However, some students who lose their scholarships drop out or transfer away because the price without the scholarship is unaffordable. On the other hand, some schools may not object to such attrition, since the scholarships were offered to lure good students, but if the student is doing poorly in college, s/he is not really that good a student.
It is to the school’s benefit to be able to price itself individually to each student (price discrimination), since it can offer each student a price at which it thinks that student is able and willing to pay, whether the discount off the list price is called “merit scholarship” or “financial aid”. An “everyday low price” model without discounts may forego additional revenue from students who would be willing to pay more (mainly those who are wealthier and/or have academic credentials at the lower end of the admission range), but still be too high a price for some of those whom the school really wants (like a top student from a poor family).