PRICE DISCRIMINATION: A COMPARATIVE STUDY OF BUSINESS UNIVERSITIES IN LITHUANIA

Abstract

The paper reflects on the phenomenon of price discrimination, evaluating the theoretical background, which is further adapted to the theory of tertiary education. The main focus is to identify the forms and levels of price discrimination in two selected business universities in Lithuania, as a fundamental comparative analysis discloses that pricing strategies differ from university to university, but the price discrimination fact stays constant as our study shows. The most popular way of price discrimination at the university level, as our study shows, is third-degree price discrimination. [PUBLICATION ABSTRACT]

Headnote

ABSTRACT. The paper reflects on the phenomenon of price discrimination, evaluating the theoretical background, which is further adapted to the theory of tertiary education. The main focus is to identify the forms and levels of price discrimination in two selected business universities in Lithuania, as a fundamental comparative analysis discloses that pricing strategies differ from university to university, but the price discrimination fact stays constant as our study shows. The most popular way of price discrimination at the university level, as our study shows, is third-degree price discrimination.

Keywords: pricing, price discrimination, tertiary education sector, comparative analysis, Lithuania.

Introduction

Why price discrimination comes as a research object these days? Economic crisis has promoted to take into account various marketing and management measures to ensure business viability and potential to sustain their activities on the market. Price discrimination could serve as a tool for marketers to achieve their viability goals, though in legal forms only. Education services are the target for university governors and administrators to seek profitability as well, taking into account several important factors, such as (Zaharia et al., 2009a; Zaharia et al., 2009b: Zaharia, 2009; Dubra et al., 2008; Wlodarczyk-Spiewak & Korpysa, 2006; Savrina & Kalnmeiere, 2006; Grundey et al., 2007a; Grundey et al., 2007b; Grundey, 2008; Gadziyev et al., 2009; Aristovnik & Pungartnik, 2009):

* global economic crisis;

* shrinking educational market due to demographic crisis in most developed countries, including Europe;

* increase in resource costing due to its shortage;

* failure of the governments to insure free tertiary education (for at least a proportion of population);

* lack of population's interest in higher education;

* rising fees for tertiary education;

* questionable study programmes quality and supporting services.

The essence in price discrimination in tertiary education lies in charging different fees for different customer segments; or charging no fees (i.e., the cases when the fees could be waved).

Therefore, the students (actual and potential) face a dilemma, which specialisation to go for, especially when a financial factor of university/ college studies is a paramount one these days.

The research object of the current research is price discrimination (see Figure 1). The research aim of the paper is to disclose and compare pricing practices of business universities in Lithuania, which necessitated the solution of the following research tasks (see Figure 1):

* to define price discrimination in general terms (as applied in economics, management and marketing sciences);

* to identify the levels of price discrimination, following the approaches by prominent authors;

* to determine the price discrimination factor as applied in university studies on the theoretical level;

* to present cases studies of two business universities in Lithuania - how price discrimination works (if at all) in their tertiary education and perform their comparative analysis.

The preliminary findings support the theoretical suggestions by a number of profound authors (Vedder, 2004; Ehrenberg, 2002; Sandler, 2006) that third-level price discrimination dominates in the sector of higher education services.

1. Literature Review

1.1. Defining price discrimination

Most businesses charge different prices to different groups of consumers for more or less the same goods or services. This phenomenon is termed price discrimination and it has been applied to nearly every market. Price discrimination occurs on the market, when an organisation offers a product or service at different prices that do not show a proportional difference in costing. It is important too, to mark clearly that there is a difference between price discrimination and product differentiation. Differentiation of the product gives the supplier greater control over price and the potential to charge consumers an excellent price because of noticed differences in the quality of a good or service (see more in Table 1). However, not all price differences are illegal; those which create a monopoly are considered to be illegal and might have legal consequences if detected.

Conditions necessary for price discrimination identified by authors GeoffRiley and Eton College (2006) are as follows:

* "Differences in price elasticity of demand between markets - a different price elasticity of demand from each group of consumers is needed".

* "Barriers to prevent consumers switching from one supplier to another - the firm must be able to prevent a process where consumers who have purchased a good or service at a lower price are able to re-sell it to those consumers who would have normally paid the expensive price".

"Price discrimination is a term that can elicit emotional responses from those who do not understand its meaning. In this context, the word discrimination should not be taken to mean any kind of difference in treatment of individuals based on their gender, nationality, or ethnic background. The term price discrimination might be less troubling if the noneconomists understood it to mean differences in prices charged across various groups of consumers" (Bishop and Colwell, 1989).

