Positional Arms Race

Even in
Robert Frank
Cornell University
Hierarchical rankings in higher education
have become far more important than
ever, because the economic reward for
elite educational credentials has jumped
sharply in recent decades. Underlying
these changes is the spread of winnertake-all markets, in which small
differences in performance (or even
small differences in the credentials used
to predict performance) translate into
extremely large differences in reward.
Robert Frank, Goldwin Smith Professor of
Economics, Ethics, and Public Policy at
Cornell University, describes the
evolution and the effects of the winnertake-all trend in higher education.
“ elite universities need
top students every bit as
much as top students feel
The Higher Education
the need to attend
elite institutions ”
The market for higher education is fundamentally different from the typical markets
portrayed in economics textbooks. When
excess demand arises in the market for an ordinary good or
service, it is almost always fleeting: producers rush to fill the
void, or prices rise so much that the market quickly clears.
Not so in the upper reaches of the academic market. Despite
the persistence of excess demand, elite colleges and universities continue to turn away thousands of well qualified applicants, while charging those they admit only about one-third
of what it costs to serve them.
Why don’t elite universities simply raise their prices?
Because a university’s status depends heavily on the average intellectual ability of its students, elite universities
need top students every bit as much as top students feel
the need to attend elite institutions. This co-dependence
creates multiple positive-feedback loops that amplify the
rewards for a university that succeeds in its efforts to
recruit top students and faculty. The result is a quintessential winner-take-all market, in which success breeds
success and failure breeds failure.
The Positional Arms Race
Participants in virtually all winner-take-all markets face
strong incentives to invest in performance enhancement,
thereby to increase their chances of coming out ahead. As
in the classic military arms race, however, many such
investments prove mutually offsetting in the end. When
each nation spends more on bombs, the balance of power
is no different than if none had spent more. Yet that fact
alone provides no escape for individual participants.
Countries may find it burdensome to spend a lot on
bombs, but the alternative—to be less well-armed than
their rivals—is even worse.
In light of the growing importance of rank in the education marketplace, universities face increasing pressure to
bid for the various resources that facilitate the quest for
high rank. These pressures have spawned a positional arms
race that already has proved extremely costly, and promises to become more so.
Colleges and universities up and down the academic totem
pole are spending far more than ever on brochures, videos,
mailings, travel by admissions officials, and other efforts to
woo top students. Competition for distinguished, highly visible faculty—another essential ingredient of elite educational status—also has intensified, so that today star faculty command ever higher salaries and require ever more elaborate
and costly support. Further, pressure to upgrade campus
amenities abounds, with rising student expectations for
nicer dormitories, better food, fancier athletics complexes,
state-of-the-art classrooms, and comprehensive career counseling and job placement services.
Yet when all schools increase such expenditures, their
actions largely cancel one another out. The additional
spending inflates costs, but in the end has little impact on
the ultimate distribution of students.
Implications for Access to
Higher Education
An arms race is expensive. Inevitably, some portion of the
institutions’ increased costs are passed on to students in
the form of higher tuition, creating new financial hurdles
and adversely affecting access to higher education for
middle and low-income students.
Competition also has wrought sweeping changes in
financial aid decisions. In the past, need-based aid prevailed at elite institutions, creating an open climate of
access for students of all income levels. Today, as colleges
and universities compete for top students, financial aid is
routinely awarded to applicants whose families could
readily afford to pay full tuition—and little wonder, since
these families often are in the position of weighing offers
of aid from several schools vying to enroll their child. As
more merit aid is used to compete for students with marginally better grades and test scores, funds available for
need-based financial aid are diminished. Middle and lowincome students are confronted not only by higher
tuition, but also by lower financial aid. This combination
at best steers them away from top-ranked institutions
and, at worst, discourages their pursuit of higher education altogether.
Positional Arms Control Agreements
The competitive dynamics that govern the battle for elite
educational status virtually guarantee a measure of social
waste. Each dollar spent on recruiting by a university
delivers the benefit of helping it to lure good students
away from other schools; on the social scale, however,
these benefits sum to zero, because one school’s gain is
offset by another’s loss. From a social perspective, then, it
would be better if all schools spent less. Yet no school
dares to cut its own expenditures unilaterally.
Under these circumstances, it is often possible to generate
socially preferred outcomes through positional arms control agreements, pacts in which contestants pledge mutual
restraint. Such agreements are particularly important in
winner-take-all markets, in which reward depends heavily
on rank, and in which behavior that looks attractive to
each individual often looks profoundly unattractive from
the perspective of the group. Collusive agreements to
restrain these behaviors can create gains for everyone. They
should not be summarily judged as wrong based on the
uncritical belief that unlimited competition necessarily
leads to the greatest good for all.
The challenge is to distinguish between agreements that
compromise the positive forces of competition and those
that limit its harmful effects. The collective agreement
among several elite institutions to target their limited
financial aid to students with the greatest need was
attacked by the U.S. Justice Department for being a
restraint on open competition. It was precisely that, but
that does not mean it was a bad thing. Once we appreciate the logic of the financial incentives that confront participants in winner-take-all markets, it becomes clear that
collective agreements to restrain competition can often
create gains for everyone. Such agreements should be
scrutinized not according to outmoded textbook models
of the widget market, but according to the practical test
of whether they limit harmful effects of competition
without compromising its many benign effects.
No college or university, acting alone, can escape the
powerful logic of the positional arms race. Yet there
remain compelling ethical reasons both for limiting escalation in the cost of acquiring higher education, and for
basing financial aid more heavily on need than on merit.
Indeed, the growth in income and wealth inequality
caused by spreading winner-take-all markets makes the
case for cost containment and need-based aid more compelling than ever.
But such goals can be met only through collective action.
Positional arms control agreements may be the only practical way to keep higher education within reach for the
average American family. To resist these agreements on
the grounds that they are anti-competitive would make
sense if the market for higher education were just like the
market for an ordinary private good or service, but it is
not. To move forward effectively, institutions must be
permitted to come together to defuse higher education’s
positional arms race.
Robert Frank is the Goldwin Smith Professor of Economics,
Ethics, and Public Policy at Cornell University, and professor of
economics at Cornell's Johnson Graduate School of
Management. He has written numerous journal articles and
books, including Luxury Fever (1999). He also co-authored The
Winner-Take-All Society (1995) with Philip Cook, which was
named a Notable Book of the Year by the New York Times.
“ the growth in income
and wealth inequality
makes the case for
need-based aid more
compelling than ever ”