http://www.nytimes.com/2006/12/13/education/13voices.html?pagewanted=2&sq=

Upon completion of this four-course meal they call college, Cornell University will stick me with a bill totaling $200,000. The price of college education—especially at private institutions—has been the subject of much media attention as of late. Institutions such as Harvard, Princeton, and Yale have instituted bold programs providing free education for students who cannot afford tuition. Earlier this month, Provost Martin outline a similar program here at Cornell. These programs only deal with the beginning of the financial issue vexing many parents across America. Even after financial aid, student loans, and scholarships, a private college education can cost as much as a house. For example, Jenny Russel, an alumna of the University of Redlands prides herself on her private educate despite the $50,000 in debt she received along with her degree. Those, like Ms. Russel, who note a marked difference between public and private schools cite the network effects produced by private education.

In a normalized market, the laws of supply and demand function fluidly. However, network effects examine how networks function when a good or service’s potential value to customers depends upon the number using it. For example, telephones would be relatively worthless if many people chose not to purchase them. The same goes for computer operating systems.
The fact that there is an integrated network of telephone users justifies the value of purchasing a phone and paying for service. Yet, for the purchaser to assess how much he/she will pay for the object, he/she must predict the total number of users of the good. When examining colleges, this term of “users of the good” can be quite vacuous. However, as the article suggests, we can bifurcate the users of the good to general educational experience and resulting job opportunities.

While many like Cal State University’s President, F. King Alexander claim that private institutions have a Chivas Regal affect—having an aesthetic facade, but nothing special internally—a private institution does exhibit network effects. We must be clear, however, the variable cannot be expressed in ‘how many’ use the service, but rather who uses the service. The selectivity is the most desired attribute of private institutions. A group of students is winnowed into an entering class representing the supposed pinnacle of applicants. The perceived benefit of a private education is the ability to be around students of similar caliber thereby creating a cocoon of higher learning that will benefit all. The second variable is who used the good before, meaning what types of alumni and networking do schools afford. I can only speak for Cornell on this matter, unfortunately. Having gone through an on-campus recruitment process and subsequent internship, I can personally attest to the benefit of private school networks. For example, perhaps the most qualified candidate in my analyst class, attends a state school in New Jersey. One day, several analysts from private colleges were discussing how easy on-campus recruitment was. Unfortunately, my friend from the state school did not have it as easy as we. He spent most of his time cold calling banks, sending faxes and resumes, and networking consistently.

When examining the price tag of private universities, one must ask, why would anyone pay such astronomical fees when cheaper alternatives exist? The answer lies in the network effects of private institutions.