Revisiting Economies of Scale and Scope in Higher Education

Chapter
Part of the Higher Education: Handbook of Theory and Research book series (HATR, volume 33)

Abstract

In this chapter, we examine the range of methods used by researchers to assess economies of scale and scope in higher education. We begin by providing some context for why researchers and policy makers are interested in the relationship between an institution’s size and scope and their cost per unit of output. We then provide an explanation of the alternative methods that have been used in studies, the advantages and disadvantages of each method, and how they can be applied to different types of institutions. Next, we conduct a thorough review of the empirical literature on higher education. Finally, we use more current data from the 2012–2013 academic year on institutional finances to reexamine whether there are economies of scale and/or scope in higher education. Our findings show that across methods and sectors there is clear evidence of economies of scale, and that the results for economies of scope are more mixed due to methodological challenges with the models.

Keywords

Economics Economies of scale Economies of scope Finance Efficiency Regression analysis Production Cost function Optimization Bowen Baumol Average cost Marginal cost Average incremental cost Outputs Inputs 

Notes

Acknowledgements

An earlier version of this paper was presented at the meeting of the Association for Education Finance and Policy (AEFP), Denver, CO, March 17–19, 2016 and the meeting of the Association for the Study of Higher Education (ASHE), Houston, TX, November 9–11, 2017. We would like to thank Keith Allen for his help at the early stages of this project, and Steve DesJardins, Steve Porter, and Sarah Pingel for their helpful comments on earlier drafts of this paper.

