Costs and Industrial Structure in Contemporary British Higher Education

The National Committee of Inquiry into Higher Education, chaired by Sir Ron Dearing, is required to make recommendations on the future development of the purposes, shape, structure, size and funding of higher education in the United Kingdom. In this context a useful starting point is to ask what a cost‐efficient higher education system would look like at current output levels. How many universities should there be? How big should each institution be, and what is the efficient distribution of sizes of universities? How many of them should be involved in research? How many should involve themselves only in teaching? How concentrated should the provision of sciences be in the universities? This paper attempts to provide early answers to these question.1 It does so by extending the work of Johnes (1996) to include the former polytechnics and to address questions about industrial structure in higher education. The starting point is the estimation of a cost function appropriate to the context of a multi‐product organisation; this follows first the theoretical developments of Baumol (1977) and Baumol et al. (1982) and second the work on American universities by Cohn et al. (1989). Once the cost technology of a representative university has been evaluated, the results can be used to evaluate the optimal structure of industry; this is achieved here by extending the early work of Bain (1954) to the multi‐product context by using the heuristic methods of tabu‐search (Laguna et al. 1995; Punnen and Aneja, 1995).