SOME CLEAR THINKING ABOUT PRICE DISCRIMINATION. The topic of rising college tuitions came up in Professor Mankiw's class.

The student wonders whether the article's claim that college popularity rises with tuition is related to our study of Giffen goods and perversely sloped demand curves. I don't think so. The phenomenon about college popularity, to the extent it exists, does not rely on an odd combination of income and substitution effects but, instead, imperfect information. Consumers may use price to judge quality. Would you choose a surgeon that advertised having the cheapest rates in town?

That presupposes competitive models in which prices reflect marginal costs and consumers are able to infer quality from price. It's somewhat less convincing in the presence of a status system that a college can game by encouraging via a lower price more applications than it will admit, so as to look selective.

This I'll agree with.

Colleges have gotten increasingly good at price discriminating. (Recall the discussion of price discrimination in chapter 15 of my favorite economics textbook.) The list price is set high, and then many customers are offered a discount called "financial aid" based on their ability to pay. Here's the secret plan: In the future, Harvard will cost $1 billion a year, and only Bill Gates's children will pay full price. When anyone else walks through the door, the message will be "Special price, just for you."

The balance of the post and the comments are worth your time, and there are links to related posts to follow.