The Industrial Organization of Sports

1
The Industrial Organization of Sports

• Part II
• Monopoly and Antitrust

2
PreliminaryConsumer Surplus
P

• Who loves the Sixers?
• Who likes them?
• Who doesnt care?
• Do you get what you pay for?
• Limit is pie-wedge
• What about producers?

D
Q
3
Whats Wrong with Monopoly?Deadweight Loss

• Given by colored triangle
• Lost consumer surplus
• Could lose producer surplus
• If MC sloped upward
• Caused by Lower output
• Competitive Firm Qc
• Monopoly Qm
• What about higher P?
• Not a factor

P
PM
Q
Qm
D
Qc
MR
4
Leagues and Market Power

• Leagues based on uncompetitive practices
• Baseballs National League (1876) set mold
• Monopoly Power
• Territorial rights
• Monopsony Power
• MonopsonyOne Buyer
• Reserve system bound players to teams

5
Monopolists andPrice Discrimination

• Recall Consumer Surplus
• People value differently
• But pay same price
• Also applies to individual
• Worth less as consume more
• What if producer charges different prices?
• When can producer do it?

P
D
Q
6
Forms of Price Discrimination

• Depend upon information/separation
• 1st degree producer knows everything
• 2nd degree know demand curve slopes down
• 3rd degree can separate consumers into groups

7
First Degree Price Discrimination

• Know what everyone is willing/able to pay
• Can charge everyone different price
• Capture all consumer surplus
• More efficient
• PMR PMC
• No DWL
• Hard in practice to do

MC
DMR
Q
8
2nd Degree Price DiscriminationQuantity
Discounts
P

• Know demand slopes down
• Charge less for added tix
• Could sell all 8 for 80
• 10 each
• Large consumer surplus

10
D
Games
8
9
2nd Degree Price DiscriminationQuantity
Discounts
P

• Know demand slopes down
• Charge less for added tix
• Could sell all 8 for 80
• 10 each
• Large consumer surplus - OR
• Can charge 140
• 1st for 40 (40)

40
D
Games
1
10
2nd Degree Price DiscriminationQuantity
Discounts
P

• Know demand slopes down
• Charge less for added tix
• Could sell all 8 for 80
• 10 each
• Can charge 140
• 1st for 40 (40)
• 2-4 for 20 (60)

40
20
D
Games
1
4
11
2nd Degree Price DiscriminationQuantity
Discounts
P

• Know demand slopes down
• Charge less for added tix
• Could sell all 8 for 80
• 10 each
• Can charge 140
• 1st for 40 (40)
• 2-4 for 20 (60)
• 5-8 for 10 (40)
• Capture some consumer surplus
• Group sales/season tickets

40
20
10
D
8
Games
1
4
12
Third Degree Price Discrimination

• Can separate groups
• Group 1
• Demand Curve D1
• Constant MC
• Buys Q1 and pays P1
• What of Group 2?
• Less Willing/able

P1
D1
MC
Q
Q1
MR1
13
Third Degree Price Discrimination

• Put to left of Group 1
• Group 2
• Lower demand
• Same MC
• Same cost as serving 1
• Buys less pays less!
• What if charge both groups the same price?

P1
D1
P2
MC
Q
Q
Q2
Q1
D2
MR2
MR1
14
How Its DoneA Sign at Karlstejn

• TOURS OF CASTLE
• 150 Kcs
• Cesky pruvodce tricet korun

15
A Sports ApplicationPersonal Seat Licenses
(PSLs)

• First used by Carolina Panthers
• Now widely imitated
• Pay for right to buy season tickets
• A puzzle to economists
• Just changes form of payment
• Does not change overall willingness to pay
• If pay for PSL will pay less for ticket
• Some see tax advantage to city if team uses PLSs

16
Key to PSLs Consumer Surplus

• Firm captures consumer surplus
• Charge competitive price for tickets
• Not monopoly price (PM)
• Fan enjoys surplus
• Willing to pay for chance to buy tickets
• With PSL team gets ABC
• Not just B

A
PM
C
B
Q
D
MR
17
The Other Key to Leagues Monopsony

• Monopoly stood on its head
• One buyer
• Must pay more to buy more
• Upward sloping Supply Curve
• If cannot price discriminate
• Pays more for all to buy 1 more
• Marginal Expenditure Curve lies above Supply
• Pays less buys less
• Deadweight Loss exists

D
ME
S
P
Q
18
Whats Right With Monopoly?

