Built into this tuition and financial aid system is the usual liberal redistribution of wealth. The high tuition/high financial aid model allows colleges to force the upper middle class and wealthy to subsidize everyone else's tuition.
Gordon further compares colleges to a cartel. I cannot speak to the lower tier colleges, but it is clear that prestige colleges think that high tuition helps maintain their brand mystique. I once heard a top university administrator assert that it was essential that he maintain his school's brand, and "that brand is Tiffany, not Walmart." High prices are part of luxury branding.
I am more of a Walmart shopper myself. This year the average tuition and fees at U.T. Austin are $8500-$10,000. Don't complain about prices if you feel compelled to shop at Tiffanys.