The roots for price discrimination in higher education could be evaluated from the following perspectives:

1) The pricing theory (Paulsen, 2000);

2) The market structure theory;

3) The theory of costing;

4) The theory of imperfect competition (monopolistic competition);

5) The behavioural theory (Casse and Manno, 1998);

6) The concept of product homogeneity (Mitra, et al., 1997);

7) The concept of product differentiation (it might take a form of a non-price competition, often in the form of marketing activities, such as advertising, promotion, public relations; fund raising, recruitment and programme development);

8) Ways of market entry (either for an educational institution by establishing a subsidiary or by opening a new study programme for the market).

1.2. Degrees in price discrimination

Price discrimination can be differentiated into three degrees. Different authors call the degrees of price discrimination differently, but the main features in the whole three degrees are the same. First, second and third degree price discrimination exist and apply to different pricing methods used by companies. The comparison of three authors can be seen in the table below.

Armstrong (2006) indicated that he could determine three cases of price discrimination in competitive markets (Armstrong, 2006, pp.1-2): 1) "a dominant firm may "exploit" final consumers by means of price discrimination, with the result that total and/or consumer welfare are reduced"; 2) "...sometimes (it is) a policy objective to attain a "single market" across the region" (Armstrong refers to the European market, being treated as one region); 3) "...price discrimination can be used by a dominant firm to "exclude" (or weaken) actual or potential rivals". There might be other forms of price discrimination as indicated in Table 3, based on location, customer-segment, image, channel, product-form and time.

1.3. Price discrimination theory as applied in higher education

"... schools function as a large, bureaucratic system, based on politics, preservation of the status quo, and daily routines" (Chen, 2010, p.3).

The latest research performed by OECD (2010) disclosed the main five trends in education and what factors influence these trends. Firstly, the factor of globalisation takes place in our lives. This trend encompasses the growth of global population, the migration patterns of population, the gap between rich and poor, global environmental issues, shifts in global economic power. Secondly, new social challenges are in the horizon. It is related to changing age structures, changing patterns of social expenditure, new forms of community involvement, and the persistency of poverty - though, the number of population content with their life is also on the rise.

Thirdly, the nature of working culture experiences changes. It is witnessed that life cycles are changing (life expectancy is on the rise even in less developing countries), work flexibility is also expected, knowledge-expected economies are on the rise, massification and globalisation of higher education, women at work and in higher education.

Fourthly, the transformation of childhood has been identified as a serious challenge in shaping education. It concerns living in more diverse families, families turn to be smaller, parenting has been pushed to older age (delayed marriages and delayed children due to career seeking working culture), children's health and inheritance of life chances, a minor trend of having more children (also see Filed et al, 2007).

Fifthly, ICT is forming the next generation. It is connected to Internet (WWW) and rapid growing participation online. All institutions, including colleges and universities are working towards universal access, providing explicit computer networks for their students. Lots of IT companies have been working for decades to get the feeling of "world in your pocket" (i.e. word in your PC/laptop).

"If one views the university as a seller of positions in its freshman class, accepted applicants as buyers of these positions, and the net tuition (the tuition level minus the grant award) charged to an accepted applicant as the price of a position, then it follows that the university should charge a lower price and give more grant aid to the first accepted applicant. Thus the strategy of preferential packaging within a need class is nothing more than a form of price discrimination" (Ehrenberg, 2002, p.86). It has been identified (Vedder, 2004) that tuition costs at universities have gone considerably up; other costs, not directly related to tuition fees, have also increased, accommodation (lodging), catering services, etc. amongst them. Therefore, the total amount for university tuition increased 4 times in the period of 14 years (1989-2003) in the USA (Vedder, 2004).

Vedder (2004) emphasised that price discrimination at colleges and universities might take various forms (see Table 4): 1) the most obvious type is the tuition fees (students are charged a different fee for different forms of studies - such like, day-time or evening-time, or executive studies); 2) a less obvious pricing policy is hidden behind scholarships and grants. Most colleges and universities give some kind of financial aid to a considerable proportion of their students.

