The Competition Implications of Lifting the Cap on University Tuition Fees

(by Andreas Stephan) The prospect of abolishing the cap on University tuition fees in England raises a number of competition issues. Apart from coordination in setting fees, a particular danger exists in relation to bursaries in clearing. There may also be the facilitation of parallel pricing through focal points, such as the level of fees underwritten by the government or the figure of £7,000 suggested by the media and by the Business Secretary.

Background

On Tuesday 12 October 2010, Lord Browne delivered his long awaited review of England’s higher education system, which recommends radical changes to the university funding system. Currently fees are capped at £3,290 per annum. The key recommendations of the review are:

  • There should be no cap on fees
  • The UK government should underwrite fees up to £6,000
  • Universities should pay a levy on fees above £6,000, to cover cost to government of financing fees up front in the form of a student loan.
  • Universities should keep a diminishing proportion of fees over £6,000.
  • Students should begin repaying fees when their salary reaches £21,000, with a progressive scheme for repayment thereafter.

The recommendations come at a time when public funding for universities is expected to be cut by 79% in the coalition government’s spending review, to be announced on Wednesday.

The temptation to talk to competitors about uncapped fees

The first reaction of Pro Vice Chancellors, bursars and School or Faculty heads, may be to pick up the phone to their counterparts at universities of similar reputation and prestige. Panicked conversations about fee levels could of course result in their institutions being fined up to 10% of annual turnover and themselves being convicted under the cartel offence. When 50 of England’s top independent schools were found to have breached competition law by talking to each other about tuition fees in 2006, they paid only nominal fines and were allowed to avoid an admission of guilt. The OFT is unlikely to show such leniency in relation to universities; especially as competition law enforcement can no longer be described as something new. Yet many university executives do not know that such conduct is illegal, even when instigated by another institution. They may assume that universities are somehow different to a private business. In fact, they are commercial undertakings and are subject to the same rules and responsibilities as any private corporation.

Bursaries in clearing

The most heated competition between universities may come in the use of bursaries in clearing. Higher fees may result in fewer applications and therefore a greater reliance on a last-minute matching of students and places (known as ‘clearing’) as a means of filling places. In order to secure quality applicants through clearing, universities will have to provide bursaries. This could spark a price war between competing universities at similar levels of prestige and quality, possibly tempting them into agreeing the number and size of bursaries. In all likelihood, universities will fail to honour such an arrangement because the incentive to cheat will be so strong. However, even an attempted breach of competition law would constitute an equally serious infringement.

Tacit collusion

When the current capped system of tuition fees was introduced, it was thought that some competition would exist between universities on the level of fees charged. In fact, every mainstream university set their fees to the maximum level. The Browne report identifies £6,000 as a key figure; beyond this point the review recommends that universities should start bearing the risk of fees being unpaid and must pay a levy to help the government finance the fees upfront.  The levy starts at 45% and notches up 5% for each extra £1,000 (except for an odd 10% point jump at £10k fees) up to a maximum 75% marginal rate.  Media reports have concentrated on a figure of £7,000 – confirmed by the Business Secretary, who told parliament it was a figure “we are considering”. As with the current fees policy, Universities are likely to gravitate towards these figures, without independently attaching a price to the degree programmes they offer.  A small number of focal points may develop for different groups of universities (e.g. Russell group, ‘new’ universities). As fees will continue to be financed by a government loan, students may be less price sensitive than we would otherwise expect. In addition, there will be fears that charging less than the focal point will signal that the institution is somehow inferior to the competition.

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