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Since applicants are generally hard-put to know just how much they are really learning, let alone how much they can expect to learn at a school they have never seen, they do not make enlightened choices. They rarely possess either the time or the information to explore all the promising options available to them and usually have only a limited basis for comparing the options they do consider. Under these conditions, competition does not necessarily cause good instruction to drive out bad. Instead, students often flock to courses with superficial appeal or to institutions with established reputations even though the education they receive is only mediocre.... [C]ompetition does not inspire universities or their faculties to do as much as they might to improve their instruction in the way that it forces computer companies to work at improving their products (Bok, 2003, pp. 161-162).

As many other advanced countries, Australia has substantially reformed its research policies in the last two decades. In order to encourage efficiency and performance in the higher education sector, the Australian government has introduced various policy instruments that stimulate competition and establish market incentives in the sector. The effect of such market-based policy instruments on research performance is the subject of this dissertation. The dissertation focuses on three interrelated questions. The first empirical analysis examines the effect of market-based policies on the structure of the academic research market. A theory that higher education is a winner-take-all market has triggered a concern that market mechanisms may lead to the concentration and stratification of the higher education market. The analysis develops a convergence model for the Australian research market and observes that the gap in research performance between universities declines over time. Furthermore, the new policy incentives have encouraged universities not only to improve their research inputs but also to maximize the productivity of these inputs. As a response to government research policies, universities have developed various research management practices in order to improve research performance. The second analysis examines the effect of seven management practices on institutional research performance over time. The results indicate that research management practices indeed have a positive effect on research performance. The most consistent effect is demonstrated by practices that target individual schools and faculties. The third part uses the Data Envelopment Analysis in order to examine the productivity and efficiency change in the sector more broadly. The dissertation concludes that market-based policies have had a considerable effect on Australian universities. Universities all across the sector improved their research performance, even though the invigorating effect of the market-mechanisms seems to fade over time. The government policies have also encouraged universities to implement internal research management practices and the effect of these practices outlives the immediate post-reform responses. Although the market-based policies may also have unintended effects, the reform in Australia seems to have achieved its primary goal: to provide incentives for productivity improvement in the higher education sector.