The Economics of Online Education

The Economist covers the economics of online education:

Alex Tabarrok…reckons the most salient feature of the online course is its rock-bottom marginal cost: teaching additional students is virtually free.

..as prices converge towards marginal cost, there will be little scope for undercutting the competition. Instead MOOCs are likely to compete on quality…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 textbooks already fits this description. New textbooks are costly to write and design but can be reproduced fairly cheaply. Not surprisingly, only four introductory economic texts account for half of the American market, according to Mr Tabarrok. Indeed, says Tyler Cowen, a co-founder of Marginal Revolution University, it is possible that textbook publishers are better equipped than universities to develop MOOCs profitably.

I agree also with a point made by Caroline Hoxby:

Less selective institutions are close substitutes for MOOCs. Course content is often standardised and interaction with professors is limited in order to keep costs down.

…Elite institutions face very different circumstances, Ms Hoxby reckons. They operate like venture-capital firms, offering subsidised, labour-intensive education to highly qualified students. They aim to cultivate a sense of belonging and gratitude in students in order to recoup their investment decades later in the form of donations from successful alumni…. For top schools, the best bet may simply be to preserve their exclusivity.