It’s college commencement season so it seems like an appropriate time for me to write about how messed up college admissions are in the US. I am finally free to speak out with my kids now all in (or admitted to) college, so here’s what I learned from navigating the college application process in recent years.
My position is the top tier universities in the US are an illegal oligopoly and need to undergo substantial reform to limit the abuse of their market power.
Note, this is not sour grapes. My kids both had good outcomes. It is rather an observation of how maddening it is to interact with such a broken system that could easily be improved.
Defining Oligopoly
An oligopoly is a market dominated by a few large players. There is nothing inherently wrong with being an oligopoly. Many oligopolistic industries are highly competitive, especially when there is heavy fixed investment so competitors can’t afford to sacrifice market share. Some of the lowest return industries in the economy are hyper competitive oligopolies.
However, an oligopoly that colludes to restrict choice is illegal. For example, if all companies in an industry only sell a blue widget – even though they all have the capability to make a cheaper green widget – then this is an antitrust violation as they are artificially keeping prices high by limiting choice.
Similarly, if they all switch to green widgets but each produces the exact same quantity rather than compete for market share, this is an antitrust violation. Or, if they publicly disclose price in such a way that when one raises prices, the others coincidentally also raise prices, this is an example of an oligopoly abusing its power to maintain prices above a market clearing level.
In a nutshell, when members of an oligopoly don’t compete with each other for market share but, instead, protect the status quo to maximize prices above a natural equilibrium, they have abused their market power.
Colleges Act In Unison
If there is one thing that I’ve learned in recent years, it’s that most well known colleges have stunningly similar admissions policies.
There weren’t just a few schools that discriminated against Asians. It was most of them.
There weren’t a few schools that went to “test optional” policies. It was most of them.
There weren’t a few schools that gave admissions preference to first generation applicants. It was most of them.
There weren’t a few schools that favored applicants from underrepresented groups. It was most of them.
Amazingly, every admissions department even prefers the same style of college essay (some burden the student overcame, preferably one that suggests their parents were either marginalized or were an obstacle who didn’t understand them)!
The most recent trend that magically many schools have stumbled upon at the same time is free tuition if your family makes under $150K/yr (some schools have raised it to $200K but it’s all the same idea). How is it so many schools all decided upon this new policy simultaneously???
I’ll tell you how. It’s called oligopolistic price signaling! One school makes the change and all the others see the signal and follow along. It’s Oligopoly 101 – and it’s illegal.
It is also price discrimination. The same service is being provided to all students, yet some pay more because they can afford more. That is illegal and only happens because an illegal oligopoly acts in concert rather than competing.
Lack of Choice
Just to be clear, there is nothing wrong with any individual school – or even a healthy minority of schools – having any of the policies above. They each have varying degrees of merit.
However, when all the schools follow the same memo, it becomes illegal because it restricts choice. It’s hard to believe every admissions department independently came to the conclusion that non-academic talent matters as much as academic achievement.
If you imagine a continuum of qualified students, some will only excel on quantitative metrics but not be “well rounded”, others will maybe be a little lower on grades but have lots of leadership experience, some will have a novel interest that makes them stand out, some will have great ability but be a little short quantitatively because they didn’t have access to tutoring, etc.
Ideally, there would be a mix of all of these student profiles across campus. In reality, some favored parts of the continuum get into most schools they apply to while others hardly get into any. That is not how a market should work. There should be good options for all the different parts of the spectrum.
Why are there no schools that compete on “we just take the highest test scores” or “we don’t give any legacy preference” or “we are essay optional”? Surely, if some schools followed novel paths, they would find a market for students who don’t fit as well in the current zeitgeist.
The fact that no schools have bucked the consensus suggests they are engaging in collusion and should be subject to an antitrust investigation.
The Discriminated Consumer
So who are the net losers in this system? There are many, but the most common are applicants with high grades and test scores, who experienced a “normal” childhood but with parents making more than $200K – who live in the US.
That last modifier is an important one. Because there are wealthy applicants with high (or even not so high) scores who get in rather easily. Can you guess who they are?
Foreign applicants. Why? Because they pay sticker price. They are not eligible for financial aid so they are admitted at an above average rate to subsidize the foot on the scale for preferred American students who can’t pay as much but come from preferred demographics.
The irony of this is that a person of Chinese descent has better odds of getting into a top school by living in China than growing up in America – even if they are both full payers.
