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  For more than a decade, successive governments have increased the extent to which higher education functions as a market. With higher education student debts typically totalling £50,000, going to university is now one of the biggest financial decisions of a person’s life. Yet the decision is made with limited ability to know the value […]


Is the market for higher education working?

Posted on January 23, 2018 by

Photo of university graduates in academic gowns and holding their degree certificatesFor more than a decade, successive governments have increased the extent to which higher education functions as a market. With higher education student debts typically totalling £50,000, going to university is now one of the biggest financial decisions of a person’s life. Yet the decision is made with limited ability to know the value of the investment, and with less consumer protection than other complex products. Our recent report on The higher education market applied our Market Analytic Toolkit: for assessing public service markets and found students have insufficient help and advice, and institutions have little competitive pressure to provide best value.

Government’s role in overseeing public service markets

Higher education (HE) institutions are independent organisations, so what is government’s role in overseeing them and other public markets?

There’s a broad spectrum of ‘public service markets’, as we outlined in our previous blog-post Making public sector markets work. HE sits squarely in the middle, with a mix of public and private funding, most of which now follows student choice, therefore promoting competition between providers. Key government aims for using markets to deliver public services, such as HE, are that service users act as consumers to make choices, based on knowledge of the options and their benefits, and that providers compete for consumers, which should – in principle – drive effective and efficient service delivery, better quality, and greater innovation.

Government also aims to achieve social and equality objectives in public service markets. A typical private market would often struggle, or fail, to deliver equal outcomes for all groups, in particular vulnerable users. In HE, the Department for Education (DfE) attempts to make university accessible to everyone, for example, requiring providers that charge maximum fees to have ‘fair access agreements’, spending a proportion of the student fees on ways to improve participation and outcomes for under-represented groups.

But these public service market aims aren’t always achieved. Market failure can arise for a variety of reasons, often related to the common characteristics of public service markets, including the following factors, all of which are features of HE:

  • Users find it difficult to discern quality and service differences when exercising choice because the ‘product’ is complex, personalised and/or they are unlikely to purchase the service more than once in their lifetime.
  • Users struggle to make well-informed choices due to too much or too little information.
  • Users’ knowledge of the service is only discernible during, or after, ‘consumption’.
  • Users are, or feel, ‘locked in’ once the service is bought and switching provider is not considered realistic or desirable.
  • Users play an important role in co-producing the value that they derive from the service.
  • Disadvantaged groups struggle to access the services, and or have worse outcomes than other user groups.
  • It’s difficult for providers to enter the market or poorly-performing providers to exit it.

To help government oversee public service markets, we published our Market Analytic Toolkit: for assessing public service markets. We used it in our report: The higher education market, to evaluate the HE market and whether DfE intervenes effectively to correct market failures.

Is the market for HE working?

In HE, the government aims to ensure that everyone can make good choices; that they can choose from a wide-range of high quality universities; and that they benefit from excellent teaching. Since the introduction of student fees, and especially since their 2012 increase to around £9,000 per year and the removal of student number caps in 2015, the HE sector has operated increasingly as a market. There have, inevitably, been questions about whether this market is working and achieving these aims.

Using our Market Analytic we looked at the effectiveness of demand side, the supply side and the achievement of these government objectives.
On the demand side, three key aspects determine how a market is working:

The factors affecting the demand side

Two aspects we focused on are:

Students are in a potentially vulnerable position when making decisions: The decision on what and where to study, or whether to enter HE at all, is a complex and personal one, and has a significant bearing on someone’s career and earnings prospects. It involves a large financial commitment compared with alternatives (such as apprenticeships), and outcomes vary significantly between courses and providers, for example in terms of employment or earnings. Despite the vulnerable position of many prospective students, support such as careers advice is poorly targeted and doesn’t always reach those disadvantaged groups who need it most.

