I called it last week. Today’s NYT reports that Princeton has accepted Harvard’s invitation to join it in eliminating early admissions. In addition, the presidents of eleven elite liberal arts colleges (including Swarthmore, Williams, Barnard, and Amherst) have met to discuss, among other things, collectively eliminating their early admission programs and reducing merit-based aid.
Just a friendly reminder, guys:
You are competitors. This is not a joint venture. You are agreeing to reduce competition by eliminating a service option that your customers desire and that would be available but for your agreement not to compete. That’s not good.
Now, each of you may decide that the early admissions program is bad for your school because, for example, it tends to produce a class of homogeneous, privileged students who blow off their last semester of high school. If you reach this conclusion and you want to change your admissions protocol unilaterally, then by all means do so. But there’s no legitimate reason for you to agree among yourselves to eliminate competition.
Make no mistake — that is what the elite schools are doing. As Reed College president Colin Diver said with respect to merit aid: “Do we really need to be part of this arms race in merit aid? … I talk to lots of presidents who would love to disarm, but they’re afraid to do it unilaterally.”
Of course they are. When any business decides to stop responding to customers’ demands, it runs the risk of losing business to its rivals unless it can get them, too, to stop responding to customers’ demands. Unfortunately, limiting competition in this fashion usually isn’t good for customers.
The presidents of these elite schools are less confident about competition’s benefits. As Amherst president Anthony Marx remarked, “Competition is important and strengthens us and can spread our net. But if it’s designed to drive us in a way that’s self-serving and not in society’s interest, then that’s a problem.” That’s an awfully big exception there, Mr. Marx. Pretty much all competition is designed to be self-serving rather than public interest-promoting. To quote Adam Smith: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages.”
The elite colleges’ idea that they may limit competition among themselves in order to preserve the “public interest” seems to derive from a conclusion that the competition at issue is somehow “ruinous.” While the notion of ruinous competition has a long history in antitrust jurisprudence, it’s certainly in decline. As the Supreme Court remarked in the Professional Engineers case:
The Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services. “The heart of our national economic policy long has been faith in the value of competition.” … The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain – quality, service, safety, and durability – and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers. Even assuming occasional exceptions to the presumed consequences of competition, the statutory policy precludes inquiry into the question whether competition is good or bad.
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Presumably the colleges here will make the same arguments that MIT made to the Third Circuit, namely that agreeing to limit merit aid will allow those schools to increase need-based aid. Thus, the schools are not increasing their “profit,” but merely redistributing how they award a fixed pool of aid funds. This is beneficial, so the argument goes, because it will increase the diversity of the student body by allowing more low and middle-income students to attend these schools.
Whether these types of social policy justifications are valid under the antitrust laws is an interesting questions, but the Third Circuit bought it and I would be surprised if other Circuits did too.
Excellent post, as always. Any thoughts on the announcement by Wal-Mart and Target that they will start testing a $4 generic drug program in Tampa? Incredible how that little “market” idea works to solve problems – and i thought only Congress could solve our healthcare woes!
Wouldn’t elimination of Early Decision actually increase competition in one sense? My understanding is that the existence of early decision/ early action actually lowers the total number of outstanding applications. If you apply early decision/ early action (or whatever they call it) to brown and get in, you aren’t going to apply to as many schools as you would if the service did not exist, no? Under that scenario, you might not apply to Penn, Columbia, Cornell etc. and those schools won’t have the same opportunity to “compete” for you as they would if there was no ED, correct?
Plus, early decision tends to exclude a certain segment of lower income kids, in my view. I wanted to apply early decision to a top 5 US News ranked undergrad in the early ’90s, but my parents wouldn’t allow me since it was binding. They didn’t want me committed without knowing what the financial aid package was going to be. Wouldn’t getting rid of early decision be a societal good in this way? And wouldn’t it open up the 30% of the class chosen through ED to a larger pool of applicants, thus increasing competition?
Another question that needs to be asked is wheter the current ED system is coercive in that students are applying ED, not becuase they really want to go to that school, but because they are making a statisitical call on their outcomes: “I think my best chance to get into an Ivy is to apply to Cornell ED”
Thanks for the comments, Keith and Josh. A few thoughts:
1. I don’t think the MIT consent decree suggests the legality of what the colleges are doing here. My understanding of that decree (and I could be wrong) was that it merely permitted qualifying colleges to exchange information about financial aid applications (in order to identify discrepancies), and then, after awards were granted, to provide award information to a third-party auditor, who would identify gross disparities in awards. In any event, the decree did not require court approval and thus reflects no more than the DOJ’s decision to back out of litigation, not a judgment that the practices approved were in fact legal.
2. Keith questions whether this is really a service cut. I think it is. Students (the consumers here) like early decision, much the way retail consumers like well-organized, clean stores with convenient hours. It’s all part of the overall package the seller is offering. A naked agreement not to compete with respect to one aspect of that package strikes me as troubling.
