Competition , Selectivity , Quality Assurance and Innovation in the Higher Educational Market

Declining college matriculation rates, the unrelenting rise in net tuition costs and the questionable quality of some accredited degree programs has led to heightened public scrutiny of the higher education sector. There is current political pressure on institutions to increase access in a manner that does not require a large and growing student debt burden. Selective and top ranked schools with large endowments that charge high tuition have been cast in unfavorable light, and yet expanding access could diminish the selectivity that makes their degrees highly valued. At the same time innovations in digital learning have enabled scalability in education that has previously not been feasible, presenting a potential disruption in traditional higher education. This paper explores these issues in a vertically differentiated model with both selective and nonselective institutions. Selective institutions offer a high quality of education where value added is gained by limiting enrollment. Nonselective institutions offer lower quality, have open admissions and are tuition driven. Students differ in ability to benefit from these educational services. We describe how selective and nonselective institutions compete for students and how free non-credentialed educational services such as MOOCs affect tuition prices and quality assurance. Our model provides insight as to why selective institutions are the main proprietors of MOOCs. JEL Codes: D43, I23