12 April 2011

Why Universities are like Beer

This is a guest post from Abhijeet Singh, formerly known as Skeptical Bandit on this blog.

An unnamed minister has described university education as a 'Giffen good' whilst discussing the decision by most British universities to charge the new maximum top-rate fees of £9000 from next year. Richard Alcock of the Guardian disagrees. Giffen goods are necessities; when price goes up, you paradoxically spend more on them because you need them regardless of price. Alcock on the other hand thinks universities are 'Veblen goods' : demand goes up as price increases because the high price gives the user 'snob value', similar to luxury goods.
Actually, they both need an economics lesson. The true reason is far simpler and more prosaic: price is a signal of quality. This is not a new thought in economics. Here's a quote from Scitovsky (1944)
"mass observation" of one's friends and their wives shows that more often than not people judge quality by price. The word "cheap" usually means inferior quality nowadays; and in the United States " expensive" is in the process of losing its original meaning and becoming a synonym for superior quality. Worse still, one of the largest American breweries uses the advertising slogan:  "Michelob, America's highest-priced  beer!"

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