Think of college like a designer handbag

Economic theory explains why the administration thinks raising tuition could ever be a good idea.

Jasper Johnson

The University of Minnesota’s Board of Regents recently endorsed a proposed tuition increase for out-of-state students. The plan is to increase the University’s cost to match the midpoint among Big Ten schools. 
 
 
This idea has met with criticism from many students, who’ve claimed such a hike would deter nonresidents from applying and could negatively affect the University overall. 
 
 
Others, however, support an out-of-state tuition increase, claiming the University should focus on Minnesotan interests first and that higher prices could even raise the school’s prestige. 
 
 
In my mind, this is a debate about Veblen goods. In economics, a Veblen good is one for which — seemingly counter to conventional wisdom — an increase in price results in higher rather than lower demand. Traditional examples of this good include luxury items like supercars or designer handbags. 
 
 
Veblen goods’ exclusivity defines their value. When a new, more expensive item comes onto the market, people desire it more than cheaper options because of the social prestige that comes with paying the higher price. 
 
 
To an extent, I think we can also apply the concept of Veblen goods to universities. 
 
 
One of the more cliche and frustrating sound bites students often hear during the college application process is that, at pricy elite schools, “you don’t pay for the education; you pay for the connections.” This platitude is true to a degree, but it by no means diminishes the real value of these schools. 
 
 
Prestige undoubtedly impacts our perceptions. Elite schools attract world-class professors and researchers, and they produce stellar students. As a result, workplaces learn to respect these institutions and they may even develop formal ties with them. 
 
 
The interesting question is whether simply raising a school’s sticker price would have a causal impact on its prestige. At least one study has suggested that when a university raises its tuition, the average SAT test scores of its attendants may increase.
 
 
Another factor to consider is sticker price versus effective prices for tuition. If the listed tuition for a particular university were significantly higher than what most students end up actually paying after financial aid pricing, how would we perceive the prestige of a certain school?
 
 
Ultimately, the implications of viewing college as a Veblen good are wide-ranging in higher education. It’s necessary to understand Veblen goods when we address the cult of prestige in academia or when we pressure students to distinguish themselves from their peers by attending a famous school. 
 
 
That said, some could argue that public and private schools have different missions and that they shouldn’t bow to market pressures when valuing tuition.
 
 
The potential impacts of a tuition increase at the University are hard to gauge. However, I’ll say it’s unwise to dismiss tuition increases outright. The relation between price and prestige is complex, and a tuition increase should work to optimize both a school’s perceived status and its affordability. 
 
 
Jasper Johnson welcomes comments at [email protected].