We study the effect of a new university in a two‐city model in which individuals’ utility depends on own ability, peer group ability, formal education and mobility costs. We compare a monopoly (one university in one city) with a two‐university system (one university in each city). Introducing the second university improves welfare when the fixed cost of each university is low. With two universities, we obtain a symmetric equilibrium for every mobility cost and asymmetric equilibria for low mobility costs. The symmetric system induces the highest welfare and is also Strong Nash (for high mobility costs).