Massive Open Online Forces

Career College Central summary:

  • In America, bowing to the inevitable, universities have joined various startups in the rush to provide stand-alone instruction online, through Massive Open Online Courses, or MOOCs. Though much experimentation lies ahead, economics can shed light on how the market for higher education may change.
  • Two big forces underpin a university’s costs. The first is the need for physical proximity. Adding students is expensive—they require more buildings and instructors—and so a university’s marginal cost of production is high. That means that even in a competitive market, where price converges towards marginal cost, modern education is dear.
  • It is also hard to raise productivity. University lecturers can teach at most a few hundred students each semester—the maximum that can be squeezed into lecture halls and exam-marking rosters. Because it is so labour intensive higher education relies on large numbers of instructors paid relatively modest salaries.
  • MOOCs work completely differently. Alex Tabarrok, an economist at George Mason University and co-founder of an online-education site, Marginal Revolution University, reckons the most salient feature of the online course is its rock-bottom marginal cost: teaching additional students is virtually free. The fixed cost of creating an online course is relatively high, however. Getting started means putting together a curriculum, producing written and recorded material to explain it, and creating an interactive site that facilitates discussion and feedback.
  • Having invested in the production of a course, a provider’s incentive is to sell it to as many students as possible. After the initial cost is covered each additional unit sold is pure profit. A low price maximises registrations and profit. But as prices converge towards marginal cost, there will be little scope for undercutting the competition. Instead MOOCs are likely to compete on quality, Mr Tabarrok reckons. Higher production costs are a small price to pay to attract much greater numbers of students. Such markets often evolve into winner-take-all, “superstar” competitions. The best courses attract the most customers and profit handsomely as a result. In this respect online education may more closely resemble information industries such as film-making than service industries such as hair-cutting.
  • The market for instructors will also be transformed. The best teachers will be fabulously productive, reaching hundreds of thousands of students. There may therefore be far fewer of them, each compensated like superstars in the entertainment industry.
  • MOOCs’ low marginal cost is responsible for some of the bad press they occasionally receive. Consumers risk little by signing up, so both registrations and drop-out rates are high. Yet that is not necessarily a reflection of poor quality. An analysis of over 1000 studies of online-course results conducted by America’s Department of Education found that people who complete such courses do better on average than students in face-to-face instruction.

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