Colleges have long been in an especially good position to benefit from price discrimination (encompassing a complex of price discrimination factors - see Table 4), because they satisfy all three requirements (Vedder, 2004; Ehrenberg, 2002; Sandler, 2006):

1. Face downward-sloping demand curves.

2. Able to identify consumers willing to pay more.

3. Able to prevent low-price customers from reselling to high-price customers.

Increased price discrimination at colleges, like so many other economic issues, is a matter of tradeoffs. It has been proved by Vedder (2004) that private and state universities charge different tuition fees, emphasizing on quality gap and professionalism. As a result we have different prices for different students, which in turn, highly correlate to their families' willingness to pay for their higher education (Sandler, 2006).

"Colleges are nearly immune from the ordinary rules of economics" (Sandler, 2006). Colleges and universities, especially the private one, are able to set their tuition fees without much regard to the economic factors, such as a) rate of inflation, b) interest costs, or the c) ability of many families to pay the tuition fees. "They can continue to do so for as long as there are those wealthy enough to pay full freight or there is enough federal aid to pay the costs for others. Those of us in the middle have to scrimp, save, and borrow - or go elsewhere" (Sandler, 2006).

It could be concluded that the most popular form of price discrimination at colleges and universities worldwide is third-level price discrimination - charging different prices for the same services (i.e. higher education studies) in different segments of the market.

2. A comparative study of price discrimination at Lithuanian business universities

2.1. Research methodology

Price discrimination phenomenon in university studies will be analysed from the tuition fees' perspective, selecting two business universities in Lithuania:

a) International Business School at Vilnius University (VU IBS) and

b) ISM University of Management and Economics (ISM) (previously International School of Management).

The rationale of university selection. Both Lithuanian business schools are selected as they have always been fee-based institutions, offering high standards of study quality and have gained reputation amongst national counterparts as being prestigious to gain higher education. Both VU IBS and ISM have been known for high tuition fees, the highest in the country, therefore, we can adopt Ehrenberg's (2002) position on third-degree price discrimination, where such factors as a) institutional prestige, b) university national and international rankings, c) need-blind admissions, d) need-based financial aid policies; e) quality of studies, f) merits and awards for students dominate in studies' pricing policies.

2.2. Research findings of Lithuanian Universities

2.2.1. International Business School at Vilnius University

International Business School at Vilnius University (VU IBS) is a business school with the rights of a faculty under the Masterbrand of Vilnius University, which was established in 1989. VU IBS offers degrees in business, management and economics, international business studies as well. The total number of students is 2393 as of 20081 data 72% of this number are bachelor degree students.

Students at VU IBS are charged according to the rankings of their performance in their studies. The best performing students are able to get 15% (were all grades should be equal to 10 - the highest grade possible), 10% (the grades should be within the range of 9 to 10) or 5% discount for their tuition fees (see Table 5). On the other hand, tuition fees at VU IBS were twice as large as compared with other faculties at Vilnius University, offering similar or identical study programmes. Therefore, price discrimination takes the third-degree form at VU IBS

As the tuition fees were on the rise at VU IBS, the amount students had to pay depended on the entrance year students (see Table 6). It should be noted that the increase in 20% is noticeable from 2006 to 2007. Tuition fees stayed stable for 2008 and 2009. The difference is noticed for International Business studies (part-time), in 2008 the decrease was 7% (as compared with 2007), but then the tuition fee caught up with International Business studies (full-timers) in 2009. Therefore, the price discrimination fact is also observed due to natural economic circumstances over a taken period of time.

Judging from the data, presented in Table 7, VU IBS retained the same level of tuition fees for two bachelor degree programmes - International Business and International Tourism Business, i.e. 3825 Lt per semester. The introduction of a very popular bachelor programme (3.5 years) in Business Finance Management presented a new pricing scheme at VU IBS: a higher tuition fee per semester for a shorter study programme. Though, the total amount is extremely close, c.f 30600 Lt for International Business and International Tourism Business and 30625 Lt for Business Finance Management study programme. Bachelor programmes delivered in English are charged a higher price due to higher costs of services.

2.2.2. ISM University of Management and Economics

ISM University of Management and Economics (ISM) was founded in 1999 in Kaunas (the second largest city in Lithuania) and it claims of offering the highest quality studies related to business, economics and politics in the country amongst private and state universities. It was established as the first privately-owned institution of management education in Lithuania and was known as ISM - International School of Management. The main founders of ISM are Norwegian School of Management and The Norwegian Industrial and Regional Development fund2. Every year about 500 new students enter the university.

