How the limited university market is failing new entrants

In its pursuit to marketise the higher education sector, the Conservative Party has introduced a range of policies centred on increasing the number of universities and students, and encouraging competition. The pace of reform has increased rapidly this year: student caps have been abolished altogether, degree awarding powers will be more easily attained, a Teaching Excellence Framework has been announced, and much more detailed graduate employment data will soon be published.

Government policy to promote university competition

In an efficient market such policies would ensure that new entrants could compete with established providers. Yet there are five significant market-limiting features preventing an efficient market from developing: government controlled market distortions, student choice that is not informed by institutional quality, limited competition on price, cross-subsidisation of costs, and barriers to exit.

Market limiting features

Government controlled market distortions

First, the government has maintained regulatory powers that severely distort the university market. It has power over barriers to market entry, university income and university global market position because it determines who is granted university title and/or degree awarding powers, determines which courses will be eligible for access to student fee loans, sets maximum tuition fee caps, sets international student visa limits and sets government research funding budgets. While we may not want an entirely unregulated university sector, the government should acknowledge that its use of a suite of regulatory powers actively hampers new entrants’ chances of success in the sector.

Student choice not informed by institutional quality

If they are able to enter the quasi-market of higher education, new entrants then face a huge hurdle to success due to the sector’s second market-limiting feature: students lack robust information on university quality, and often do not use available information when choosing an institution.

A new university that provided excellent learning and teaching experiences would find it hard to use this excellence as a tool for differentiation because there is no sector-wide measure of university teaching quality, and the Key Information Set (KIS) only publishes information on a few narrow metrics such as graduate employment rates after six months and the proportion of assessment by exams. ESRC-funded research recently revealed that university rankings based on new indicators of high quality learning did not reflect league table rankings, which primarily rely on KIS data, revealing how little the current system is able to determine and report on teaching quality.

The government is attempting to improve the quality and availability of information by publishing detailed graduate employment and earnings data and developing a Teaching Excellence Framework. While increased graduate data may help indicate university quality, it is very unclear how “quality teaching” will be assessed given there is no sector-wide tool for measuring teaching standards.

Furthermore, as Which? have noted, the proliferation of more data may have very little impact on the sector because many prospective students do not use available information when making their choices: only 38% research employment outcomes, 29% research course costs, and just 20% or less research contact hours and teaching group sizes at their prospective universities. Instead, students rely on reputation as a proxy for quality, and reputation is very strongly linked with institutional age.

This means that young institutions struggle to attract the best students and have significantly lower average entry tariffs; in the two decades since they were given university title in 1992 no former polytechnic has been able to enter the top quartile of average entry tariffs. As a case study, Coventry University (a former ’92 polytechnic) was ranked 15th in this year’s Guardian University Guide, yet it still ranks 87th on average entry tariffs because students prefer to study in older institutions.

entry tariffs

This results in a self-reinforcing cycle whereby established universities maintain their advantage over new entrants: older universities have had time to build a strong reputation and resource base, which attracts top quality research staff and students, many of whom complete internationally acclaimed research and/or become wealthy and prominent alumni, both of which result in increased university resources via research funding and alumni donations, and so on the cycle continues.

reputational advantage cycle

We can see this cycle evident in university research funding patterns: although they account for 50% of all institutions, new universities receive only 5% of all available research income in the UK.

research funding

If the higher education sector were an efficient market then this would mean newer universities were only providing a fraction of the teaching and research quality of older providers, possibly due to their inability to attract staff from more prestigious universities – a difficult situation to reverse without direct financial support. If this is not true then we have further evidence that the higher education market is broken since there is limited information available to consumers (students) and what little information is available is rarely used, meaning the sector it is hugely biased towards older universities. Either way, new entrants face extreme challenges trying to gain traction.


Limited competition on price

The third market-limiting feature of the sector is how few higher education providers compete on price; according to the Office for Fair Access 99% of universities will charge the full £9000 fees for at least one course in 2016-17. Since there is limited information available to determine institutional quality, and students do not often use relevant information anyway, it is not surprising that almost all universities have elected to raise their fees to the maximum level. Furthermore, many universities fear that charging lower fees indicates poorer quality and deters students. This prevents new entrants from lowering prices to grow their market share, further limiting their ability to compete.


Cross-subsidisation of costs

Fourth, there is very limited price competition between courses even though some cost substantially less to provide than others: a 2014 HEFCE-commissioned report revealed that teaching dentistry costs institutions on average almost £14,000 per student per year while teaching law only costs £5539. Instead of differentiating courses by price, universities rely on cross-subsidisation, using fees from courses with cheaper running costs to help fund more expensive faculties. This gives universities with large numbers of students enrolled in lower-cost subjects a huge advantage. And student fees aren’t only subsidising other courses; Dame Judith Rees, former LSE interim director, admitted last year that cross-subsidies from student fees were LSE’s “major source of research funding.” Since universities are not required to publish detailed spending breakdowns this information is hidden from consumers, further preventing an efficient market from developing.

Barriers to exit

Finally we come to the barriers to exit, the last significant market-limiting feature of the sector. As has been noted by the Competition and Markets Authority, the university sector lacks a comprehensive exit system. This prevents failing institutions from exiting because there are no protocols as to how exit would occur and what would happen to students. This means that even the worst performing universities continue on with limited (if any) penalty for generating poor student outcomes; no institution once granted degree awarding powers has ever had those powers revoked. The likely political hit a government would suffer for allowing a university to fail further deters the removal of these barriers to exit. And with the government having devolved much of its financial power to individual institutions with the new student fee structure, it is unclear how it might now go about forcing institutions out of the sector if it wanted to.

Policy solutions

However, it’s not all doom and gloom; while ending all government regulation in the sector would likely undermine the social benefits that universities provide (such as access to education and socially valuable research), the government could try to impact the other four market-limiting features through new policy solutions. Improving students’ use and understanding of university data would require significant work, but could become a key part of high school curriculum. To further reduce the power of established universities’ reputational advantages, the government could make younger institutions more competitive by offering lower student loan debts to strong students or providing research grant writing support. To combat price non-competition and cross-subsidisation the government could demand detailed institutional spending breakdowns. Barriers to exit could be removed if an exit protocol were developed to deal with the fallout from failed institutions.

Yet the government’s determination to treat the sector like an efficient market and gradually relinquish regulatory control makes such an action improbable, meaning new entrants will likely continue to find it very difficult to compete with established universities.

Jennifer Ames & Edward Fidoe


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