An Alternative to Net Price

Abstract

The theory of net price, as it applies to student demand for higher education, has become a problematic concept for administrators and policy makers. On the one hand, economic theory on higher education holds that students respond to a single net price [15]. On the other hand, enrollments do not fluctuate with changes in net price, which may influence some policy makers in institutions and government agencies to ignore the impact on enrollments of their pricing decisions. However, there is a growing body of research that suggests that students respond to both prices and price subsidies in their first-time enrollment [24, 34] and persistence decisions [1, 25, 32]. In this article we critically examine the applicability of net-price theory to higher education finance. Specifically, we examine the assumptions of the traditional net-price theory and of an emerging alternative approach to assessing the relationship between prices and student enrollment decisions. First, in a background section we summarize the origins of net-price theory and its uses in higher education finance, consider the emergence of an alternative differentiated pricing concept, and identify the assumptions of both positions. Second, we compare multiple ways of specifying prices for analyses of their effects on persistence. Third, we use the analysis to test both sets of assumptions and consider the implications of the findings. 1. Alternative Approaches to Price Response Over time, a theory of net price has evolved that has provided a foundation for government financing strategies and institutional pricing in higher education. In this section of the article we consider the origins of net-price theory and its application in higher education policy and the emergence of an alternative way of conceptualizing the relationship between prices and student enrollment decisions and compare the assumptions of both ways of viewing the relationship between prices and persistence. The Traditional Approach The concept of net price is embedded in human capital theory, which is integral to most public finance strategies in higher education. In Human Capital Theory, Gary Becker [2, p. 107] argued: Generally, the most important cause of differences in opportunities [to attend postsecondary education] is the availability of funds. He further argued that scholarships and loans are for accessibility. Thus the assumptions that students respond to a single net price and that reductions in net price for some populations can improve access were embedded in the original conceptualization of human capital theory. The Higher Education Act of 1965, enacted about the time Becker's book was first published, included major new loan and grant programs aimed at increasing access to higher education by providing new funds to students with financial need. The student-demand studies conducted in the early 1970s [for example, 3, 23] carried forward the assumption that students respond to net price [18]. The reviews of these studies generally concluded that low-income students were more price responsive to tuition than high-income students [15, 18]. Starting in the early 1970s, a series of planning models was developed so that the federal government and the states could assess the relative tradeoffs between funding institutions (thus providing a tuition subsidy for everyone who attends public institutions) and funding need-based student aid programs (thus reducing prices for those who were thought to be the most price responsive) [11, 21]. These planning models, which used price-response coefficients derived from the early student-demand studies, carried forward the net-price assumptions. Although these early attempts to assess financing strategies by using student price response were criticized [for example, 4, 18], it was not possible to construct an alternative means for estimating the effects of other financing strategies, because the extant price-response coefficients were developed for a single price. …

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