Economics and morality of price discrimination in college tuition Part 2

...Continued from the first post
Survive or die.  Capitalism wins the day
Seems harsh, but this happens in all markets, and educated labor markets are no different: employers will only look to hire and use however much they need.  Similarly, if products fail to adapt with the times, then they must either adapt or be forgotten.  In this case, a couple of majors may not survive if they continue to be priced the same way as in-demand degrees.  This creates educational arbitrage and universities do not have to take responsibility for it since they are the only institutions that offer creditable degree programs. And thus we have huge market gaps.

One example is fields or majors that are overpopulated with qualified individuals.  If there's a shortage, like there is with programmers and engineers, then wages are going to be attractive and there will be plenty of opportunities available to those who are willing to brave the choppy waters of said fields.  However if there's an overage of qualified people in certain fields, such as in law or psychology, then there will naturally be fewer jobs available for the wages they would want.  Although there would be pressure on employers to drive down wages, they can't because education costs are high enough as is and graduates want to be compensated adequately for the heavy investments they make.

Wait, What if we....
Do away with college altogether?  It's gotta be a scam right?  All joking aside, there should be a more tangible solution.  Markets may dictate availability and wages of jobs given the demand, but universities' collective role in producing the next generation of professionals can and should be altered.  If universities treat all majors the same and charge a flat rate, they aren't maximizing their return on investment for each student in the long run.   Eventually students and future applicants will opt to apply for the more profitable degree programs and when those get overpopulated, they get turned away and take their talents into other fields away from universities.  Instead of settling for underemployment after college, they'll cut out the middle man and maximize their earnings potential without debt even if it is lower than what they hoped for.  It's a dark reality but also a possible one.
 
Universities argue that they address these disparities via financial aid and wealthy donors;  however, this strategy is inefficient because it depends on factors largely outside of most students' control (parental income, tax returns, government's willingness to fund, private sector's willingness to fund, etc.).  Most of the time, the aid students receive is akin to a loan albeit at a higher interest rate either collecting interest during school or after graduation.  In the long run, universities won't maximize their investments because they will have to do away with some of their art institutes, lose some donor funding, and see a huge flock of people being turned away because there will be too much demand for their top profiting degree programs.

So why not charge different prices for different majors? An art history major will likely not make as much as a programmer anyway, so why are they charged as though they will? This is more in line with rational investment decisions because a person who realizes that his returns on investment are the same percentage no matter what route he chooses, will opt for the one he likes the most as opposed to simply the one that makes more money.

I've mentioned return on investment a lot, but how would a university set up a price discriminating system to eliminate "educational arbitrage" and maximize their future earnings from students.  I'm not sorry about using math.

• Evaluate the mean annual starting salary for graduates from the university for every major.  I_philosophy = 30,000  I_civ.eng. = 70,000.  Numbers are hypothetical
• Evaluate the unemployment rate for each major.  Subtract this value from 1 and multiply that number by the mean salary of graduates.  u_phil =.2.  E(I_phil.) = (1-u)*I =24,000.  u_mech.eng. = .05.  E(I_civ.eng) = (1-u)*I_civ.eng = 66500.
• Multiply this expected value by some coefficient correlated with the relative rankings of the university and a discounted value of future education required.  For instance a philosophy major or a law major needs more school to get a job so the university should factor that in and create a pricing scheme.

This method is far from perfect but merely a sample of how one would go about price discriminated based on earnings potential. There are other factors associated with this which I have probably not thought about or addressed.

But why should we conform to them? We hold all the information.   
There are some ethical questions behind this.  As I pointed out earlier, universities could easily fall behind the 'we're a learning institution, not responsible for the salaries and job prospects of our students' tag. After all universities have their own interests to protect whether it's maintaining buildings, hiring top quality professors, offering tenure, or attracting generations of applicants or future donors, and protecting their prestige.  What goes on in the corporate world shouldn't bother them because they don't offer half of those things. That too, universities would even argue that they are more valuable than corporations because they're the intermediate step between young adulthood and adulthood.

