Academic journal article Journal of Economics and Economic Education Research

Tuition Sensitivity in Online Education

Academic journal article Journal of Economics and Economic Education Research

Tuition Sensitivity in Online Education

Article excerpt


Postsecondary education in the US has seen remarkable growth in distance learning in the past decade. In 2000, an estimated 2,320 two and four year institutions participated in some form of distance learning [Waits et al. (2003).] By 2006, an estimated 2,746 US two and four year institutions were participating in distance learning [Parsad and Lewis (2008).] At the same time, enrollment in online education grew faster than traditional enrollment. In 2002, 16.6 million students enrolled in postsecondary education. By 2009, approximately 19 million students were enrolled in postsecondary institutions, a growth rate of 14%. At the same time, approximately 1.6 million students partook in at least one online course in 2002. In 2009, 5.6 million students took at least one online course, creating a growth rate of nearly 250% in online education [Allen and Seaman (2010).This trend is likely explained by the growing demand for higher education, widespread use of the internet, the declining cost of instructional delivery, and changing business models of postsecondary institutions (Hanna 1998; Hanna 2003; Byrd and Mixon 2012).

As enrollments for both traditional and nontraditional methods of instruction increase, a key issue that public higher education institutions face is the decline in state appropriations in contrast to the growing demand for their programs. Increasing tuition and fees has been a method that many institutions have employed to offset these funding windfalls [Potter (2003).] Yet, the changing culture of students, both demographically and technologically, has led many institutions to turn to online learning as an additional method to offset funding shortfalls.

Distance education programs allow the university to move beyond its traditional brick and mortar structure and become a global presence. Prior to the widespread adoption of computers and the internet, traditional distance education modes of delivery were two-way audio/video classes and correspondences courses. As the cost of technology decreased, so did the dissemination of distance education via online programs. Given the widespread adoption of online programs, we focus on one aspect of distance learning, e-learning.

A model of a university operating in two distinct markets, the traditional education and the online education, is presented. Postulating that the goal of the university is to maximize revenue, under a minimum profit condition, we derive that the optimal policy is to price discriminate and set prices based upon the price elasticity of demand in each market. We proceed to examine tuition sensitivity and student response for both the traditional as well as the alternative and emerging method of instruction in e-learning. We use the estimated elasticities to make inferences about whether universities achieve revenue maximization and, if not, to suggest changes in pricing policies that will help universities move toward their revenue maximization goal. Furthermore, we expand upon the extant literature of tuition sensitivity of traditional higher education, by supplementing it with elasticity estimates for e-learning in higher education.We do this by specifying a demand model for e-learning using undergraduate credit hours and pricing per credit hour in two- and four-year public colleges in the southeastern United States. The data used are from 2004-2009 and encompass a time of growing enrollments and tuition.

In the next section, we summarize the literature on tuition sensitivity and student choice. Following, we present a model of the modern university in revenue maximization with a minimal profit framework. A presentation of data that highlights the importance of e-learning in higher education follows. Finally, we consider the role that pricing plays in demand for two- and four-year colleges.


The prior literature on tuition price sensitivity is extensive in that it covers long time series (Chang and Hsing 1996) at the national level, panel data (Wetzel et al. …

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