Competing Campuses: An Equilibrium Model of the U.S. Higher Education Market

Universities compete through price and non-price characteristics, including the number and type of undergraduate majors offered. Undergraduate majors are a key source of differentiation in U.S. higher education, and survey evidence suggests that students consider a university’s offered majors when they make their college choice. The objective of this research is to understand how majors offered, prices and selectivity jointly respond to subsidies in the form of financial aid and direct-to-university subsidies to support majors in Engineering, Science, and Mathematics. I use state-level score-sending data from ACT and College Board along with university characteristics to estimate a model that features four stages: first, universities choose price, admission criteria and majors; second, students choose an application portfolio; third, universities make offers of admission; and finally, students make enrollment decisions. The estimates show that students are willing to pay over $100 per year for each major, with heterogeneity by type of major. Financial aid awarded to students to attend public universities in a state results in increased price and selectivity stratification in the public sector, higher prices and increased selectivity in segments of the private sector, and adjustments to majors offered to manage costs. A $10 per student subsidy to public universities for each Engineering, Math, and Science major offered generates similar stratification by pricing and selectivity, but also increases the median number of Engineering, Math, and Science majors at public universities from 8 to 12.