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What do you predict will happen to the price of education as more firms enter the market? Are there quality issues that must be considered?

Gordon K. Davies, the former executive officer of the Virginia State Council of Higher Education, believes that the state university systems in the United States have historically functioned as cartels. Could it be that these institutions will go the way of so many cartels before—failing in the face of competitive force? Davies thinks so. Because they are unable to prevent entry to the education market by more agile, technologically efficient, for-profit universities such as the University of Phoenix and the Graduate School of America, state universities’ market position is severely threatened.

At the core of the problem for state university systems are fundamental changes in demand and supply that have eroded their traditional entry barriers. On the demand side, accreditation and recognition by external constituents (both students and employers) are now driven by the highly vocational focus of today’s students and their focus on employment as the desired outcome of an education. “We will see a market for education that leads directly and immediately to employment,” Davies says. In addition, firms are now looking to private universities, unburdened by the traditional constraints, to solve their training needs. According to Davies, “AT&T has contracted with the University of Phoenix for employee training, for example, citing the institution’s responsiveness.” Davies believes that if accreditation bodies do not become more flexible, they risk replacement by entities similar to Consumer Reports.

On the supply side, changes in technology now allow for the delivery of courses to students without the need for students to sit in a traditional classroom. The ability to offer courses electronically means that geographic market edges may be blurred, if not gone altogether, and that education can be customized to fit the needs of the student and/or employer at very low cost. “(E)ntry into the market of large-scale, national providers of electronic courses changes everything,” remarks Davies. He recommends that state university systems form alliances similar to athletic conferences to collaborate on the delivery of electronic education.

a.    What do you predict will happen to the price of education as more firms enter the market? Are there quality issues that must be considered?

b.  How are the definitions of the product and units of output important to the study of the education market?

c.    Is competition in the education market a good thing? Use economic concepts seen in the lecture to explain your answer.

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