Understanding Entry and Exit in the Higher Education market: Contestability and the market for lemons – Carlo Morelli (UCU)

The publication of the Green Paper on Higher Education, Fulfilling our Potential: Teaching Excellence, Social Mobility and Student Choice (BIS, 2015), represents a clear attempt to undermine the existing UK Higher Education system by introducing a full market economy with entry and exit of providers in response to price signals.

Part B Chapter 2 of the Green Paper, ‘Provider exit and student protection’ identifies the minimising of ‘unnecessary’ costs of entry and exit as a key necessary requirement for the attraction of new providers of degree programmes. Yet in doing so, student protection will be placed below that of the interests of profit-maximising organisations, and sub-standard teaching aimed at maximising returns for the shareholders will undermine high quality, low cost provision.

Private providers at the heart of the system

The Green Paper locates the potential high costs of compensation to students for any failure to provide the programme students have signed up for as a key impediment to new entrants and subsequent exit from the sector. While ‘insurance policies’ or ‘rebates’ of fees might be considered these ‘would need to be carefully designed so as not to create a barrier to new entrants’. How high should these barriers be? Is it acceptable simply to reimburse student fees to a student whose programme of study is cancelled mid-study or whose university closes after graduation leaving them with an unrecognised qualification? If students are making lifetime investments why should they not receive lifetime compensation from failing institutions?

By suggesting these ‘barriers’ should be low the Government’s Green Paper demonstrates a prioritisation of the commitment to profit maximisation of private providers over that of student protection. Indeed, the Green Paper explicitly states this subordinate position of student interest in this market: ‘In designing student protection, we would seek to ensure that the regime does not create unnecessary barriers to exit.’

Embedded within this pro-market view of Higher Education is an implicit theory of competition based upon contestability theory. Here threats of entry and the low cost of exit forces existing providers to behave as though a perfectly competitive market exists in order to minimise the attractiveness of the market to new entrants. The use of price as a proxy for quality then provides consumers with a measure of the attractiveness of one provider over another.

The impact of information asymmetry

Yet Higher Education cannot be understood in this form due to the existence of strong information asymmetries in the production of education. Students’ ability to act as consumers and compare different providers provision will only be possible if the content of that provision is standardised, and uniformity can be demonstrated to potential consumers.

However, as long ago as 1970, George Akerlov, winner of the Nobel prize in Economics, demonstrated that high quality is driven out by low quality in markets where consumers cannot accurately interpret quality, such as those characterised by information asymmetry. Education cannot be reduced to a market for scondhand cars, or as Akerlov termed it, a ‘market for lemons’.

Universities themselves will also seek to demonstrate this standardisation and uniformity as a means to minimise the information asymmetry that exists between academic providers and student consumers. University education then will increasingly see the replacement of research-led teaching or innovative pedagogy with uniform standardised text-book-based training and teaching to tests. Indeed, this is exactly what the proposals for the TEF, also spelt out in the Green Paper, seeks to do via the creation of a definition of quality based upon formulaic defining of programme content and delivery.

Of course information asymmetry will not exist in the high cost, high quality sector of the market, in the elite sub-grouping of Russell Group institutions. To continue with Akerlov’s metaphor, for those who can afford a new car any concerns over information asymmetry and purchasing a ‘lemon’ are minimised.

It will end in tiers

Thus the impact of the Green Paper is the facilitation of an increasing differentiation in the provision of university teaching between high-cost, high-quality providers of higher education and low-cost, low-quality providers of higher-level training. Low-cost high-quality provision will be squeezed out of the system. The mechanism for achieving these outcomes is the creation of a means of entry and exit along with the enforced standardisation of provision through the TEF.

Opposition to the Green Paper is essential for students, staff and educationalists seeking to ensure higher education remains a means of human development, creative learning and co-operative processes of research and enquiry.

– Carlo Morelli, Dundee


About Sean

Principal Research Fellow, Survey of English Usage, University College London
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