Since admission in the US is “need blind”, wealthy applicants get no advantage for being able to pay sticker price. That advantage only confers to those living in Asia or the Middle East. Does that seem like a well functioning market?
I’m not suggesting we ban foreign students, but it is bad public policy to make highly qualified Americans settle for backup schools while wealthy foreigners get into their top choice. That’s societal self harm.
Shouldn’t some university position itself to attract the kids of investment bankers and tech executives? That would be a pretty good business model I would think.
You get applicants with above average credentials who won’t care what you charge. Sure, the student body would be less diverse, but you would have a successful alumni base who would probably donate at a higher than average rate.
I’m not saying all schools should look like this. That would be just as unfair as the market we have today. But some schools should look like this. That’s how choice works.
It is the lack of options that proves colleges act as an oligopoly.
Imagine if the lack of choice favored privileged children rather than disadvantaged them. What would the perception be of that practice? There would be loud calls for reform. Just because nobody is sympathetic to the well off, doesn’t mean their kids should be punished.
Discrimination doesn’t become legal just because it has “good intentions”. That’s why the policies that discriminated against high performing Asian students lost at the Supreme Court. Finding new ways to discriminate is just as wrong.
Lack of Supply
The other sign of oligopoly is the lack of supply. Admissions rates to top schools are now under 10%. That is clearly a sign of unmet demand!
In a normal market, businesses would expand to meet that demand. Yet, enrollment at the most selective schools is relatively flat since the turn of the century. Why is that?
Yes, there are some limitations like lack of space on campus but plenty of state schools (and even some private schools) have satellite campuses away from the main campus. If I told you that your kid could go to Harvard, but the catch was they’d have to go to the sister campus in Charlestown, I don’t think you’d say “that’s OK, I’d rather go to UMass”.
There is no good reason most of these schools haven’t expanded. I am not suggesting they act like a dumb fashion brand that over expands and loses its status, but Harvard has been at roughly 7000 undergrads for decades. To pick another Boston school, Boston College has been at roughly 9500 for decades.
I’m not suggesting they should double but 10K at Harvard or 12K at BC would not change the reputation of the university. Sure, you would need more dorms, satellite campuses, etc. That’s all doable.
So why don’t they do it? Because there is no threat from new entrants. You can’t create a new “elite” school like a startup. The number of schools is fairly capped.
But, there is nothing that stops them from growing enrollment to meet demand – other than that life is pretty good when the government pays a large chunk of your costs and wealthy foreigners contribute another large piece.
Oh, and also that top schools think their status comes from rejecting the most students (having a low acceptance rate) rather than growing their share of the most qualified applicants.
In a non-oligopoly, Yale and Harvard would compete for top students by offering them lower prices or better dorms or guarantees of research opportunities. Instead of capping themselves at 7000 students, they would brag about who got to 10,000 first (while maintaining the same level of student quality) rather than who rejected the most good candidates.
It’s highly ironic that top tier economics schools can’t realize they are endorsing closed markets. Where are the economics faculty calling out the need to increase supply to meet market demand?
Why It Matters
There is a reason so many graduates are disappointed with their outcomes, whether it be the amount of student debt, not making enough to “afford to have kids” (I could write a whole separate post on how misguided that mindset is but it’s not good public policy when successful people don’t pass on their genes), realizing their choice of major limited their future prospects, etc.
Universities don’t compete on outcomes post graduation. They compete on outcomes pre matriculation. Reputation shouldn’t be about how many applicants you reject! It should be how great your alumni are doing at their 10th or 25th reunion.
That means admissions needs to put more emphasis on who is most likely to have career success than who might save the world. Spoiler alert: Nobody is going to save the world!
That also means universities need to promote to students the virtues of capitalism and free markets and career achievement rather than demonizing success and promoting class warfare while only finding fault in our culture and history.
Make college more about training productive citizens. If graduates are really as worried about AI as they claim, they should welcome school being more about career preparation than social activism.
But to get there requires a change in admission philosophy to admit that smart kids who want to be successful shouldn’t be rejected for not being diverse enough but rather pursued for what they can contribute to our future economy that desperately needs people with the skills to thrive in a technology centric world.
If the government really wants to reform higher education, it shouldn’t be pursuing penalties against individual schools. It should have the FTC bring antitrust charges against the top 100 universities and demand that they change admissions policies to compete with each other rather than imitate each other.