Yes, it's kind of like a prisoner's dilemma / race to the bottom, (see my first point here: #1286911)

However, that would naturally lead to the question of why grade inflation doesn't cause a university's reputation to suffer. So that's my second point, I think reputation is a lot more weighted towards upfront selectivity than difficulty of coursework. In other words, reputation is based on selection of innate talent now, rather than the value-add of the coursework itself.

A third point is that the fiatization of the economy may have led the Cantillon effect to be more important. And thus selectivity on pedigree has become more important than classwork as well.