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Why do for-profit higher education providers have a small market share?

By Andrew Norton - posted Tuesday, 6 January 2009


In this week’s Campus Review (March 3, 2008), John Quiggin in polemical mode takes aim at for-profit higher education. He claims “for profit education has been a consistent failure in all times and places”, with some “limited exceptions” in vocational training.

Curiously, he provides very little evidence of the failure of for-profit higher education. He reports some of the legal troubles of the University of Phoenix, but it has 250,000 students and has operated successfully for many years, as have various competitors in the US market. The legal troubles relate to violations of student admissions and loans regulations, not the quality of their courses. The statistic he cites on their graduation rate refers to a market they barely target, full-time and first-time college attendees (as here, US completion statistics are of poor quality).

Apart from the Singapore-based but partly Australian owned U21 Global he doesn’t even mention any of the Australian for-profits, though there quite a few of them, with nearly 30 signed up for FEE-HELP (some with common owners). The players in the for-profit market include the stockmarket listed and profitable Navitas, the Australian College of Natural Medicine, and the various providers owned by Amadeus Education.

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But there is an interesting issue here: why is for-profit higher education relatively rare? Even in the US, the for-profits have only about 1 million students out of a total enrolment of 17.5 million. (In 2006, about 20 Australia for-profits reported 5,094 students to DEST, but they were only obliged to report students receiving FEE-HELP.)

Professor Q’s answer is:

Because the benefits of education are hard to assess in advance, and only realised over a number of years, short-term market incentives are ineffective or perverse. Only a long-term commitment to academic standards and professionalism can maintain the quality of education, and such a commitment cannot be driven by managerial skill or direct incentives.

“Professionalism” is over-rated as a protection; it has taken Australian universities the best part of 150 years to introduce even rudimentary routine teacher training for academics, and there is very little follow-up of students to see how well they do after graduation. This is the one aspect of higher education that I think is under-regulated for self-accrediting institutions, and I hope Labor will implement its 2006 promise to look into this. Some added managerial skill, along with better accreditation and audit processes, would probably improve things.

But even with these systems is not easy for either students or their potential employers to assess quality. As Quiggin suggests, only after graduation may students fully realise how good their education was, or conversely how under-prepared their course left them. Therefore people fall back on established brands more than they might in other markets, where the quality of the product or service is more easily observed and assessed. This means that in higher education older institutions tend to be better regarded than newer institutions, regardless of their actual quality.

Another powerful aspect of this reinforcing of older institutions is that because “peer effects” can be valuable in education - learning from other students, or simply networking for career and social advancement, it makes sense to go where the most talented students are going, even if the university-provided education is not as good as elsewhere.

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Not-for-profit private higher education is strong in the US - including many of the leading universities - because it had a first-mover advantage there; in Australia the public universities had the first-mover advantage.

There is also a simple market explanation for the prevalence of public and private not-for-profit institutions, which is that they almost always and often respectively price their courses below cost, with taxpayer subsidies and endowment income/donations making up most of the difference.

So what we see in both the US and Australia is that, for the most part, the for-profit sector targets either fields of study (e.g. theology, natural medicine, narrow forms of professional education), modes of delivery (online, easily accessible campuses, small classes) or clienteles (working adults, academically weak students) which the other sectors don’t service or under-service.

There may be a case for consumer protection for low-ability students; they can be targeted by unscrupulous for-profits hoping to make money even for a semester and by well-meaning but operating-on-ideology-rather-than-evidence public providers seeking to expand “access”. We certainly need a lot more research on outcomes for these students.

While there are historical reasons why institutions with different ownership structures service different parts of the market it should be a matter of public policy indifference who owns higher education institutions. If a course is no good, it should not be offered regardless of who provides it. If a field of study should not be subsidised (natural medicine or theology perhaps) it should not be subsidised in either public or private institutions. If students have low chances of success, they should receive frank warnings of the risks whether they are applying to a public or private institution. These are the kinds of guiding principles we need, not theoretical assumptions about for-profit education.

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First published in Andrew Norton's blog on March 9, 2008. This article has been judged as one of the Best Blogs 2008 run in collaboration with Club Troppo. If you have a blog post you would like to nominate please send it to submissions@onlineopinion.com.au.



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About the Author

Andrew Norton is a research fellow at the Centre for Independent Studies and Director of the CIS' Liberalising Learning research programme.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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