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What is the Price of a Good Education at Chinese Universities? It Depends on Your Interests

by Brian Viard

August 5, 2013

CKGSB, Brian Viard
Brian Viard, Associate Professor of Strategy and Economics

How will choosing your major affect the cost of your education? For students attending Chinese universities, price discrimination between majors is a costly concern.

College applicants in the US often experience “sticker shock” when they discover the price of a university education. But one thing they do not have to worry about is how their major will affect the price. US universities generally charge the same tuition regardless of major. The same is not true in China. For example, at Renmin University here in Beijing, tuition for most majors is RMB 5,000 per year. However, if you major in a foreign language it will cost you RMB 6,000 and in art it will cost you RMB 10,000. At Central University of Finance and Economics, also located in Beijing, the price range is even greater. Annual tuition for most majors is RMB 5,000 but if you major in international trade or financial risk management it will cost you RMB 30,000.

Chinese universities are practicing what economists call “price discrimination”–charging different prices to different consumers. The price discrimination in this case is called “versioning” in which a menu of different products is offered at different prices. The versions are tailored to appeal to different consumers who choose the one they prefer most. In the context of Chinese universities majors are versions. Some courses are common to all majors but each major requires specific courses that distinguish it as a separate version.

To effectively price discriminate, three conditions must be met. First, the discriminator must have market power. It must offer a unique enough product that it can charge a price above its cost. If it faces many competitors with similar products, it will be forced to charge a price equal to its cost for all its customers. Universities meet this condition–their offerings are unique enough that they can vary their prices. Second, different consumer segments have different values for different versions. This condition is also met. For example, applicants interested in sociology probably value a college degree differently than those interested in math. These differences could result from the uniqueness of the skills learned in the major or the career prospects after college. These first two conditions are met for US universities as well and therefore do not explain the different pricing practices across the two countries.

The third condition is the most interesting: it must be possible to separate the different demand segments. In particular, consumers must not be able to engage in “arbitrage”. For universities this requires that an applicant cannot pretend to be interested in a lower-priced major and then later switch to a higher-priced major. For applicants in China this is not feasible. Two years before the national college entrance exam (gaokao), high school students must declare themselves as either a science or humanities major and take courses specific to the track they choose. After taking the exam and when applying to college, applicants must declare their major. Once they enter college, students must pursue their chosen major. This allows Chinese universities to enforce the “no-arbitrage” condition.

This same kind of price discrimination would not work in the US because the no-arbitrage condition is not met. Suppose a US university tried to charge a lower price for an engineering major. I predict colleges would start receiving many heartfelt essays from applicants expressing their lifelong desire to build circuits followed by a rash of admitted students switching to other majors. This would undo the attempted price discrimination and force the university to revert to the same price for all majors.

Although the prices of majors differ somewhat across five Beijing universities that I surveyed,  the highest-priced majors tended to be art, engineering and finance. Why are these majors priced higher? I don’t know for sure but there might be either cost or demand reasons. The explanation for engineering and finance are likely demand-side reasons. Both of these majors probably offer above-average salaries after graduation which means applicants to them might place a higher value on a university education than applicants to other majors. The explanation for the high price of an art major is less obvious to me. It could be a supply-side story–perhaps faculty qualified to teach art are in short supply in China driving up the cost–but I am not certain.

Is this kind of price discrimination good or bad for applicants overall? Answering this question requires more data than we are able to observe. Eliminating the price discrimination would likely result in a price somewhere between the highest and lowest prices a university charges for different majors. This would make applicants to high-priced majors better off. At the same time, applicants to low-priced majors would pay more or might even be priced out of the market which would make them worse off. Students are often advised to choose their college major wisely. In China, this is even more the case.

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