There are several ethical concerns about how much higher education should be determined by what's popular in the private market since often times their interests are at odds with each other. But my argument is that from an economical point of view, universities should offer variable rates on their tuition fees based on earnings potential from the majors students choose.  Not only does this allow students to make a more informed decision on following their passion but it also gives them more liability.  Survive or die isn't going to be thrust open them, but rather presented to them so they can make a rational choice.  

Economics and morality of price discrimination in college tuition

It seems that every other day, we see a story of recent college graduates being overwhelmed by massive student loans and limited job prospects.  As a result we see plenty of critics decrying both the universities and the graduates from them for some of the following reasons. This is not an exhaustive list. 

1.) Education itself hasn't changed, but the price has skyrocketed.  

2.) Students have unrealistic expectations of what  4 year college programs will do for them and don't prepare themselves for the practicalities of the job market. (I was told I would learn to make cookies)

3.) They don't choose practical degrees or there are too many people majoring in one or two fields (Capitalism: survive or die, love it or leave it #'Merica).

But that can't be the full extent of the problem.  Not all job markets are equitable for degrees and not everyone's qualifications guarantee them an equivalent job.  Some degrees require a masters/PhD, MBA, CFA, and others don't need graduate degrees at all.  So we have to find a way to make accurate comparisons between different degrees and find a more market-friendly solution.

It's still the same apples, just twice as expensive.

This begs the question of how is what we're learning today, different from or better than what our parents learned  20-30 years ago?  In some of the more job market friendly degrees such as engineering, computer science, or medicine, we can perhaps understand the economic justification behind higher tuition.  Why?  Because these areas have benefited the most from technological growth between say, 1980-2013.  Capabilities and modernization of tasks in the job market mean roughly equitable increases in salary, without considering inflation.  Naturally a university would think that they would want to see a greater return of investment on educating these future infrastructure developers, doctors, and potential startup creators.  After all, where would these men/women be if it weren't for universities.

The same can't be said for other degrees such as those within humanities.  Despite the intellectual value and critical appreciation one could earn from studying in these fields, often times there isn't a whole lot of tangible growth or difference between what a humanities major learns today as compared to 20-30 years ago.  Because salaries and career opportunities in those fields was high and cost of education was low back then, people saw a satisfyingly high return on investment.  Not as high as some of the more technical majors, but enough to justify their passion in art history.  Now the cost of education has risen, the economy has slumped, people are more tech oriented, and thus opportunities are low.  Same apples from 20 years ago, except they've gone a bit too ripe, and they're twice as expensive

What would you say, you [can] do here?  

There's a memorable scene in Office Space in which an employee struggles to tell the consultants what exactly he does for the company.  Needless to say he gets laid off later on, but sadly this is how a lot of companies see college graduates nowadays:  Smart kids, but not necessarily valuable.

This is a big problem.  Universities have either attempted to absolve themselves of responsibility by hiding behind the tag of 'learning institution' or they have advocated a higher level thinking approach by instituting core requirements.  While students aim to learn there, that's not usually the sole purpose for them to take on $40,000+ in debt.  It's not enough for them to see how the chocolate chip cookie evolved and changed over time, they want to learn how to make it.  Should it be a university's obligation to incorporate practical elements such as how to use Excel, Salesforce, PhotoShop, Java, Python, etc or how to get the most out of that cool internship? Or is that entirely the responsibility of the students to make themselves valuable assets?  The truth, as with a lot of things, lies somewhere in between.  It's hard to gauge what students would need since universities can scarcely predict what a student wants, but it will eventually hurt those universities' future returns on investment if students recognize that these 4 year programs don't meet employer expectations anymore at some basic level.

(Continued, see next post)

  

Is Borussia Dortmund a 'Moneyball' Success story?

In the past 3 seasons, Borussia Dortmund has won the Bundesliga title twice, and has consistently gotten the better of traditional German and European powerhouse that is Bayern Munich.  So to followers of  the Bundesliga and die Borussen, it may not come as a surprise that they will be playing in the Champions League final. But to the casual football fan, Borussia Dortmund is like a lesser-known family restaurant that  has received rave reviews on Yelp, a marked change from the ultra-posh fusion restaurant that everyone is used to raving about.

