Economic Naturalist Question #15. Why don’t top-ranked private universities charge higher tuition than many of their lower-ranked counterparts? #EconTwitter 
After posing this question, my former student Lonnie Fox noted that although the ratio of applications to available slots is far higher at top-ranked universities than at their lower-ranked counterparts, tuition payments vary little across schools of different rank.
Top-ranked schools typically admit less than 10% of applicants, whereas many lower-ranked schools admit more than 50%. Expenditures per pupil are also higher at top-ranked schools. If both costs and demand are higher at top-ranked universities, why don’t they charge more?
Although there can be only 10 universities ranked in the top 10 at any given moment, there are usually 50 more whose administrators firmly believe they would have made the top 10 if not for some real or imagined shortcoming in the rankings formulas.
And with the full blessing of faculty, students, and alumni, those administrators spare little effort to improve their institution’s standing in the eyes of external evaluators. Considerable rewards accrue to all these groups when a university achieves elite status.
To be a realistic candidate for such status, a university must attract a world-class student body. Many of the rankings formulas give explicit weight to the average SAT scores of a school’s entering freshman class.
The upshot is that top universities are forced to compete bitterly for their most talented students. The select few to whom they grant admission are also much in demand by other top-ranked schools.
Princeton would have no trouble filling its freshman class with reasonably qualified students even if its tuition were $100,000 a year. But if it charged that much, it would attract only a fraction of the top students it attracts today.
Many parents would ask, “Why pay $100,000 to send my children to Princeton when I can send them to Harvard for only $50,000?”
Tuition payments cover only a fraction—in many cases, less than one-third—of the total cost of educating a student. Most of the rest comes from endowments and annual gifts from alumni and others.
Top-ranked institutions are able to cover the higher costs they incur because their income from gifts and endowments tends to be much larger than at lesser-ranked institutions.
The result is an equilibrium in which students pay no more to attend the highest-ranked school than to attend the number 100 school. A top-ranked school cannot charge more, because it needs its most accomplished students every bit as much as they need it.
