My choices of funding college for the kids could have been to put the money into a stock fund and bet that stocks would rise faster than college education prices. Or, as I did, buy an inflation-protected investment that is no longer offered. At the time, the state offered a college savings plan that would buy the education at 90's prices. It wasn't a clear-cut decision, but i was able to foresee the train-wreck that was coming, relative to higher education prices. I based my logic solely on the fact that it was getting easier to get government-backed student loans. I happened to be right, and it may have been coincidental, but many people did NOT go the same route as me. And the investment offering has since been canceled, as it was extremely expensive for the State.
You seem to say that competition is causing businesses to raise prices and reduce quality. I (and probably most economics text books) would disagree. Just looking at the three examples I cited: Books, Retail, and Cell phones. In each case, I'd say the prices have fallen and the service level has risen. Twenty years ago, you couldn't order any book in print from your bedroom at 3 AM, for a fraction of the list price. Nor could you buy groceries, clothing, and office supplies at deeply discounted prices from one store, with polite customer service. And of course prices on cell phones continue to drop as service goes up. So I'm not sure how you can say "And how are businesses coping? Higher prices and lower quality services." Sorry, the facts don't support you on that. my facts, anyway. :)
"Or are you suggesting that the nearly $200 price tag on the book is in some way relative to the production costs of the book?" - I DO think production costs factor into the price tag. Not just the price of the paper, but the layout and editing for a relatively small print run. Many of those "production costs" don't magically disappear with Kindle versions, but some do. But the real savings would come if we quit re-inventing the wheel. It's funny that you mention "Fundamentals of Physics", because an Amazon search shows over 12 thousand hits with that search (various names, not all related. But many many hits directly related). Exactly how many versions of "Fundamentals of Physics" do we need? As an analog, consider how many online encyclopedias we need. Wikipedia seems to do a pretty decent job. Maybe, just maybe, there are 12,000 online encyclopedias, but there is only one leader, and it just keeps getting better. Higher education needs to learn from the working models that are out there.
You say that putting courses online doesn't fight costs, it maximizes profits. You are acting as if profits don't have cost in the equation. Cost is a factor in calculating profit, so this argument is nonsensical, to me, anyway. You say that schools can't lower costs ("They'll go out of business.") Yet maximizing profits somehow is disconnected from costs? I lost you there.
The bottom line is that if we agree that the cost of higher education is too high, then different, less-costly methods must be implemented. And those schools who can't figure that out deserve to go out of business. If we subsidized buggy-whip manufacturers (or rail transportation or airlines), we encourage waste and production of items that are not worth the price. If you want to reduce the price, the best thing to do is end the subsidization.
I can see your case for a slow implementation, but I don't happen to agree with it. There are a lot of industries where a major breakthrough occurs, and companies are forced to adapt or die. And amazingly, things work out. Now, I don't have a spouse who is a college administrator, or I might be less brutal. But the quickest way to fix the issue is to rip the band-aid.
But with our legislative process, that would never happen, unfortunately. Having an extreme, obstinate leader (as Obama was on Healthcare) can get things done. And I'm glad that Ron Paul is taking that stand. Even if he never gets elected as President (which is the most likely scenario), I really appreciate that he puts up the most aggressive position, as he gets the conversation going, and maybe we'll actually get to a partial solution.