Sorry Adonis, but there's no tuition fee cartel

On Friday, Lord Adonis had an op-ed published in The Guardian in which he conducts a volte face concerning tuition fees. Specifically, although he was responsible for increasing tuition fees from £1,000 per year to £3,000 per year, he now believes that they should be scrapped entirely on the (actually spurious) grounds that graduating students now leave university with about £50,000 of debt.

Notwithstanding the lack of a cogent argument for scrapping tuition fees, Adonis makes the highly-charged allegation that universities are running a cartel because a large number of them set fees at or close to the £9,000 maximum that is permitted. This allegation shows a shocking lack of understanding of the meaning of the term “cartel” and the jurisprudence underlying previous instances in which cartels were found to be operating.

In short, a cartel (as per Article 101 of the Treaty on the Functioning of the European Union) is defined as a group of firms that restrict or distort competition in a market by, for example (but not limited to), directly or indirectly fixing prices, limiting or sharing production / output, and so on. As such, Adonis is claiming that the universities are fixing prices when they all set their fees close to £9,000 and claims that he has asked the Competition and Markets Authority (CMA) to investigate this matter.

However, Adonis ignores the established and standard guidance for determining whether or not a cartel is actually in operation – simply taking the fact that a number of universities are pricing at a focal point is not evidence in and of itself. Instead, as per the guidance set out by the then Court of First Instance in Airtours/First Choice, three conditions are necessary for a cartel finding.

1. The market must be transparent – i.e. the area (such as prices, volumes etc.) over which a cartel agreement is made must be able to be monitored easily and (relatively) costlessly for the members of the cartel. In the case of university pricing, this condition probably is satisfied as a university’s fees are published on their website and therefore can be monitored by other universities. However, it is the only one of the three conditions that is satisfied.
    
2. More importantly, the members of the cartel must be able to ”punish” any cartel member that does not adhere to the cartel agreement. This is one area where Adonis’ claim falls down – there is no punishment mechanism available for universities to punish those that deviate from a cartel agreement. To see this, suppose that there was an agreement between universities to maintain fees at £9,000. Now suppose that one university that had made this agreement instead decided to cut its fees to £4,000 – this “deviating” firm might have a strong incentive to do so since that could enable it to get more students applying to it, enabling the university to have a wider range of students from which it could select the best candidates.
   
   In this scenario, how would the non-deviating universities be able to punish the deviator? They couldn’t decrease their own fees because 1) those fees are set some time in advance so cutting them as a rapid response is not really feasible; and 2) that would simply decrease those universities’ own revenues anyway, without the likely prospect of recouping that loss in future, such that doing so would be cutting off their nose to spite their face. Moreover, since the impact of the punishment would arise a year later (i.e. when the next set of students were applying to university), the punishment itself would not provide a strong disincentive to prevent the deviator from cutting fees in the first place.
    
3. Any “external” competition (i.e. options other than going to the universities in the supposed cartel) must be weak. Again, Adonis’ argument fails on this criterion too - although the vast majority of UK universities are charging fees at the upper limit, the fact is that there are multiple outside options that provide a competitive constraint: 1) private universities are increasing in size and coverage and are often a viable alternative for students; 2) prospective students can choose not to go to university, but instead attend a technical college or other institution; and 3) future students can choose to study in foreign universities and are doing so in ever greater numbers. In other words, there are external options that constrain the ability of UK universities to cartelise fees.

Therefore, universities in the UK do not seem to satisfy two of the three conditions required for a cartel to be present. Hence, it is highly likely that Lord Adonis’ claim that UK universities are operating a cartel is baseless and will be given short shrift by the CMA.