Students don’t have the same protections at the point of sale as some other services: DfE has improved information available to help in choosing course and provider, including information about teaching quality, but only one in five prospective students use it. Furthermore, there is less consumer protection for HE than other complex products such as financial services, where decision-making is similarly challenging but firms are directly regulated on what they disclose to retail customers to ensure they understand risks and uncertainties. DfE has created a new market regulator for HE, the Office for Students (fully operational from April 2018), with a remit that includes a focus on competition, student choice and outcomes. This may make some improvements, but current proposals don’t include the sorts of protections at the point of sale that are seen in other sectors.
On the supply side, five aspects drive effectiveness, as detailed in our Market Analytic:

five factors driving supply side efficiency

Two of these aspects that we particularly highlighted in our report are:

Provider behaviour in relation to government priorities: There are few incentives for providers to encourage take-up of the HE courses the government would like to prioritise, such as science subjects, which can be expensive to provide. Providers therefore have greater financial incentives to prioritise cheaper courses. The market also offers little incentive to focus on teaching quality as a way of attracting students, and providers are mostly competing in other ways such as increased advertising and investing more in facilities.

Service continuity is untested: With more competition between providers, and government moves to make it quicker and simpler for new providers to enter the market, DfE expects more providers to exit the market. DfE’s new regulatory framework requires providers to have plans to protect students in the event of a course or provider closing. But as these changes are currently untested, it is not yet clear how well protected students will be in the event of provider failure nor whether the changes will help to drive HE quality improvements.
Achievement of government objectives typically depends on four main aspects:

the four elements driving the achievement of aims

Our analysis of these issues highlighted two particular concerns for HE:

Risk of a two-tier system, to the disadvantage of the disadvantaged: The HE market risks creating a ‘two-tier’ system, undermining government’s social mobility aims. The proportion of young people from disadvantaged backgrounds entering HE has increased, although participation remains much lower than for those from more advantaged backgrounds. Furthermore, increased participation among disadvantaged students is weighted towards lower-ranked providers. There is a potential risk, therefore, that a two-tier system could develop between providers that find it easy to attract high-achieving candidates and those that struggle to compete at all.

Competition won’t result in providers charging different tuition fees, as government intended: Normal price / quality trade-off in markets is not happening in HE. In a well-functioning traditional market, competitive pressure should drive quality up and cost down, as consumers make informed decisions and seek out the best deals. But HE is not a traditional market, “quality” is difficult to discern and means different things to different people, and outcomes depend on the student as much as the provider. There is no meaningful price competition in the sector as market incentives for HE providers to compete for students on course quality are weak, and most charge the maximum possible fee for all courses.

Achieving intended outcomes

In assessing the achievement of the government’s HE aims, we found that DfE has taken, and is taking, action on a number of issues, including introducing a new regulatory framework. But the HE market has substantial challenges that DfE and the new regulator, the Office for Students, will need to understand and grapple with in taking forward their reforms.

Identifying, defining and assessing public service markets is the crucial first step in ensuring intended outcomes are achieved, and our Market Analytic Toolkit: for assessing public service markets provides a framework for doing this.

Other useful NAO resources include:

These and other useful reports and guides can be found on our User choice and consumer protection web-page.

If you would like to know more about the NAO’s work on HE or on public service markets more generally, you can find links to more reports, papers and toolkits on our website.  We also welcome your comments and invite you to contact us if you would like to discuss any issues raised by this blog.

Peter LanghamAbout the author: Peter Langham is a senior member of the NAO’s regulation, consumer and competition team and leads the Office’s work on public service markets: developing best practice approaches, and coordinating a cross-government public service markets group. Peter also has extensive experience of assessing the effectiveness of the UK competition regime.


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8 responses to “Is the market for higher education working?”

  1. David Walker says:

    In this ‘market’ the ‘product’ is a degree. The producers assess the ‘buyers’ and assess themselves for quality. Peter says HEIs behave as a bloc (ie single supplier) so HE controls price and quality. Surely ‘market’ is a misnomer. Information asymmetries are simply too great to apply nostrums of competitive supply and demand.
    Many other anomalies could be identified. HEIs are not ‘just’ about teaching. They receive large amounts of public money for research. Yet the interaction between (publicly assured) student finance and research funding is invisible, even to the NAO.

