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, 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. Here is one clear takeaway: