary (from the site)

As an economist, anything with a sample size in the millions (!) has me drooling, even if a test administered over the internet is going to be unavoidably biased. The idea behind what they’re doing – constructing a measure to predict someone’s vocabulary from observable characteristics – will, if nothing else, highlight any flaws in tests like the SATs in the United States.

Tests such as the SAT and GRE aim to measure how likely an individual is to succeed at university study. Evidently, success is related to factors such as discipline, intelligence, existing knowledge, etc., all of which are difficult to measure. Instead, the tests shoot for something easier: vocabulary size. The underlying assumption is that individuals with larger vocabularies will be smarter, harder working, more knowledgeable – in short, possess a larger dose of the unobservable qualities that make for a good university student.

Trouble is, it’s widely known that these tests feature a vocabulary component. Individuals who therefore are not the best cut out for university can attempt to appear as though they are by developing their vocabularies specifically to ace these tests. To spell it out more clearly: universities want a certain calibre of student, which they attempt to identify. Individuals who are not in this group can still falsely signal that they are by improving their abilities to score high marks in the test (rather than actually improving their general abilities and hence moving into the group of desired students).

The data from the ‘test your vocab’ site might help to shed some light on this – it’s a lot harder to fake your abilities in the real world, so the correlation between vocabulary and earnings (a much better proxy for ability, but one which is typically observed after an individual has concluded their studies) will show whether knowing lots of words is a good signal for general intelligence.

Secondly, it will also be interesting to discover some of the good predictors of vocabulary size. Using vocabulary as a proxy for ability isn’t much good if some demographic characteristic (e.g. ethnicity or socioeconomic status) is a stronger determinant of it than underlying capability for success. For the record, that’s my bet. I’m not willing to throw vocabulary out entirely as a proxy for ability, but I predict that it is actually a much less accurate measure than universities hope.

Are you a maths person?

Maths - derivative of a parabolaMaths-philic or maths-phobic? Reading the post title, most people would assume that the answer is fixed – I mean, someone is either born with a knack for maths or they aren’t, right? Well, I disagree, and a recent article featured on Quartz backs me up. Miles Kimball and Noah Smith (who shows a similar affection to mine for using punny eponyms to title his blog) argue that one’s internal narrative – the stories we tell ourselves – is a huge determinant of mathematical success, especially at an early age. Students who believe that they can improve if they work hard enough do so, and thus create a self-fulfilling prophesy.

The authors focus on internal determinants of engagement with maths, but external factors are just as important. An individual doesn’t form their self-beliefs in a vacuum – their peers, family, and community all contribute. That explains why certain trends are difficult to reverse: the idea that girls are bad at maths, the tendency for low educational achievement to run in families, and certain cultural stereotypes.

Moral of the story? Next time you’re tempted to think to yourself (not that any of my readers would be in this category, but still) “Oh, I can’t do [insert life/uni problem involving maths here], I’m not a maths person”, wash that mouth out with soap! Instead, say: “Wow, that’s a hard maths problem! Lucky thing anyone willing to put in a bit of work can learn how to solve it!”

Don’t get me wrong – I’m not asking everyone to go and tackle the Millennium Problems (not until you’ve had a look at some of my other blog posts, anyway). My point is simply that if you think you can’t do maths, you’ll prove yourself right. Be ye not afraid – change your thinking and tackle those problems head-on!