University structures – including TTOs – reflects firm behavior and commercial focus, diverting universities from their public good origins

[Christopher J. Jr., et al. "The Hidden Cost of University Patents." Berkeley Business Law Journal, vol. 21, no. 1, 2024, pp. 203-249. HeinOnline -tm]

With a few exceptions, universities are non-profit entities, meaning that they have no duty to increase profitability to satisfy public shareholders. Rather, the wealth universities derive and control affords them the means to provide educational resources and pursue knowledge generation through research. Yet, universities are corporations of the non-profit variety. They have chartering instruments, and increasingly, their make-up structurally resembles the for-profit corporate model.

The concept of the corporate model, or firm, is well-established in the law and economic literature. Dating back over 85 years, Professor Coase defined the firm along the lines of several elements, among them: the boundaries of market actors and the markets in which they participate; structural organization; and heterogeneity of firm action.96 Let us consider the application of each in tum to the university.

Higher education is a competitive market. Universities compete for students, faculty, staff, and administrators: their human capital. They also compete for resources, including the funding mechanisms that make their research possible. 97 While some universities have huge endowments that generate vast quantities of investment income, the overwhelming majority of universities are largely tuition-dependent, relying on this income to fund overall university expenditures, including research. And increasingly, universities compete for the same sponsors and pools of funding that further support their research. Taken together, these examples evidence competition for resources within the larger, competitive higher education market.

Similarly, firm boundaries in the higher education sector are also defined with respect to scale-size and output variety-in relation to the market. Many universities operate with a large footprint by vertically coordinating activities within their organizational boundaries. Others occupy relatively small niches of the sector and rely on the market to transact through horizontal coordination, but examples of this form are vanishing in the construct that is the modem university. That is, for the most part, the university model has transformed in the last several decades to include enterprises seemingly unrelated to the provision of education and discovery of new knowledge. Instead of exclusively contracting for services, as they have done in the past, most universities have begun to internalize some market transactions by creating administrative units in-house to provide the same services once contracted-for. This not only augments the scale of the university footprint within the market but increases the output variety of universities.

Technology transfer offices are a prime example. By creating such offices to operate under university oversight, universities internalize some of the cost of market transactions for the commercialization of their research. Of course, a good deal of these costs still exist outside of the university's ambit. But the acceleration of the existence of technology transfer offices reveals a preference by universities to mitigate the net market transaction costs by internalizing them.

This is an illustrative example of what Professor Klein and other industrial organization economists would call "vertical integration" and, more broadly, what Professor Coase would call "firm behavior," in that it evinces a centralization of coordination activity within the locus of the firm.98

Likewise, the structure of university organization and governance has changed overtime. Historically, universities were governed by boards of trustees and internally governed and administered by faculty. The first universities held administrators as firsts among equals; faculty served in roles of university administration in addition to teaching. Yet, as the market in which universities operate has changed, the modem incarnation of the university has changed as well. Universities are still governed by boards of trustees, but the composition of these boards has little relationship to the academic enterprise. Titans of industry and donors are overwhelmingly appointed to university boards.99 Internally, universities are run by presidents and subordinate university officers that occupy executive seats. Increasingly, these administrators' positions mirror their private­ sector counterparts. While historically the university was structured as one academic unit, they are now divided into separate educational and administrative units. This evidences the diversity of the modem university's output, as well as the corporate firm organization of the modem university.

In sum, universities' component parts have taken on a commercial focus. They have commercial hubs, centers, spinoffs, and other ventures related to the university's mission but also unrelated to its central purpose. 100 Again, the technology transfer offices housed at universities serve as examples of both the former and the latter. These offices do serve a role in promoting the research endeavors of universities while centering on the commercialization of this research, which takes universities afield of their central purpose and increases the heterogeneity of university action within multiple markets.