Introduction of Online Degree Programs: A Competitive Framework

Abstract

Educational services contribute $315.65 billion to the U.S. GDP, with online education representing the fastest-growing segment. This paper examines how operational and market factors influence universities’ decisions to introduce online degree programs. We study the strategic introduction of such programs in a vertically differentiated market, where universities differ in online program rankings (quality) and compete for a diverse student population with varying willingness to pay for perceived quality. Our analysis focuses on a simultaneous market entry scenario, yielding robust insights that also hold under alternative settings—such as when universities are equally ranked or differ in their variable costs of technology. We also examine two additional contexts: (1) A mixed competition setting in which one university operates independently while the other is guided by a social planner, and (2) an incumbent—entrant setting in which a university considers launching an online program when its competitor has already entered the market. Our findings reveal that symmetric market entry—where both universities introduce online programs—is more likely when technology integration costs exceed a certain threshold and student valuation heterogeneity is significant. In contrast, when these costs fall below the threshold, asymmetric equilibria arise in which only one university introduces an online program. When a social planner regulates tuition at the lower-ranked university, it faces tighter constraints on entering the market. However, when the higher-ranked university is subject to tuition regulation, broader market coverage and improved social welfare outcomes are achieved. Additionally, lower-ranked universities can strategically enter by targeting lower-end segments through moderate technology investments and competitive pricing. Yet, the entry of a higher-ranked rival can exert downward pressure on tuition fees for both institutions, promoting a more accessible educational environment. These insights offer strategic guidance for universities navigating quality-based competition and provide policy implications for balancing competitive dynamics with educational equity through regulatory interventions.