In fact speaking of wealth, there is a similar point you can make about things like endowments. Of course the Harvards of the world just keep getting wealthier too, but over the last 30+ years or so, many other institutions have grown their endowments far faster than inflation. But most have not expanded much if at all. So, they have a lot more real money to spend per student.
And I think you can literally see it. So many campuses are just nicer than they used to be, these days many have really amazing new STEM facilities, and so on.
Of course a fair criticism is–why then were tuitions also increasing faster than inflation? And I think the blunt answer is basically that for a long while, they basically could keep increasing tuition above inflation, and yet more and more desirable applicants kept showing up anyway. So why not?
But starting around 2016-17, things seem to have changed. Full pay tuition seems to have stopped increasing more rapidly than inflation, and actually dropped in inflation-adjusted terms during the inflation spike, although it looks like there is some catch up going on now. And then average costs of attendance have actually gone down further in inflation-adjusted terms. And it seems like every week, another college announces a “free tuition for families below $X in income (assuming typical assets)” policy.
So I personally think this massive explosion in endowment wealth and such is finally translating into a bit more cost competition.
But returning to your point–it is not like the Harvards of the world are in any danger of LOSING that competition. It may cost them a bit more to maintain their reputation of having the best available need aid for most families, but they can absorb that cost.
And again, that’s great for college-bound kids. More colleges leveling up. Also (finally) more cost competition. Not so bad.