The effect of competitive structure on price elasticity in local markets of higher education in the commonwealth of Pennsylvania

This study tested the general proposition that competitive structure strongly influences the price elasticity of local, concentrated markets of higher education. A concentrated market is one in which each institutional type in the competitive structure captures at least a 20% share of the market. A competitive structure is defined as the set of two or three institutional types that absorb the largest share of their market (i.e. college applications). Mixed competitive structures consist of one four-year institutional type that is publicly controlled and another that is privately controlled. In homogeneous competitive structures, there are two four-year institutional types, both publicly controlled. Concentrated markets where price is inelastic tend to be oligopolistic markets. Choice tends to be inhibited under these conditions, because institutions are reluctant to attempt to compete through price changes. Using an analytical technique specifically designed for research models involving choice, this study explored the effect of the competitive structure on the elasticity of demand in concentrated markets, focusing on the thirteen higher education markets in Pennsylvania. The study employed an interactive logit regression technique to generate a choice function for each student and a market function that aggregates the choice functions for the students residing in a market. The market function was then used to generate a price elasticity for the higher education markets under study. The findings supported the specific proposition that price is more inelastic in markets with a homogeneous competitive structure that in markets with a mixed competitive structure. The implications of this study are instructive for public planners setting objectives for financial aid programs. The analysis suggests that a financial aid program in which money is given directly to prospective college students would help price-sensitive students more than aid disbursed through institutions. This is because the relative prices of institutions may not be altered by standard financial aid packages in concentrated markets with homogeneous competitive structures. Students could use direct financial aid to adjust the cost of attending a chosen institution and thus overcome the oligopolistic tendencies of their local markets