The disruption to come

THIS week's Free exchange column looks at the economics of online higher education:

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 piece goes on to discuss how these economics might affect the business models of different sorts of institutions of higher education: of less-selective schools versus highly selective schools, for instance. Building on the discussion in the piece, economist John Cochrane, of the University of Chicago, offers a very interesting take on "Mooconomics" building on his own experience putting together online courses. It's not an easy post to summarise and I recommend you read it for yourself. But here is one clear takeaway:

On these dimensions, online is about halfway. The forums, google chats, and growing community between students are not as good as a high quality classroom experience. They are much better than a mediocre class at a university in the middle of nowhere.

Many of those who get paid money to think and write about these issues were educated at top universities. Their experience is one in which peers are highly motivated and interested in the course material, in which there is a high level of interaction between students and with top faculty, and in which both learning for its own sake and a research mission are considered vital parts of the university model. For people educated in that environment, the MOOC model looks like a woefully inadequate replacement for existing modes of higher education.

But that is not remotely the median experience in higher education. Many more students (in America, at least, and probably elsewhere) have a very practical view of the benefits of higher education, are paying considerable sums of money to sit through mediocre lectures consisting of fairly standardised material, are going to school at irregular hours or intervals and are not interacting heavily with peers, and are dropping out of school at relatively high rates. For these students, the earliest online courses were "disruptive" in the sense that they offered an alternative that was not as good for a much, much lower price. But online offerings have very quickly evolved into something that is better right the way round, and which will only continue to improve.

Students will soon find that for very low prices they can get a much broader array of course choices, most of which offer superior instruction with much more flexibility: you can view the lectures when you want, as many times as you want, wherever you want. They may find that opportunities for interaction with instructors and fellow students are actually improved by the shift to online, because of the benefits of economies of scale and the gains from temporal and spatial flexibility. It will not be long before completion of particular MOOCs earn students enough credit at "real" universities to enable students to get a "real" degree. The stigma associated with MOOC learning should quickly flip to status signalling, since anyone who can do an entire degree online is probably disciplined and self-motivated.

It is very easy to see how elite universities survive this, as they provide a fundamentally different experience. It is equally easy to see how large segments of the world of higher education are rendered unnecessary: where, within a decade or two, all that will remain of hundreds or thousands of less-selective universities will be the buildings—and a skilled teacher or two who built courses that prospered in online markets.

That disruption will be very painful for many members of society, especially those who enjoy good salaries and high status teaching unremarkable courses at local universities. On the other hand, it will be a terrific boon for all those with a desire to learn. The spillover effects will carry well beyond the typical higher-education experience. Good, cheap online education will allow people of all walks of life all over the world to explore an enormous range of topics. Interested secondary school students will have no reason not to take university courses in economics. Middle-aged professionals can dabble in everything from computer science to explorations of 18th century Baltic poetry. One of the great advantages of online learning is the ability to work at massive scale, which makes production of courses studying the tiniest niche subjects economical.

There is also the distinct possibility that higher education will become even more of a critical American export than it already is. America will be able to sell its highly sought-after education services to even more of the world. Of course, there will also be few barriers to entry to talented course producers in Britain or Singapore or anywhere else. But high fixed costs suggest there may be a first-mover advantage. It will also be fascinating to see how geographical clustering of the Mooc-making industry evolves. American higher education is very geographically dispersed at the moment, but we tend to observe high levels of geographic concentration in tradable industries. Which cities will serve as the Hollywood of online education?

What will be interesting to observe, in the near term, is where the two worlds meet and what happens at that juncture. How far down the ranks of American universities will "elite status" protect current business models? Beyond the top 20? The social shock of the arrival of online education will be substantially greater if it devours the top echelon of public universities.

There are many unknowns where higher education is concerned. But with the MOOC experience rapidly overtaking, in quality, the standard education at non-selective universities, dramatic change now looks inevitable.

via:http://www.economist.com/blogs/freeexchange/2014/02/online-education