    • Peter Langham says:

      Thank you for your comments David, and Julian; they raise some interesting issues and policy questions.

      As you will appreciate, our report – The Higher Education Market – covers much more than is possible on a blog. Furthermore, the NAO’s role is not to question government policy but to look at whether policy has been implemented in a way that represents value for money and meets government’s policy objectives (such as improving access to HE for everyone irrespective of background). The decision to use market mechanisms in the HE sector is government policy. In our report we point to the unusual and complex characteristics of the ‘product’ in this market, including the information asymmetries, which can contribute to students making poorly-informed choices.

      Our report acknowledges that most HEIs are about more than just teaching undergraduate degrees and they earn income from sources other than undergraduate higher education, including public funding for research. However we deliberately decided to focus on the HE market from the ‘student as consumer’ perspective since the large majority of up-front funding in the sector now comes from tuition fees.

      Finally, our report recognises that providers do use cross-subsidies to protect certain activities, such as their desire to maintain expensive but important subjects, and cover additional costs with cross subsidies from other areas (fees from international students, commercial income, lower cost subjects, etc.) However, the subject of cross-subsidisation is not one that our report sought to focus on, as we recognised that HEIs are independent autonomous institutions. Their accounts are not subject to audit by the NAO.

      Peter Langham, NAO

  2. Julian says:

    Such effort to turn education into something that it isn’t and shouldn’t be, and after all that, it doesn’t work, in fact does damage to the very thing it is supposed to all about (but greedy VCs amass fortunes, as do the non execs who help them so to do)! What unholy nonsense.

  3. D.R. Myddelton says:

    It can hardly be a surprise that disadvantaged students are at a disadvantage. It was surprising to see no mention of reputation (or ‘brand’) as an indicator of quality.

  4. Simon says:

    On the disadvantaged student issue this returns to the difficulty/need to recognise achievements of this group when compared to those from advantaged backgrounds.

    Any discussion on acknowledging that getting comparatively lower A level grades for students from disadvantaged backgrounds sees uproar from those who have had advantage but fear missing out.

  5. Doctor Alan Cleary says:

    UK Degrees have been steadily downgraded to achieve cheap popularity and a false sense of achievement.When I was awarded a Bristol LLB Coutts was Dean and Churchill Chancellor. Tuition was excellent and exams demanding. No 1st Class Hons had been awarded for 10 years. >20% of entrants failed to reach the standard to receive a degree.

  6. AshV says:

    If the UK government really wants to create a market place for education then they need to be prepared to provide the full set of consumer tools. Just look at PPI, it needed legislation (and people like Martin Lewis) to bring about compensation for mis-selling. HEs are likely to already have fallen foul of mis-selling, so will the new Office for Students have ANY real teeth to tackle these obvious current failures? Could there be comparison sites springing up for HE, where consumer-power forces establishments to break-down their educational products into separately priced elements (e.g. reading materials, research tools, student support, 1st/2nd/3rd year charges, social services etc.). Could that process then commoditized the wrong things, missing the real value being that, the value to the UK of utilising a universally educated and empowered set of unique innovative individual future leaders and inspirational thinkers in their chosen fields of study?

  7. albert wright says:

    I would like to see the NAO focus their attention on the Total Funding provided to the HE sector to better answer the question “Is the market for Higher Education working?”

    Governments seem to believe that spending increasingly more money on HE is a good thing.I think this should be challenged and that HE funding amounts to a major mis allocation of resources and provides a poor return on investment for tax payers.

    The UK Government gives Universities about 25% of the total amount spent on research. Much of this seems to me to be wasted. Germany and Japan spend a much smaller percentage via Universities and seem to be more productive.

    We also have a higher % of 18 to 24 year olds at University than in other countries yet this does not seem to lead to higher productivity.

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