References

  1. Agasisti, T., & Bianco, A. (2007). Cost structure of Italian public universities: An empirical analysis. Higher Education in Europe, 32, 261–275.CrossRefGoogle Scholar
  2. Agasisti, T., & Johnes, G. (2015). Efficiency, costs, rankings and heterogeneity: The case of US higher education. Studies in Higher Education, 40, 60–82.CrossRefGoogle Scholar
  3. Baumol, W., Panzar, J., & Willig, D. (1982). Contestable markets and the theory of industry structure. New York: Harcourt and Brace Jovanovich.Google Scholar
  4. Bowen, H. (1980). The costs of higher education. San Francisco: Jossey-Bass Publishers.Google Scholar
  5. Brewer, D., Gates, S., & Goldman, C. (2002). In pursuit of prestige: Strategy and competition in U.S. higher education. Piscataway, NJ: Transaction Publishers.Google Scholar
  6. Brinkman, P. (1990). Higher education cost functions. In S. Hoenack & E. Collins (Eds.), The economics of American universities: Management, operations, and fiscal environment. New York: State University of New York Press.Google Scholar
  7. Brinkman, P., & Leslie, L. (1986). Economies of scale in higher education: Sixty years of research. Review of Higher Education, 10, 1–28.CrossRefGoogle Scholar
  8. Cohn, E., & Cooper, S. (2004). Multi-product cost functions for universities: Economies of scale and scope. In G. Johnes & J. Johnes (Eds.), The international handbook on the economics of education (pp. 579–612). Northampton, MA: Edward Elgar Publishing.Google Scholar
  9. Cohn, E., Rhine, S., & Santos, M. (1989). Institutions of higher education as multi-product firms: Economies of scale and scope. The Review of Economics and Statistics, 71, 284–290.CrossRefGoogle Scholar
  10. de Groot, H., McMahon, W., & Volkwein, J. (1991). The cost structure of American research universities. The Review of Economics and Statistics, 73, 424–431.CrossRefGoogle Scholar
  11. Dundar, H., & Lewis, D. (1995). Departmental productivity in American universities: Economies of scale and scope. Economics of Education Review, 14, 119–144.CrossRefGoogle Scholar
  12. Fu, T., Huang, C., & Tien, F. (2008). University cost structure in Taiwan. Contemporary Economic Policy, 26, 651–662.Google Scholar
  13. Getz, M., Siegfried, J., & Zhang, H. (1991). Estimating economies of scale in higher education. Economics Letters, 37, 203–208.CrossRefGoogle Scholar
  14. Hashimoto, K., & Cohn, E. (1997). Economies of scale and scope in Japanese private universities. Education Economics, 5, 107–115.CrossRefGoogle Scholar
  15. Izadi, H., Johnes, G., Oskrochi, R., & Crouchley, R. (2002). Stochastic frontier estimation of a CES cost function: The case of higher education in Britain. Economics of Education Review, 21, 63–71.Google Scholar
  16. James, E. (1978). Product mix and cost disaggregation: A reinterpretation of the economics of higher education. Journal of Human Resources, 13, 157–186.CrossRefGoogle Scholar
  17. Jaquette, O., & Parra, E. (2014). Using IPEDS for panel analyses: Core concepts, data challenges, and empirical applications. In M. B. Paulsen (Ed.), Higher education: Handbook of theory and research (Vol. 29, pp. 467–533). Dordrecht, The Netherlands: Springer.CrossRefGoogle Scholar
  18. Johnes, G. (1996). Multi-product cost organisations and the funding of tuition in UK universities. Applied Economic Letters, 3, 557–561.CrossRefGoogle Scholar
  19. Johnes, G. (1997). Cost and industrial structure in contemporary British higher education. Economic Journal, 107, 727–737.CrossRefGoogle Scholar
  20. Johnes, G. (1998). The costs of multi-product organisations and the heuristic evaluation of industrial structure. Socio-Economic Planning Sciences, 32, 199–209.CrossRefGoogle Scholar
  21. Johnes, G., & Johnes, J. (2009). Higher education institutions’ costs and efficiency: Taking the decomposition a further step. Economics of Education Review, 28, 107–113Google Scholar
  22. Johnes, G., Johnes, J., & Thanassoulis, E. (2008). An analysis of costs in institutions of higher education in England. Studies in Higher Education, 33, 527–549.CrossRefGoogle Scholar
  23. Johnes, G., & Schwarzenberger, A. (2011). Differences in cost structure and the evaluation of efficiency: The case of German universities. Education Economics, 19, 487–499.CrossRefGoogle Scholar
  24. Johnes, G., & Velasco, M. S. (2007). The determinants of costs and efficiencies where producers are heterogeneous: The case of Spanish universities. Economics Bulletin, 4, 1–9.CrossRefGoogle Scholar
  25. Koshal, R., & Koshal, M. (1995). Quality and economies of scale in higher education. Applied Economics, 27, 773–778.CrossRefGoogle Scholar
  26. Koshal, R., & Koshal, M. (1999). Economies of scale and scope in higher education: A case of comprehensive universities. Economics of Education Review, 18, 269–277.CrossRefGoogle Scholar
  27. Koshal, R., & Koshal, M. (2000). Do liberal arts colleges exhibit economies of scale and scope? Education Economics, 8, 209–220.CrossRefGoogle Scholar
  28. Koshal, R., Koshal, M., & Gupta, A. (2001). Multi-product total cost function for higher education: A case of bible colleges. Economics of Education Review, 20, 297–303.CrossRefGoogle Scholar
  29. Laband, D., & Lentz, B. (2003). New estimates of economies of scale and scope in higher education. Southern Economic Journal, 70, 172–183.CrossRefGoogle Scholar
  30. Laband, D., & Lentz, B. (2004). Do costs differ between for-profit and not-for-profit producers of higher education? Research in Higher Education, 45, 429–441.CrossRefGoogle Scholar
  31. Lenton, P. (2008). The cost structure of higher education in further education colleges in England. Economics of Education Review, 27, 471–482.CrossRefGoogle Scholar
  32. Lewis, D., & Dundar, H. (1995). Economies of scale and scope in Turkish universities. Education Economics, 3(2), 133–157.CrossRefGoogle Scholar
