Pro: The Student Agencies Monopoly Stifles Competition
By Andrew Blumenfeld ’13
For all the terrific services offered by the University, students have continuously sought to fill still-unmet needs on campus—and to derive a profit while doing so. For about 100 years, this has meant the presence of the Princeton Student Agencies– University-recognized businesses that are student-run and that submit themselves to the regulations that Princeton has stipulated as part of their conditions for operating on campus. These services – ranging from tuxedo rental to water delivery – have many virtues and offer much to the University community. However, the relationship by which these agencies and the University engage deprive the campus of the market forces that encourage students to create, incentivize quality, and drive prices down so that they might be reasonably accessible to those who find the services useful. Born from the innovation of ambitious students, the agreement into which these agencies enter with the University stifles widespread entrepreneurial spirit on campus, impedes the quality of services available to Princeton students, and limits the availability of these services to the particularly well-off members of our community. All 18 student agencies are subject to the same detrimental forces created by the monopolistic arrangement with the University even if some agencies have done a better job than others in mitigating the full range of detrimental effects. In order to get a better picture of this, we must first examine the content of this arrangement and its impact upon agency operations as well as the broader University community.
When a student or group of students believe they have a unique business to operate profitably on campus, they may submit themselves to the University for approval as a Princeton Student Agency. A key component here is that the business be “unique.” Herein lies the first problem: this stipulation means that students may not imagine new ways to provide the same or similar service as any other Princeton Student Agency; students may only propose entirely new businesses to fill entirely different needs on campus. Even a basic understanding of economic theory, minimal experience, or common sense would suggest that this stipulation amounts to a significant financial gain only for approved student groups. Indeed, once approved they have effectively earned a guarantee that any and all competitors can only possibly come from off-campus. In fact, given that the University forbids unapproved businesses from operating on campus and that the nature of many agencies requires some sort of on-campus presence, approved agencies are essentially granted a monopoly. Such a guarantee is clearly quite valuable, and the University – good as it is in generating revenue – would likely not grant it at no cost. Indeed, it does not. Unfortunately, that cost is first exacted from the agencies—and then absorbed by the rest of the Princeton community.
Monopolies are incredibly lucrative and this fact has not eluded the Student Agencies Program, which charges an annual fee on each of the agencies as well as garnishing a portion of all profits. In addition to receiving some general services for these fees, the cost to an agency includes the exclusive rights to the specific market in which that agency operates. Even for such costs, the agencies are happy to oblige because their monopolies enable them to pass any excess cost onto the students. In other words, without competition, the agencies have no downward pressure on their prices and can make up the expenditures to the Program in excess revenue from otherwise exorbitant prices. As I have suggested, this arrangement results in a slate of disservices to the students who might otherwise benefit from a more free-market arrangement.
Something worth examining further is that the agencies are left with a monopoly that harms the interest of students. This is not an entirely uncontroversial claim. Supporters of the Student Agencies contend that the agencies still face competition from outside businesses. Since the University only allows approved businesses to operate on campus, there is a range of services provided by agencies that are insulated entirely from competition due to their on-campus nature. The Publicity Agency, for example, might be a service that would be widely enjoyed and utilized by nearly all students at some point in the Princeton career, but its exclusive right to this market means a lack of quality assurance—and guaranteed bloated prices. Door-to-door flyer delivery, for example, costs students $1000. On its face, the price seems incredibly unreasonable, but to evaluate this empirically requires that students be afforded the opportunity to offer the same service more efficiently and at a lower cost. Even with regards to the agencies in which outside businesses might be a factor, an argument about the possible competitive effect this has is to ignore the incredible advantage an on-campus business has—something that can never be rivaled on an equal playing field if all other on-campus businesses in that particular market are prohibited.
The result of this system is a business climate that disincentives both the creativity born from competition as well as the inclination to provide the highest quality service at the lowest possible cost. While there are certainly some agencies that have run up against legitimate market forces with greater force than others, we must concern ourselves with the institutional systems that actively discourage this. The Princeton Student Agency system allows for the University community to be divided sharply in the services available to them as a function of one’s background and economic status. While some students enjoy a range of services (such as publicity, laundry service etc…), others are more sensitive to the uncompetitive prices that make these services the exclusive purview of their wealthier friends. The University is clearly under no obligation to make these – or any- services available to any student—let alone as many students as possible. But to institutionalize the safeguards for businesses that make some services systemically unavailable to lower-income students is socially irresponsible for a community like Princeton.
