Gordon K. Davies, the former executive officer of the Virginia State Council of

Question

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.

Questions: 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? Is competition in the education market a good thing?

Explanation / Answer

As more and more firms enter the market, firms wil no longer be having much influence on prices.As they were cartels where firms usually do te price fixing as they have the influence on the prices as in the oligopoly. In oligipoly, there are barriers to entry of the firms but in this market they are unable to prevent the entry of new firms and students are benefitted at low cost. This shows that the market is becoming perfect competitive where there are infinite sellers and they have no barriers to entry and exit of these firms. produts are also homogenous and education is provided the same by all but there can be slight difference in quality.

a) Price of education will tend to fall down as there are so many sellers in the market. If any one tries to increase the price, then whole market will be captured by the one who has less price. so price wil be equal to the MC like in perfect competition.

b) quality issues must be considered as now prices will fall so they can compromise with the quaity of education.

c) No, competition i education market is not a good thing as the quality will go on falling where no. of sellers keep on entering the market without any restrictions.

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