How the UK HE sector functions as a market, and why it warrants analysis

Last Friday, we at the National Audit Office published our report The Higher Education Market. This study examined how the higher education sector functions as a market, and the extent to which this supports the government’s objectives.

So why did we approach the study this way?

The NAO does not comment on the merits of government policy objectives, but rather on the value for money with which policies are designed and implemented. As we describe in the report, for more than a decade, successive governments have increased the extent to which higher education functions as a market. Most funding now directly follows students, via tuition fees, and for the most part HE providers can recruit as many students as they like. This increases the pressure to attract students in order to cover costs.

If a traditional market functions well, this competitive pressure should drive quality up and cost down, as consumers make informed decisions and seek out the best deals. But higher education is not a traditional market. As with most public services delivered through market mechanisms (normally called “public service markets”), there are significant complexities. “Quality” is difficult to discern and means different things to different people, and outcomes depend on the student as much as they do on the provider.

Without questioning the merits of market forces in higher education, we therefore felt that it was important to examine how these dynamics are working in practice. In this blog, we provide a brief summary of our key findings in two areas: student choice and access, and incentives on HE providers. 

Student choice and access

The decision about what and where to study, or whether to enter higher education at all, is a complex and personal one. What suits one individual might not be right for another.

The benefits of higher education will be substantial to many students, but they are not consistent for all courses. In financial terms, for example, graduates from some courses and providers earn less on average than non-graduates. Earnings are not the only value to be gained from higher education, but varied outcomes highlight the importance of prospective students, typically aged 16 to 17, understanding this and being able to make informed choices from the range of options available.

There are other markets where decision-making is similarly complex, and which face similar challenges. We found particular parallels with some financial services, because of the overall complexity, the uncertainty over outcomes and the fact that there is some level of financial commitment (although student loans themselves come with certain statutory protections, due to income-contingent repayments). There are, of course, substantial differences, too, but common challenges reveal areas where useful lessons could be learned.

For example, consumer choice in financial services comes with more protection than it does in higher education, owing to tighter expectations on what information firms should disclose to customers at the point of sale. In HE, the Department for Education has made substantial improvements to the information available, and it plans further improvements. But the evidence suggests that few students use this information, and many do not get the advice and support that they need to make informed decisions.

We also found that increased participation in HE among students from disadvantaged backgrounds, a key objective for the government, is weighted more towards lower-ranked providers than those from more advantaged backgrounds. There is a potential risk, therefore, that a two-tier system could develop between providers that find it easy to attract high-achieving candidates and those that struggle to compete at all.

Incentives on HE providers

We found that market mechanisms in higher education do not naturally incentivise providers to support some key government objectives.

For example, we found no meaningful price competition in the sector. In a traditional market, competition should drive down prices and, therefore, costs. But higher education is not a typical market, and on the whole students do not appear to be attracted by lower prices. Most providers charge the maximum possible fee for all courses.

While there is increased pressure for providers to compete for students, the complexities over decision-making described above mean that there are limited incentives to compete directly on quality. Our findings suggest that increased competition comes primarily from more marketing and advertising, and increased investment in buildings and facilities. This is a rational response by providers to the increased market dynamics, but it creates a challenge for the DfE in determining how best to ensure that educational quality is prioritised.

It may also create sustainability challenges in future, as most providers have assumed that they can maintain or increase student numbers, but the number of 18-year-olds in England is declining. 

And finally, providers similarly have a natural, rational incentive to prioritise courses that are cheaper to run. This may not support some of the government’s objectives around skills needs in the economy (for example in expensive-to-run science subjects) or lifelong learning (as part-time students tend to cost more to teach, and mature students typically have higher dropout rates). Again, the department will need to think about whether, and how, it corrects for these incentives.

Rich Sullivan-Jones is an audit manager at the National Audit Office, and was part of the Higher Education Market study team.