What makes Dortmund different is that they are an example of financial recovery and a "model for the future" as many English pundits have now come to accept, when not 3 years ago, they were bashing Arsenal for doing something similar.  They reached the Champions League semifinals with a starting 11 that cost £29 million to assemble.  The team they beat, Real Madrid, spent close to £400 million on their team.  And let me be the first to tell you that Real Madrid is no slouch when it comes to European play.  Bayern Munich, Borussia's main title rivals, spent massive sums over the past few years to close the gap on Dortmund, and while it has resulted in an emphatic league title, they have only beaten this Dortmund team once.

So can we say Dortmund is the first successful 'Moneyball' story in European football?  In an era where filthy rich owners can sign anyone at will, exploiting indebted clubs during the process, our inclination is to hail Borussia Dortmund as the financially sound team who has found a way to outfox the "big money" clubs.

On one hand, I think it is incredible that within 8 years, Borussia Dortmund went from near bankruptcy to creating one of the best teams in Europe on a budget like the figures above state.  But on the other hand, they weren't so drastically removed from success because of bankruptcy. They never dropped out of the top flight, meaning they had a roughly constant revenue stream, they just had to settle their debts via loans and restructuring.  When they fell into debt, the club's supporters stepped in and bought shares of the club, paving the way for a new model of club ownership and sustainability.  While this left Borussia Dortmund with less money to spend, they were able to assemble a team through the unique scouting networks the Bundesliga has often had.  According to prominent football finance blogger Swiss Ramble, Borussia Dortmund didn't impact their cash flow significantly by the transfer market .  He also points out that Borussia Dortmund had a higher percentage of commercial revenue, meaning that they still had a lot of marketability and popularity, despite their lowly financial status at the time.

Compare that to the original "Moneyball" situation at the Oakland A's. Granted it's a different sport, but the original idea meant that the A's formed a team by using lesser known but much more valuable metrics such as on-base percentage, number of walks earned, etc.  Borussia Dortmund has done what a lot of German clubs do when it comes to assembling a team:  They had a good group of young academy players, found some players for very reasonable prices, and formed a team greater than the sum of its parts.

These concepts seem very foreign to the Premier League, and many Bundesliga clubs have taken pride in their lower ticket prices, fan-ownership, and exciting football.  But I still wouldn't deem Borussia Dortmund's success as Moneyball.  Is it a very smart and well-managed financial turn-around from a failed IPO?  Absolutely, but when it comes to team building, they weren't coerced into forming a team based around statistics and specialized play.  

What the new Premier League TV deal means for EPL's future

The English Premier League signed a new deal with Sky Sports which will take into effect for the 2013-14 campaign.  The new deal will be worth approximately £3 billion  ($4.8 billion), which more than doubles the current deal.  There are other elements as to who has broadcasting rights in the United Kingdom (BT can broadcast 38 games, essentially breaking the BSkyB monopoly) but what's also included is that NBC will now become the primary broadcaster of Premier League games in the United States, rather than ESPN.

So what does this all mean for the Premier League's future?

Well that ultimately depends on what we're talking about. From a global viewership standpoint, we can't expect much to change in terms of accessibility, in fact it will probably improve.  The Premier League is the most watched football league in the world and consistently makes the most money by attracting viewers everywhere.  For the UK, they get more channels to watch their favorite teams, more live games, etc and I would imagine a similar effect for other countries who already have steady EPL viewership going.

What it means for United States viewers though is something different and has to be put into context.  ESPN typically gets the rights to only one game per week, and then a midweek game around once a month.  So that amounts to roughly 45 or 46 games per season.  ESPN got a lot better about distributing their viewership for all teams starting from the 2010-11 season so it wasn't all Manchester United, Arsenal, or Chelsea games being  aired; however, that's a very small sample of the 380 games per year even if we get a roughly even distribution of seeing all 20 teams play.  Fox Soccer, as a dedicated channel, offered a lot more games but there aren't that many viewers who subscribe to Fox Soccer since the game hasn't reached the point where people are willing to pay for sports packages exclusively to watch soccer.  The bundles and sports packages aren't optimal either so the Premier League hasn't fully tapped into the US market.  So the ability for NBC to get these games means more access for everybody since the network isn't under as much pressure to air other sporting events on Saturday(ESPN typically has to juggle college sports with the EPL, and occasionally Nascar)  And it lowers the need for online streaming.  NBC has promised to air more games than ever before on NBC, NBCSports, and NBCSports.com.  Accessibility won't be a problem