In case one might suppose that the services become more “unavailable” as they become increasingly considered “luxury” goods (e.g., the laundry service), consider the Moving and Storage Agency. All students must make moving arrangements each summer, and many include some form of storage. Certainly, storage in this sense is not a luxury. Even with outside “competition” (which, again, ignores the advantages an on-campus competitive presence might have on prices/quality), the Agency still charges about $25-$35 per box for a summer of storage. Yet, the Undergraduate Student Government (USG) has recently negotiated a contract with an outside storage company that will offer this service to students at less than $10 per box, including on-campus pick-up and delivery. The USG is in the unique position to facilitate this service; without the USG, these outside vendors would not have had the opportunity to engage this market, and the monopoly otherwise guaranteed by the Moving and Storage Agency allows them to offer their service at what is obviously an inflated price. Hopefully, this effort by the USG will help push the Student Agency cost down, but, unfortunately, this is just one example, and the USG cannot be the main competitor for all of the individual agencies—and it doesn’t have to be. This example demonstrates that businesses are eager to provide similar services to students on campus- and, indeed, there are students interested in facilitating and/or providing these services for a profit- and their exclusion has allowed the Student Agencies program to deprive all but the highest-income students from important (as well as luxury) services.
The final point worth considering is that of stability. It has been suggested that the elimination of the regulations that govern agencies and drive up costs is the optimal economic arrangement given the inevitable instability of a free market. However, this argument assumes a false dichotomy. The University need not choose between allowing any and all vendors (students or otherwise) to operate on campus or promise every agency the monopoly it does now. A more practical plan would enable competing agencies to operate out of the same organization.
As mentioned previously, the University is under no legal obligation to offer its property up to vendors in any way. However, since the University does allow Student Agencies to exist, one could fathom a reformed Student Agencies program that allowed for healthy competition among its agencies such that support and stability could be maintained, while encouraging the type of innovation that brings about new and better services at competitive prices that don’t needlessly exclude entire portions of our community. This could be accomplished without debilitating impracticalities if the Student Agencies program served less of a managerial role for all the agencies and more as a general set of guidelines and avenues for support. In so doing, the University would help create an environment that is both friendlier to entrepreneurship as well as to students who might otherwise feel excluded by a community less inclined to engage the market than it is to exploit it.
Andrew Blumenfeld is a sophomore from Los Angeles, CA. He can be reached at firstname.lastname@example.org.
Con: Monopoly Power Allows Student Agencies to Provide Essential Services
By Brad Stanger ’11
Princeton Student Agencies is a program on campus designed to give students a chance to run their own businesses. Established 100 years ago in 1911, the program was pioneered with the goal of helping students to help themselves and to give students the opportunity to finance their educations while providing the campus community with valuable services. Today, there are 18 different Student Agencies, each of which provides a unique service to the campus community.
It has been suggested that the Agency program stifles competition by creating monopolies on campus that raise prices for students and parents on various services which might otherwise be cheaper. This line of reasoning is based on two myths commonly used as hard facts when critiquing the Agency Program: first, that there are many viable alternatives to the Agency Program that will indeed improve service; and second, that the Agency Program enjoys a protected monopoly free from outside competition.
In this world we cannot be so lucky as to cling to ideals; we have to compare the systems that we have to the relevant alternatives that could be implemented. There are two theoretical alternatives to the Agency Program as it currently exists. First, it could be abolished entirely, turning the businesses into privately owned and independently run companies. Or, it could be modified to allow multiple Agencies to operate in the same line of business.
Looking at the first case, if one could hypothetically convince the University to allow this new option, we would then have a system where any student could found and run a business out of his or her dorm room. Unlikely as this is, it is worth consideration.
This alternative might sound appealing at first, but it has some important drawbacks, especially from an economics perspective. First and foremost, students would have at best three and a half years to accomplish the feat of starting, growing, and sustaining a new business—all the while taking classes full time. Because of the high opportunity cost that a student faces when deciding to start one of these business, the average price of goods and services would have to be higher to compensate them for the lost time, even if there were more competition.
Additionally, the short time horizon creates a setting with some very interesting incentives. If students actually owned these businesses, then they would continue to own and operate them after graduating, forcing the operations into the hands of alumni. They would also, if successful, very quickly be tempted to expand off campus, making them very similar to ordinary businesses. Since normally non-Agency businesses are prohibited from operating on campus, it is unclear how the University would react to such a situation.
If students were not allowed to own the businesses, then they would have very little incentive to start them from scratch in the first place. And, even if they did, they would have very little incentive to monitor product quality, because their business venture would only be a temporary affair. In the event that they could not secure a new student manager after graduation, the entire infrastructure would collapse, leaving the campus business scene in constant flux.
