Matthew Yglesias's view:
Yglesias » Competition in Higher Education: [T]he key point I would make is that of course the universities do compete against one another. If a skilled administrator leaves University A to get a higher paid job at University B that’s a wash from the perspective of American higher education as a whole but it certainly makes a different to both University A and University B.... [T]his form of competition happens at all kinds of levels. Universities bid against one another for “star” faculty members, etc. Most of all, since university quality is primarily measured in America based on the quality of the inputs (average SAT score of entering freshmen, etc.) they spend a lot of effort bidding against one another to recruit the best students. But it’s not possible for every university to have an above-average freshman class.
On net, all this expenditure on competition for the best administrators, the star professors, the most lavish physical facilities, merit-based scholarships for the top tier of students, etc. simply serves to drive up the overall cost structure of the entire system without doing anything to improve quality of instruction. Cheaper travel and better information technology have made it more feasible than ever for students to study at out-of-region universities, bringing much more intense competition to the market. And in most markets, that kind of intensified competition would be creating a healthier market. But in higher education, it just further accelerates the cost increases. And that, in turn, is how you end up with these ever-growing debt levels among graduating seniors.
It is not clear to me whether Yglesias is describing all of higher education, or just the elite slice of it with which he is most familiar.
But, as I have said, I don't think I understand what is going on--couldn't Yale pull a lot of students it wants from Harvard and Princeton by undercutting them by $5K a year? We do know that HYPSM tune their financial aid policies in the hope of making it not worth any student they want's while to attend Berkeley, with some success. But why doesn't Berkeley fight back effectively? A $3K a year surcharge for 750+ SAT students that gets you private-college levels of residential support and class sizes?
None of this is clear to me.
I do observe that education and medical care are the two large sectors in which the private market did not have a strong presence a century ago and are also the two large sectors where market competition does not seem to produce lower prices. And I feel that there must be some connection.