The winning move is not to play: Game Theory and the Willetts funding model

During a speech at the Universities UK Spring Conference, David Willetts (UK Secretary of State for Universities) reiterated his warnings about the high potential cost to the taxpayer of universities electing to charge fees reflecting the full range of that which is permitted to them. It is now an open secret that the new funding model for universities is certain to cost the taxpayer more within this parliament, and is very likely never to cost any less than the current model. Bearing this in mind, Willetts has warned senior university staff that money may be taken from other university income streams (for instance the research budget) in order to be able to fund the additional loans that would be required to meet these fees.

Tough talk. But it unfortunately betrays an inability to understand his own policies around competition and an “open market”.

The table above outlines my analysis of the situation. The only chance that institutions have of even maintaining their existing funding is to charge above £7,500 and hope that enough of their competitors choose not to in order to avoid triggering the threatened cuts in research funding. Were the expected lower levels a revenue neutral (including inflation and additional costs incurred for the move to the new system) situation, it may be rational to broker a sector-wide compact (or cartel, if you prefer) to ensure that no-one steps over whatever line the government has drawn in the sand.

But the minimum (and even the implied “normal” maximum) mean that institutions would lose money as against the current system. When you combine this with the decade of incentives encouraging the sector to compete, we are very likely to see a rush to the top. Based on my analysis above, this is the only rational choice for institutional managers looking to maintain or increase income.

This is a “non-zero-sum” game, as there is no way to maintain a position. Institutions will either win or lose – and a lower price than the rest of the sector means that they will lose heavily. The same goes for private institutions, incidentally. What motive have they got not to seek the maximum possible income?

I’ve said it before (many times), I’ll say it again. This model of university funding is unworkable.

You could make your own game theory analysis of the two models of HE. On one side you have the new model, where students, institutions and the tax-payer all lose out. On the other the current model, where they don’t.

This post originally appeared at The Followers of the Apocalypse

The opinions expressed within this blog post are my own, and not those of my employer, or of projects or programmes I am responsible for. This post is available under a Creative Commons Zero (public domain) license. The very little I know about the application of game theory on educational policy I learnt from my inspirational former colleague, Professor David Turner at the University of Glamorgan. The bits that I have got wrong are, however, entirely my own fault.