More than anything else, the Student Agency Program is focused on keeping the businesses in the hands of students, while providing critical stability to make sure that these businesses survive the difficult transitions between student managers. By doing so, the University accomplishes the two goals it seeks in allowing students to run businesses on campus.
Another idea for reforming the Agency Program is the possibility of allowing more than one Agency to exist within a specific line of business, for example allowing two Agencies to sell water instead of one. This would maintain the stability of the Agency Program while allowing for more competition.
Again while this scenario sounds ideal, the reality makes it nearly impossible. First, it is unclear which student managers would prefer to risk starting a new business instead of just managing an existing business. Because the University owns the businesses, the normal lucrative component of entrepreneurship, the ability to own the business itself as it grows, would be completely lost. The students would necessarily prefer to collude, keeping prices higher anyway. While increased ‘competition’ could be beneficial, the mechanism that such a system would use to generate this competition is unclear.
It is also quite hard to envision two similar businesses sharing the same office space, using the same website, and receiving advice from the same set of staff. In addition to being a horribly awkward experience, it would also be quite a large waste of resources. Agencies competing for the same vendor contracts would either have to collude, or be forced to compete and necessarily leave more profit in the hands of vendors instead of students.
Indeed, reforming the agency program through either of the two methods above seems like a step backward. Nonetheless, it is also useful to examine the current system, focusing on the claim that the supposed ‘monopoly’ power of the agencies is causing them to charge the campus community unreasonably high prices.
As explained above, even under a model with competition, prices would naturally be higher to compensate students for the opportunity cost of running these businesses, compared to individuals who are not full-time students. Additionally, the lack of scale created by operating exclusively on campus means that prices would tend to be higher as well, regardless of the system. That is to say, the cause of higher prices is less likely to be coming from exclusivity, as from the basic fact that these are small businesses run by Princeton students.
At the same time, Agencies do face a tremendous amount of competition and are forced to operate in very price competitive environments. For example, Shipping and Packing, an Agency that prides itself on providing quality package shipping services, claims to offer better prices than the local UPS store. One might think, because of their convenient location in Frist, that they might stand to exploit their captive student market. Yet, cash-strapped students deciding where to ship their items really can quite easily make the walk out to Nassau Street.
Furthermore, the Moving & Storage Agency, in the business of storing students’ belongings over the summer, also must compete aggressively with other options, including the very large number of storage lockers on Route 1.
Similarly, Tiger Foods, a food delivery business, competes aggressively with the other food venues on and off campus. It offers excellent prices of which many students readily take advantage. While there is technically little other competition specifically on campus, that certainly does not mean that these businesses are protected. Princeton’s campus is very small, and students seeking other options can easily look to other local businesses.
In some cases too, Student Agencies do charge more money for their services than other options on Nassau Street. But, arguing that this is because they are monopolies demonstrates a fundamental lack of understanding about the business world. Michael Porter, author of Competitive Strategy, argues that businesses must carve out a niche for themselves in order to be successful. Certainly, some Agencies offer premium services, including superior customer service and product personalization, and, therefore, charge premium prices. In the outside world, Apple may charge more for its products than Best Buy, but this does not mean that Apple is a monopoly. This means that Apple is providing a premium product. In order to conclude that Agencies are gauging consumers, one would need to do a thorough comparison between the specific Agency in question and its rivals.
To the extent that the Agencies do have a monopoly on campus, it is almost exclusively a result of their ability to use the University to advertise. This includes advertisements on campus and use of the Universities database of parent addresses. It cannot be denied that exclusive use of these two venues generates advantages for the Agencies. However, the University keeps a tight lock on advertising that goes out to parents and approves all posted advertising on campus. That is to say, the University allows Agencies to use their advertising advantage only under tight scrutiny. Either allowing more agencies to operate on campus or allowing a free enterprise system would require that the University allow more businesses to advertise, meaning more mail on Princeton parents’ doorsteps. This is unlikely to happen.
At the end of the day, the University owns all property on campus, and it can choose what system to allow, if any, where students can start and run businesses. In the most fundamental sentiment of capitalism, the University chooses to use its resources in the way that benefits itself the most. It is able to keep tight control over student businesses, ensure that these businesses have stable operations, and allow students to support themselves and gain valuable business experience. The Agency program is not perfect, but it serves its purpose well and is better than any of the alternatives.
Brad Stanger is a senior majoring in economics from Scarsdale, NY. He can be reached at email@example.com.