ANTITRUST AND HIGHER EDUCATION: MIT FINANCIAL AID (1993) Presented by: Jim Sever Megan Carle

Case Background 4 What is the Overlap Network 4 Which schools are involved 4 How is their financial aid policy applied 4 What is the problem and what issues does it raise

Case Chronology DOJ sues Overlap Network 4 The Ivy League schools soon settle the case 4 MIT continues with legal action 4 MIT found in violation of Sherman Act in Subsequent Congressional Action in fall of MIT wins appeal in Appellate Court in Government and MIT reach a settlement

Sherman’s Intentions 4 Act of 1890 outlaws “every contract, combination…or conspiracy in restraint of trade.” 4 Sherman did not intend it to charitable activities 4 Is there room for interpretations? 4 Should there be?

Profit vs. Not-for-Profit Firms 4 For-profit firm: MAXIMIZE PROFITS! 4 Not-for-profit firm: –Does not pay out profits (dividends) –Socially desirable goals –Response to “market failures”

US Government Position 4 Clear per se violation of the Sherman Act 4 MIT by engaging in commercial conduct nullifies their non-profit protection 4 Overlap process by nature and effect is price fixing 4 Consequence of the behavior of the Overlap schools was to increase tuition revenue 4 Social policy justification is irrelevant

MIT ’s Position 4 MIT disputes designation that Overlap process is a block to trade and commerce 4 Sherman Act was never intended to be applied this way 4 Rule of reason exception rather than per se 4 Comparison to Collegiate Athletic exemption 4 Behavior justified on social grounds, with the statistical evidence to support it

Regression Statistics Results 4 Cost less than non-Overlap schools 4 All else equal, highly selective schools more costly 4 No statistical evidence linking Overlap to higher prices 4 Income distribution of scholars at Overlap schools

What the Court ’s Said District Court 4 Sherman Act applies 4 Commerce is being impeded 4 Abbreviated rule of reason analysis 4 MIT must defend with affirmative defenses Court of Appeals 4 Overlap system does constitute commercial behavior 4 Social justification is still a strong mitigating factor 4 Need to evaluate procompetitive factors

1993 Settlement 4 Information can be exchanged among the Overlap schools 4 No information on individuals until after aid offers are made 4 Overlap cartel never met after settlement Source: “Ivy League Duplicity”, Eric Neutuch

Social Goals vs. Price-Fixing 4 Diversity at schools 4 Affirmative Action? 4 Definitely prevented price competition Bush vs. Clinton Administrations

“Aid Chicanery” 4 Overlap produced only one possible aid package –Simply not the case in a free market 4 Need-blind admissions? 4 Airlines vs. Ivy league schools –Why no price wars? 4 Overlap as a cartel Source: “Ivy League Duplicity”, Eric Neutuch

Discussion 4 Should profit vs. not-for-profit matter when trying firms for Sherman Act violations? 4 Can social goals justify price-fixing? 4 Was Overlap illegal? How do YOU feel about such aid packages?