ISM University of Management and Economics all forms (full-time or part-time) and types (bachelor or master degree) of studies are charged. The focus of our research is the bachelor studies, for a more precise comparison. Therefore, five bachelor degree programmes at ISM are compared in Table 8, providing a clear distinction of the price discrimination, based on students' performance, which directs to third-degree price discrimination.

If compared to the situation in VU IBS, ISM University provides a more distinctive price discrimination case, as students might expect tuition fee reduction at the levels of 25%, 50%, 75% or in extreme cases - even 100%. These discounts are given for a limited amount of students (not more than 20% of course students of a particular studies programme).

Another substantial difference for ISM is that are no tuition fee differences for foreign students, entering ISM or studying on students' exchange programme.

As it was identified in the VU IBS case, price discrimination at ISM depends on the year student has started the studies (see Table 9). Though the rise in tuition fees at ISM has little evidence over the past three years (2009-2011), being stable over the economic crisis period in the country. The rise in tuition fees was noticed only in 2009 (as compared to 2008), when the tuition was increased by 5%, not like 20% in the case of VU IBS. But another factor is also important - the general tuition fees at ISM are approximately 1.5-2 times higher than in other private colleges and universities in Lithuania.

It could be stated that ISM follows Ehrenberg's (2002) position on third-degree price discrimination, where such factors as a) institutional prestige, b) university national and international rankings, c) need-blind admissions, d) need-based financial aid policies; e) quality of studies, f) merits and awards for students dominate in studies' pricing policies.

Conclusions

Price discrimination could be referred from four different perspectives, namely: a) economic, b) micro-economic, c) marketing, and d) money & business. It is also stated that most theoretical studies identify three major forms in price discrimination, which take the forms of 1) first-degree price discrimination (or in other terms "perfect discrimination/optimal pricing"), 2) second-degree price discrimination comprises cases, where price depends on the purchase volume, and 3) third-degree price discrimination encompasses cases, when different prices for different segments.

The overview of price discrimination cases in the higher education sector pointed out that third-degree price discrimination is the most common case in practice. Factors of price discrimination in higher education were searched and the following findings could be summarised here:

Situation No 1: universities could differentiate their tuition fee policies due to institutional prestige, student quality, faculty quality and enrolment (proposed by Paulsen, 2000).

Situation No 2: colleges and universities could charge students on the grounds of third party providers, vicious circle of funding and spending, the lack of market discipline, ineffective price competition, government regulation (Vedder, 2004).

Situation No 3: universities and colleges follow their pricing policies based on allinclusive costing model, which incorporates this year's salaries, fixed costs, and variable costs need to be offset by revenues generated by apportionment, tuition, property tax, and other general fund sources (Boroch et al., 2010).

Situation No 4: it has been identified by the authors of this paper that third-degree price discrimination takes the most popular factors at colleges and universities, such as institutional prestige, university national and international rankings, need-blind admissions, need-based financial aid policies; quality of studies, merits and awards for students (Ehrenberg, 2002).

When comparing two business universities in Lithuania - International Business School at Vilnius University (VU IBS) and ISM University of Management and Economics (ISM) - the conclusion could be drawn in the following lines:

a) both universities (in the case of VU IBS we should use the term "school" or "faculty", but for the purpose of simplicity, we will use the term "university" in both cases) are based on private foundations;

b) both universities charge for all levels of studies, including bachelor degree studies (there are no free entrance cases);

c) in the case of ISM, bachelor degree tuition fees tend to be 1.5-2 times higher than in the counterpart institution - VU IBS;

d) both universities apply discount scheme, though ISM is the leader in this field, offering up to 75% discounts in the case of highest performing students. There are cases when tuition fees are waived;

e) time discrimination is also applied, as tuition charges changes over the years for the entrants;

f) course discrimination is also applied, as students, studying in different study programmes (e.g., international business, tourism management; finance and accounting, etc.) are charged different prices (the case of ISM);

g) language discrimination is highly applied in ISM, as courses delivered in English (or the full study programme) are charged higher fees;

h) the system of scholarships is also applicable in both universities, as students are able to win grants and national/international scholarships from a choice of funds and aid programmes;

i) the Lithuanian Government introduced a new financing scheme of the higher education system in 2009, providing full or partial financial subsidies even for private colleges and universities, which, to our opinion, distorted the market conditions for fair service provision in higher education in Lithuania.

Sidebar

Dainora Grundey, Ingrida Griesiene, Price Discrimination: a Comparative Study of Business Universities in Lithuania, Economics & Sociology, Vol. 4, No 1, 2011, pp. 64- 77.

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