What will be a problem for us though is that NBC has a bit of pressure on them to maintain the quality of analysis. For established sports, like football, basketball, and baseball, we really don't care about what the commentators have to say all the time since we already have a solid understanding of what's going on in the game.  But soccer is very subjective and the sport hasn't yet reached the same level of popularity or understanding. (importance of possession, pressing, offside rules,etc.)  ESPN made a smart move in getting Ian Darke and Steve McManaman to cover their games.  Ian Darke was already popular with US viewers after covering the national team at the 2010 World Cup, and McManaman was a former elite player in England and Spain who knew enough about the game to reasonably satisfy knowledgeable soccer fans. Essentially, NBC has to find good commentators who can present the game well, otherwise people could lose interest and the overall growth of the sport could diminish.

Champions League Predictions and Power Rankings

The Champions League Round of 16 is 3/4 of the way through but there are still some important games to be decided.

Borussia Dortmund impressed me the most with their turnaround against Shakhtar Donetsk.  Shakhtar looked a bit sluggish and perhaps since it is the Ukrainian league's off-season, they weren't perhaps ready to play one of Europe's most in-form teams.  A victory was expected but Dortmund dominated the game 3-0, barely allowing Shakhtar a sight of goal

The Manchester United and Real Madrid tie was on a knife's edge, but Real Madrid did what was expected of them when United went down to 10 men.  United put in an admirable display and will feel rightfully aggrieved with the red card, but those have been given before. Real weren't convincing but  The form they've been on recently in all competitions including the consecutive wins over Barcelona makes me think that they're finally hitting the heights of last season and that could put them back among the strong favorites to win  La Decima.  Cristiano Ronaldo has scored 9 goals in the competition and leads everyone.

The other ties went roughly according to plan.  Valencia gave PSG a scare and were the better team for most parts of the game but couldn't get the crucial second goal.  Juventus cruised against Celtic and are quietly establishing themselves as a threatening team in Europe again.

On to this week

Barcelona vs. Milan.  Milan shocked everyone with not only a win but a dominant defensive display as they restricted the space for Barca's midfielders to disrupt their passing rhythm.  As a result Barca ended up passing horizontally with little penetration which is very unlike them.  Barca's form has recently dipped but Milan managed to restrict Barca as a whole team to 1 shot on target.  Messi didn't even have an attempt.  A 2-0 win makes the job much more difficult for Barca who require a 3 goal win to go through and that's no guarantee even in front of a hostile Camp Nou.  I think Milan will get the job done but will lose in the process.  A 2-1 Barca win but Milan go through 3-2 on aggregate.

Bayern Munich vs. Arsenal:  Bayern were the much better team against Arsenal and showed how many ways they can hurt you.  They played mainly on the counter attack against Arsenal but scored 3 away goals at the Emirates. Arsenal have an impossible task on their hands and have to go all out to go for a 3 goal win in Munich (next to impossible given Bayern's defensive record this year).  I think Bayern will get a 2-1 win and advance 5-2 on aggregate.

Schalke vs. Galatasaray: The 1-1 draw in Turkey was a very open game for a first leg but Schalke wasted several opportunities to get the second.  Schalke are primarily a counter-attacking side but I expect them to advance and create more chances at home because Galatasaray have to chase the game.  A 2-0 win on the night.  

Malaga vs. Porto: Malaga were very poor in the first leg in Portugal and Porto deserved to score more; however, Porto only managed 1 goal and the tie is fairly open.  Malaga will need to put Porto's midfielders under pressure as they chase for a goal.  However, this Porto side has a little too much quality for Malaga and I think they'll go through 2-1 on aggregate.