• Why are Dodgers different from Fox?
• What if CNN goes out of business?
• What if Braves go out of business?
• Is a league colluding firms or one multi-plant
  firm?
• Some collusion necessary schedules!
• Are Sixers really a monopoly?
• Monopoly means no substitutes
• Is there such a thing as a true monopoly?
• Even if a monopoly is it a Natural Monopoly?

19
Key to Natural Monopoly

AC

• Large Efficient Size
• Large relative to demand
• SuperFresh v. Kosher butcher
• Bigger size makes more efficient
• No room for entrants
• If Small Efficient Size
• ACmin at low Q
• Lots of room for entrants

D
Q

D
AC
Q
20
What If We Split Up a Natural Monopoly?

• Many small firms at beginning of big U
• High Average Costs
• Must cover high costs with high prices
• Breaking up drives prices up
• Examples?

21
Natural Monopoly and Professional Sports

• Cost structure of most franchises
• High Fixed Costs
• Low Marginal Costs
• If MC constant
• AC falls to it
• Get 4.0 1st term and 3.0 thereafter
• AC continually falls
• Large efficient size
• A Natural Monopoly!

AC
MC
Q
22
Lighter side of Monopoly Profit

• Monopolist may need profits to break even
• If firm bought sold in a competitive market
• Purchase price reflects expected profits
• Static vs dynamic efficiency
• Monopolies inefficient at moment in time
• DWL static inefficiency
• BUT profits allow to invest in RD
• Dynamically efficient
• Apply to pro sports?

23
Unnatural Monopoly?Barriers to Entry

• TV has become a key barrier
• Can save a weak league
• ABC/NBC saved AFL in 1960s
• Can also kill a league
• WFL, USFL, ABL foundered w/o network commitment
• XFL killed by bad ratings
• Leagues also block entry by strategic location
• Local market not big enough for competing entrant
• Competitor denied use of facilities
• NFL did this to AFL in 1960s Dallas Minnesota

24
Anti-trust at lastThe Sherman Act

• Two basic clauses
• Every contract, combination in the form of a
  trust or otherwise, or conspiracy, in restraint
  of trade or commerce among the several states, or
  with foreign nations is hereby declared to be
  illegal.
• Every person who shall monopolize or attempt to
  monopolize any part of the trade or conspire with
  any other person or persons to monopolize any
  part of the trade or commerce among the several
  states or with foreign nations, shall be deemed
  guilty of a misdemeanor

25
Key to The Clauses

• Clause 1 prohibits cartels (or trusts)
• Firms cannot cooperate to act like monopoly
• Clause 2 attacks monopoly itself
• Does not matter how monopoly formed
• Suits based on clause 2 highly publicized
• Typically unsuccessful

26
Baseballs Antitrust Exemption

• Only industry with a blanket exemption
• Not regulated like natural monopolies
• Not good for a limited time like patents
• Curt Flood Act of 1997 supposedly limits power
  BUT
• Applies only to labor relations
• Union must disband first
• Exemption comes from lawsuit by Federal League
• Tried to form 3rd major league in 1914-15
• Charged MLB w/violating both parts of Sherman Act

27
The Lawsuit

• In U.S. District Court of Northern Illinois
• Kennesaw Mountain Landis presiding
• Federal League knew he was a trustbuster
• Once ruled against Standard Oil
• FL Didnt know he was a huge baseball fan
• Landis sat on case for a year
• FL folded before ruling issued
• One FL owner appealed to Supreme Court

28
The Supreme Court

• Reached Supreme Court in 1922
• Ruling Baseball a public exhibition, not
  commerce
• Bizarre opinion
• Some say due to Black Sox scandal
• Court afraid to further damage sport
• Others note Chief Justice Taft played ball at
  Yale
• And was cousin of Phillip Wrigley owner of Cubs
• Subsequent decisions denied to other leagues

29
Contrast with NFL

• Denied exemption in 1957 Radovich decision
• No legal monopoly power
• No legal monopsony power
• Tried to retain monopsony
• Gentlemans Agreement until early 1960s
• Rozelle Rule imposed when that broke down
• Successful antitrust suit in 1970s by John Mackey
• Players Association negotiated deal that allowed
  Rule to continue
• Tried to establish monopoly
• Got limited exemptions for TV and merger with AFL

