The 'market' for university places

The debate on higher education funding in Scotland remains in a mess, with the major political parties claiming that student fees - in any shape or form - are simply not on the agenda for Scotland, while University Principals are becoming increasingly strident in their opposition to this view, and rightly so, I believe. It seems that we shall have to await the formation of the next Scottish Government (following the May elections to the Scottish Parliament), in order to discover what the higher education policy in Scotland is really going to look like.

Meanwhile, the situation in England is evolving rapidly. By now, over two dozen universities have announced what fees they will charge for home/EU undergraduates from academic year 2012/13. Contrary to what the Government was expecting, most have so far opted to set their fee at £9000 per student per year, i.e. at the maximum level permitted by the recent legislation. Many more still have to decide, but it now looks as though far more universities than expected will charge the maximum fee. When asked to justify these decisions, institutions tend to cite their very high costs, their need to replace the money which is being cut from their block grants over the next few years, and their academic quality.

All of these arguments have some merit, but taken together they start to raise some interesting questions about the likely workings of the 'market' for undergraduate places at English universities. As an economist, I naturally tend to think of this in terms of a supply curve (for each potential level of fee, how many undergraduate places will, in aggregate, be offered by the universities?), a demand curve (for each possible level of fee, how many potential students will be seeking a university place?), and an equilibrium price (the fee level at which demand and supply are equalised). In practice, any sensible analysis of the higher education market can't be quite this simple, as there are some other important factors to take into account, such as:

(a) Most universities don't just accept any student with the basic minimum qualifications for university entry who is willing to pay the fee. Instead, each institution has its own view of the student quality threshold that it requires, and these entry standards vary a good deal between institutions.

(b) In a similar way, entry standards also vary by discipline, both within any given institution and across institutions. Historically, institutions have often tended to think of themselves as having a fixed supply of places that they need to fill (which is largely true in the short run), and entry standards for different disciplines have adjusted to enable the available places to be more or less filled (subject to whatever minimum standard is deemed appropriate for each discipline or degree programme).

(c) Although permitted to charge different fees for different subjects, only a couple of the universities that have announced their fees for 2012 have elected to do so. Most set a single fee, nearly all at the maximum permitted level.

(d) Whatever fee levels are set by the universities, individual UK students will pay nothing up front. Instead they will incur student debt on which a modest interest rate will be levied, repayments only starting once a student has graduated and is earning over £21,000 per annum; the repayment will then be at the rate of 9% of income in excess of this £21,000 threshold. Any debt outstanding after 30 years will be written off. Thus students are to be funded through income contingent loans, so the fees charged by universities should not feel like a 'price' in the normal sense.

What all this means for the evolving market for university places in England is not yet clear, and may not be for some time. What I would expect is that some of the institutions setting the highest fees will have little or no difficulty filling all their places. Others, however, may discover that the price elasticity of demand is not zero - in other words, they will find that demand for places is indeed responsive to the fees being charged. Such institutions will either struggle to fill places right across the board, or they will find that demand is sufficient in some subject areas, deficient in others.

Hence in the first few years of the new system, I would expect quite a few institutions to re-think their fee strategies, either lowering the general level or lowering the fee in certain subject areas. At the same time, the new market environment might well compel some institutions to undertake restructuring by eliminating 'unprofitable' degree programmes from their offerings - this is already happening, of course, but it will likely be accelerated. Institutions will also try to make themselves more attractive to potential students, partly through marketing programmes, partly through improving the services offered to students, and perhaps also through efforts to build reputation - such as supporting high quality research or developing diverse foreign links. At the extreme, there might even be one or two institutions that simply cannot cope in the new conditions, and they might either merge with financially stronger universities or close down altogether.

So, the English universities are certainly living in interesting and challenging times, and I wish them well. I also wonder when the Scottish higher education system will start to catch up with England in terms of its financing arrangements. For the current opposition to fees, and the claim that government funding will enable Scottish universities to keep up with their English counterparts, are simply not credible. Something will have to give, eventually.