Tuesday, I discussed how higher education as a whole is probably a normal good, with some degrees of both qualitative difference and conspicuous consumption that are both less influential than commonly believed.  However, Robert Salomon of NYU's Stern School of Business has a qualification:

(T)he market for a college education is, without a doubt, subject to the forces of supply and demand...It’s just that there are anywhere from three to five times as many applicants at the “traditionally” elite universities as there are spots. Because elite private universities are oversubscribed several-fold, they are less likely to feel the impact of the recession on the demand side (although they have certainly felt the haircuts to their endowments).

For private universities without the strong brand recognition (or the endowments) of the more storied programs, the reality is likely to be quite a bit different. Private universities without well-established brand names will be forced to make a stronger case for their value proposition vis-a-vis the public alternative.

Could this mean that the market for higher education is actually increasingly two markets: one of which involves public competition with lower-tier private schools and a possible price-war in the future; and one of which, still far below market equilibrium, threatens skyrocketing tuition costs with decreased endowments and increased international branding efforts? 

Probably not in an extreme form or permanent, though probably to some degree and driven by the recession.  As Salomon points out, branding plays a strong role in the top-tier schools's budget maintenance.  Schools with brand names have to spend money on maintaining their brands vis-a-vis "the rankings" and other measures of prestige via expensive research, equipment, sports teams, marketing, etc., all of which mean they have to spend more money than the average university.  Normally, they can accomplish most of this through donations, which allows them to charge the same tuition as other less-prestigious, smaller-budget private universities.  Salomon therefore suggests two different markets, yet I would go a step further and say that there is such a wide range of costs and services that the market for tertiary education in the U.S. is more like several markets, or a continuum of markets.     
 
Tertiary education in the U.S. is the world's best because of an extremely delicate balance of prestige, a range of qualities and services suiting various means, abilities, and desires, the profit motive's still being there but not taking prominence, and a certain spirit of egalitarianism (scholarships, need-blind admissions, etc.).  Basically, all of the above provide services corresponding to a disparate number of complex desires, from those of people who have no options but to take on debt and be provided room, board, and education in exchange (like prison), to those of people who seek to maximize their own utility via traditional cost-benefit analysis, to those of people who go to college because it's the "thing to do", to those of people trying to accumulate cultural capital, to those of people who basically throw down massive amounts of money, perhaps in the form of donations, in exchange for prestigious degrees for their progeny, to those of people who think of college as the step before law school.  I think the fact that higher education in the U.S. provides many options and disparate services and is not standardized and cannot be compressed into a single market for economic analysis allows for a flexible system that maximizes what people can get for their money in a utilitarian fashion, no matter what it is they want.  This is doubtlessly a strength.

However, with a recession, the profit-motive in higher education takes on a stronger role.  It is ironic that when people are poorest and the economy is deflationary, the cost of tertiary education increases.  This most likely represents a shift from the other ways universities maximize utility, such as research, prestige, and branding, to more conventional cash-seeking behavior, as generally occurs during recessions.  It also reflects the long-term desires of top-tier universities below market-clearing equilibrium to continue financing the activities on which they built their brands in the first place, while shifting the costs of branding (ever-so-slightly) from their shrinking endowments onto their own students.  It is unfortunate that this shift takes away from higher education's egalitarianism and disproportionately affects the people already hurt the most by the recession.  However, high tuition costs, while excluding the poorest among us from top-tier education, help pay for the things, like particle accelerators and cloaking devices, that make the research and innovations produced by America's universities the world's best.  And as important as I think universal healthcare is, I can't help but notice healthcare's parallels with higher education in this regard.