30
Impact of Baseballs Exemption

• MLB has had few challengers
• Federal League was last major rival
• Other leagues have had regular challenges
• Baseball has been stable
• Last move in 1972
• Washington Senators to Texas 1972
• Blocked attempts by Giants, White Sox, Pirates
• Coming move by Expos under MLB auspices

31
NFL Has Been Far Less Stable

• 1980 Oakland Raiders sue NFL
• Challenged NFLs right to block move to LA
• Brought antitrust suit
• Jury drawn from LA! agrees
• NFL cannot force other teams to stay put
• Moves from Baltimore, Cleveland, LA (2X),
  Houston, St. Louis
• Did dissuade
• New England from moving to Hartford, CT
• Seattle from moving to LA

32
NCAA An Incidental Cartel

• Formed after 18 football-related deaths in 1905
• Football lacked accepted rules violence
  resulted
• President Roosevelt called jock schools
• Princeton, Harvard, Yale
• TR said Clean up act or Ill ban football
• First goal rules to curb football violence
• The Flying Wedge the line of scrimmage
• Soon codified rules for other sports

33
A Rocky Start For The Cartel

• Once got on-the-field rules set
• Turned attention to off-the-field
• Problem How to get schools to agree?
• Failed attempt The Sanity Code (1946)
• Drew up rules for behavior
• Key Limits to financial aid to athletes
• Seven Sinners refuse
• NCAA fails to get 2/3 majority needed to expel
• NCAA in tatters cannot enforce own rules

34
Rupp to the Rescue

• NCAA borders on meaningless after failure
• Point shaving scandal breaks out in 1952
• Grand Jury in NY investigates local schools
• And schools playing at Madison Square Garden
• CCNY ruined as national power
• Kentucky implicated
• Investigation showed
• Players shaved points
• UK Coach Adolph Rupp likely involved as well
• Also found illegal payments to players by Rupp

35
The Death Penalty

• NCAA fails to respond
• Southeast Conference embarrassed
• Suspends Kentucky for a year
• Kentucky says so what?
• NCAA sees opportunity
• Requests that other members honor boycott
• First application of death penalty
• Does not ban team just has no one to play with
• Not applied since
• Could easily have applied to Alabama football team

36
Applying the NCAAs Cartel Power

• Monopsony Power
• Drive down price of labor
• Problem Schools cheat
• Monopoly Power
• TV contract
• Benevolent beginnings (Fritz Crisler Utah
  State)
• Limited teams to 3 TV games every 2 years
• Problem NCAAs own members brought antitrust
  suit
• NCAA loses case
• Now many broadcasts but less revenue!

37
The Prisoners Dilemma

• If everyone obeyed rules everyone better off
• Schools constantly disobey rules
• Common to all cartels
• Prisoners Dilemma
• 2 Jewel Thieves Caught
• No evidence
• Must get a confession but how?

38
Applying Game Theory

• Game consists of
• Players
• Strategies
• Outcomes
• Prisoners Dilemma one type of result
• Dominant Strategy exists
• Optimal for individual regardless of what other
  player does
• When everyone does it bad news
• Think back to Tragedy of the Commons

39
  A Payoff Matrix
 
40
Applying to Cartels

• Better off if limit output
• But overproduce OPEC
• NCAA better off if
• Do not pay under the table
• Limit TV appearances
• Prisoners Dilemma leads away from optimum

41
Another Type of Game

• Simone Gagne has breakaway on Martin Brodeur
• Gagne knows Brodeur vulnerable to a high shot
• But shoots low why?
• If Brodeur knows he is vulnerable to high shot
• What is he likely to do?
• What can Gagne do in response?

42
The Payoff Matrix
 
 
43
The Mixed Strategy

• No single strategy best
• Brodeur adapts if Gagne keeps shooting high
• Best for Gagne a mixed strategy
• Hit em where they aint
• Keep Brodeur from guessing correctly too often
• P(score low shot).4p.6p
• P(score high shot).5(1-p).6(1-p)
• Solving p.57 1-p.43

44
Newest Antitrust Issue The Bowl Championship
Series

• BCS ostensibly to crown football champion
• Not an NCAA creation
• Major conferences TV networks concocted it
• Major conferences guaranteed participants
• Lesser conferences left out
• Big differences in revenues
• Lesser conferences threatening antitrust suit

45
Net Revenue from FootballBCS v. Non-BCS
Conferences