3. Both Keith and Josh then ask whether we can really call this an “agreement.” Well, the agreement among the 11 elite liberal arts colleges is certainly an agreement. But what about Harvard’s and Princeton’s parallelism? It strikes me that this is the sort of “conscious parallelism” from which an agreement may be inferred (a la Interstate Circuit): there is consciously parallel behavior that does not make business sense if engaged in unilaterally. Now, as I argued in my initial post, it might make sense for Harvard to act unilaterally, but the fact that it’s delaying its decision to allow others to sign on suggests that’s not the case. Moreover, statements like Diver’s (“they’re afraid to do it unilaterally”) suggest this is an irrational business move but for acquiescence by competitors.
4. Josh asks whether there are procompetitive justifications. I cannot think of any. This is certainly not a case (like BMI or NCAA) in which the competition limitation at issue is needed to create some product or service that otherwise would not exist.
5. Keith suggests that there might be more competition for aid “in a world where talent doesn’t get locked up early by a single school not facing any financial aid competition for the locked up student.” I think he’s making a “Chicago Board of Trade”-like argument that the market will work better if all buyers and sellers come together at a single place and time and bid against each other. (I may be mischaracterizing; I apologize if I am.) I don’t find this argument compelling. College admissions is not like a commodoties market, where the value of some centralized market (i.e., its efficiency) grows as more buyers and sellers participate in it. There is thus no allocative efficiency created by forcing all the players to make their admissions, funding, and college selection decisions at the same time.
6. Keith’s last comment contends that “other applicants benefit by Harvard and Princeton ending the policy of putting seats aside for early applicants” and that “it’s hard to say which effect predominates.” Perhaps that’s right. But since it would be virtually impossible to weigh the total social utility of responding to consumers’ demands against the total social utility of eliminating some competition, antitrust presumes that the effect that results from unfettered competition is optimal. I therefore start with the assumption that consumer surplus is maximized by vigorous competition among sellers.
All good stuff, guys. Thanks for the comments. It’s a pretty intriguing issue, huh? Exam question, perhaps?
(P.S. to any of my antitrust students reading this comment: I’m not that dumb.)
One more point: Josh and Thom are right that some applicants obviously benefit from being able to apply early. My point is simply that other applicants benefit by Harvard and Princeton ending the policy of putting seats aside for early applicants. It’s hard to say which effect predominates, which means that one can’t say that the new policy is unambiguously harmful to consumers as a class.
Yes, Josh raises and then brackets an important additional issue: is there really an agreement here? The schools might argue that it’s just a case of conscious parallelism (or “service cut leadership”!). Harvard’s announcement was unilateral, as was the Princeton announcement that followed. Harvard’s tentativeness about the policy may not be very different from an airline raising price in response to competitive considerations and waiting to see if others will follow, planning all along to cut price back if others don’t follow. Meeting the competition is not itself evidence of agreement.
But Thom and Josh make good points about these meetings among and statements from the various administrators, though none is exactly a smoking gun. Still, Josh’s suggestion to “tone it down” sounds like awfully good advice.
A few thoughts:
First, I really enjoyed this post.
Second, regardless of whether this is ultimately an antitrust violation, shouldn’t some antitrust lawyers be somewhere be telling these university presidents and officials to tone down the rhetoric about stopping “arms races” and making agreements?
Third, and in response to Keith’s point that only some consumers of education services may value the early admissions program, much competition takes place only to win marginal consumers and does not proportionally benefit the infra-marginal, i.e. targeted price discounts at consumers that are not brand loyal. But an agreement to stop competing for this subset of consumers would clearly be illegal.
Fourth, perhaps it is true that all consumers do not value the alternative of the early admissions process, but it is then difficult to see how it evolved out of a competitive “arms race” between schools. I think the real issue to tackle here is not whether the agreement (assuming there is one for the moment) can be characterized as a coordinated service cut, but rather, the first point Keith raises re: possible competitive justifications.
Excellent post, Thom, as was your prior one on this issue. Here’s a question: given the outcome in the MIT case on financial aid in the early 90s, is there any reason the schools should worry about what they’re doing? After all, that earlier case involved conduct affecting the effective tuition price charged to students, a much more sensitive area from an antitrust perspective than what’s at issue here: an admission procedure.
You characterize this as a coordinated service cut. But is an admissions procedure really a service? The schools might argue that the services they offer remain unaffected by the new admissions policy. If anything, they may argue, they’re enhancing competition by eliminating early exclusive dealing arrangements between individual applicants and particular schools.
You say that applicants want this admissions procedure to remain, and that is undoubtedly true for some applicants. But there are probably others who are indifferent about it and some who would be happy to see it go (e.g., those whose admissions chances would now be enhanced, and those who could get in on the early policy but worry about applying later with the general pool and who would rather have more time to make up their minds).
Is it clear that the new admissions approach would actually reduce merit-based competition? Seems to me that the merit scholarship market could be more competitive in a world where talent doesn’t get locked up early by a single school not facing any financial aid competition for the locked up student.