  33. Lewis, D., & Dundar, H. (2001). Costs and productivity in higher education: Theory, evidence, and policy implications. In M. B. Paulsen & J. C. Smart (Eds.), The finance of higher education: Theory, research, policy & practice (pp. 133–192). New York: Agathon Press.Google Scholar
  34. Mamun, S. (2012). Stochastic estimation of cost frontier: Evidence form Bangladesh. Education Economics, 20, 211–227.CrossRefGoogle Scholar
  35. Mangoldt, H. (1863). The exchange ratio of goods. Translated by E. Henderson from Grundriss der volkswirtschaftslehre, Stuttgart: Engelhorn. In International Economic Papers, No. 11 (pp. 32–59). London: Macmillan, 1962.Google Scholar
  36. Maynard, J. (1971). Some microeconomics of higher education. Lincoln, NE: University of Nebraska Press.Google Scholar
  37. Mayo, J. (1984). Multiproduct monopoly, regulation, and firm costs. Southern Economic Journal, 51, 208–219.CrossRefGoogle Scholar
  38. Middlebrook, W., et al. (1955). California and western conference cost and statistical study. Berkeley, CA: University of California.Google Scholar
  39. Moore, F. (1959). Economies of scale: Some statistical evidence. Quarterly Journal of Economics, 73, 232–245.CrossRefGoogle Scholar
  40. Nelson, R., & Hevert, K. T. (1992). Effects of class size on economies of scale and marginal costs in higher education. Applied Economics, 24(5), 473.482.CrossRefGoogle Scholar
  41. Panzar, J., & Willig, R. (1977). Economies of scale in multi-output production. The Quarterly Journal of Economics, 91, 481–493.CrossRefGoogle Scholar
  42. Paulsen, M. (1989). Estimating instructional cost functions at small independent colleges. Journal of Education Finance, 15, 53–66.Google Scholar
  43. Paulsen, M., & Smart, J. (Eds.). (2001). The finance of higher education: Theory, research, policy & practice. New York: Agathon Press.Google Scholar
  44. Pfouts, R. (1961). The theory of cost and production in the multi-product firm. Econometrica, 29, 650–658.CrossRefGoogle Scholar
  45. Pindyck, R., & Rubinfeld, D. (1989). Microeconomics. New York: Macmillan Publishing Company.Google Scholar
  46. Reeves, R., & Russell, J. (1935). The evaluation of higher institutions, finance, 7, Chicago: University of Chicago Press.Google Scholar
  47. Robst, J. (2000). Do state appropriations influence cost efficiency in public higher education? Applied Economics Letters, 7, 715–719.Google Scholar
  48. Robst, J. (2001). Cost efficiency in public higher education institutions. The Journal of Higher Education, 72, 730–750.CrossRefGoogle Scholar
  49. Rufino, C. (2006). Estimating the degree cost functions of the Philippines public and private higher educational institutions. Asia Pacific Education Review, 7, 32–40.CrossRefGoogle Scholar
  50. Russell, J. (1954). The finance of higher education. Chicago: University of Chicago.Google Scholar
  51. Sav, G. (2004). Higher education costs and scale and scope economies. Applied Economics, 36, 607–614.CrossRefGoogle Scholar
  52. Sav, G. (2011). Panel data estimates of public higher education scale and scope economies. Atlantic Economic Journal, 39, 143–153.CrossRefGoogle Scholar
  53. Stevens, E., & Elliott, E. (1925). Unit costs of higher education, publications of the educational finance inquiry, 13. New York: Macmillan.Google Scholar
  54. Stevens, P. (2005). A stochastic frontier analysis of English and Welsh universities. Education Economics, 13, 355–374.CrossRefGoogle Scholar
  55. Teece, D. (1982). Towards an economic theory of the multiproduct firm. Journal of Economic Behavior and Organization, 3, 39–63.CrossRefGoogle Scholar
  56. Tierney, M. L. (1980). An estimate of departmental cost functions. Higher Education, 9, 27–52.CrossRefGoogle Scholar
  57. Tirivayi, N., van den Brink, H., & Groot, W. (2014). Size and economies of scale in higher education and the implications for mergers (UNI-MERIT Working Paper Series, paper #2014-066).Google Scholar
  58. Titus, M., & Eagan, K. (2016). Examining production efficiency in higher education: The utility of stochastic frontier analysis. Higher education: Handbook of theory and research (Forthcoming).Google Scholar
  59. Toutkoushian, R. (1999). The value of cost functions for policymaking and institutional research. Research in Higher Education, 40, 1–16.CrossRefGoogle Scholar
  60. Toutkoushian, R., & Paulsen, M. (2016). Economics of higher education: Background, concepts, and applications. Dordrecht, The Netherlands: Springer.CrossRefGoogle Scholar
  61. Toutkoushian, R., Porter, S., Danielson, C., & Hollis, P. (2003). Using publication counts to measure an institution’s research productivity. Research in Higher Education, 44, 121–148.CrossRefGoogle Scholar
  62. Verry, D., & Davies, B. (1976). University costs and outputs. Amsterdam: Elsevier.Google Scholar
  63. Weldon, J. (1948). The multi-product firm. Canadian Journal of Economics and Political Science, 14, 176–190.CrossRefGoogle Scholar
  64. Winston, G. (1999). Subsidies, hierarchy, and peers: The awkward economics of higher education. Journal of Economic Perspectives, 13, 13–36.CrossRefGoogle Scholar
  65. Witmer, D. (1972). Cost studies in higher education. Review of Educational Research, 42, 99–127.CrossRefGoogle Scholar
  66. Worthington, A., & Higgs, H. (2011). Economies of scale and scope in Australian higher education. Higher Education, 61, 387–414.CrossRefGoogle Scholar
  67. Zhang, L., & Worthington, A. (in press). Explaining estimated economies of scale and scope in higher education: A metaregression analysis. Research in Higher Education (Forthcoming).Google Scholar

Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Institute of Higher EducationUniversity of GeorgiaAthensUSA

Personalised recommendations