Markets in which collusion is easier to sustain

1. Markets in which collusion is easier to sustain • (1) Markets dominated by very large firms/suppliers • e.g. Saudi Arabia in OPEC • (2) Crowded, mature markets • E.g. carton box market in the USA • (3) Markets where the value of the market as a whole depends on there not being predictable dominance: • Customers can gain from collusion • E.g. Professional team sports - collusion between sports clubs (the firms) in a league (the market)

2. Revision questions • (a) How can the presence of a large ‘producer in a market increase the possibility of cooperation? • (b) What kinds of market characteristics are likely to support collusion? • (c) How do clubs in league sports collude to maintain competitive balance?

3. Some suggested reading • On resolving the prisoners’ dilemma with a dominant player • See for example section on Leadership in Chapter 8 of Dixit and Skeath Games of Strategy, Norton • On competitive balance in league sports • Grimes, P, Register, C. and Sharp, A. 2009. Economics of Social Issues, McGraw Hill. Chapter 9 • Academic papers: • Michie, J. and Oughton, C. (2004) Competitive balance in football: Trends and effects, Research Paper 2004 No. 2, Football Governance Research Centre, Birkbeck, University of London. • Neale, W. (1964). ‘The Peculiar Economics of Professional Sports’. Quarterly Journal of Economics, 78, February, pp. 1–14.Szymanski, S (2001) Income Inequality, Competitive Balance and the Attractiveness of Team Sports, Economic Journal, 111:F69-F84. • Sanderson A (2002) The many dimensions of competitive balance, The Journal of Sports Economics 3(2) 204-228 • Szymanski, S (2003) The Economic Design of Sporting Contests, Journal of Economic Literature, XLI: December:1137-1187. • Szymanski, S. (2001). `Collective selling of broadcast rights’. Soccer Analyst. Vol. 3, Issue One. Page 33-37. • Chapters on competitive balance in Sports Economics text books such as: • Dobson, S. and Goddard, J. (2001) The Economics of Football, Cambridge University Press: Cambridge. • Sandy, R., Sloane, P. J. and Rosentraub, M. S. 2004. The Economics of Sport, Palgrave.

4. Markets in which collusion may be easier to sustain • Markets dominated by large ‘swing’ producer/supplier – market leaders that can vary output at low cost • large influence on price: e.g. Saudi Arabia in OPEC • situation may not be really be a PD if large supplier willing to cut output if small producers increase their output above quota • but the probability of repetition need not be very high to enforce cooperation

5. The case of OPEC • Saudi Arabia is very large relative to most other oil producers in OPEC - has a very large share of the market and large spare capacity. • Increase/decrease in output has a large influence on price • If any country reduces price, increases output this reduces profits of all suppliers but Saudi Arabia loses disproportionately - largest output • Only smaller countries gain if unilaterally increase output • Saudi Arabia can adjust output to balance the market price- act cooperatively

6. A Market with a large ’swing’ producer What is the Nash equilibrium?

7. A Market with a large ’swing’ producer May even raise output if others cut output Saudi Arabia’s dominant strategy is to show restraint so there is no prisoners’ dilemma

8. Repetition and collusion • small producer ‘cheats’ by exceeding quota • gains a payoff of 25 million compared with 20 million • But Saudi Arabia can enforce collusion by threatening to retaliate in the next time period by also increasing output • e.g. meta strategy = tit-for-tat • then the small country’s gain is completely wiped out • over the 2 time periods total payoff • 25m – 10m = 15m if cheats • instead of 20m + 20m = 40m if colludes • So no incentive to cheat

9. Crowded, mature markets • The USA folding-carton industry in the 1970s • 450 box making companies – only one controlled close to 10% of the market - but in 1976, 47 of 48 executives in 22 companies found guilty of price fixing – the largest case of its kind • Key features supporting collusion: • Overcapacity (paperboard production) – halt to supermarket expansion and substitute containers • Undifferentiated products – no unique product • Business culture – norms of collusion, contact with competitors (trade associations), loose ethics • And price elasticity of demand • Sonnenfeldand Lawrence – Harvard Business Review

10. Benefits of collusion? • Is collusion always a ‘bad’ thing? • Static analysis of monopoly (oligopoly collusion) ignores some alternative scenarios • supernormal profits could be invested to generate cost reducing innovations that benefit consumers • collusion can generate benefits in other ways for consumers e.g. to balance against monopoly power elsewhere, to combat tendency to monopoly, standard setting, security of supply, prevent damaging competition • E.g. the organisation and regulation of league sports

11. Collusion in Professional league team sports • Clubs and leagues involved in joint production - ‘collusion’ is good for consumers • Contextual considerations • Objectives not limited to profit maximisation (Sport or Business?) • Fan loyalty/brand loyalty (club monopoly power): implications for corporate governance • Players’ talent (monopoly power): regulatory implications

12. Joint production and competitive balance in leagues • The league product can be viewed as a joint product (competition and cooperation) • Aim of league is to maximise units of entertainment provided by the league; benefits all clubs • But aims of individual clubs include: • Profit maximisation, promoting (own) sporting excellence, utility maximisation (winning)

13. Contextual considerations: Sport or Business? • Objectives: profit or glory (utility) or even entertainment? • Are these the same, if not, which of these do you think is most relevant in (a) Professional Football in Europe and elsewhere (b) US sports (c) Singapore? • What differences might there be between the behaviour of sports clubs more focussed on glory and clubs more focussed on profits? • If clubs focus on glory or both glory and profits, does this mean that they are not profit maximisers? • Is there any conflict between aims of clubs and the aims of the league?

14. Conflict between clubs and leagues • The essence of sport is competition and it is in the interests of sports clubs to compete on the field (as well as off it?) • But more successful clubs have more fans, sell more tickets, merchandise etc.. and in the long-run: • Earn higher revenue and profits and attract the best players • They then become even more successful; Virtuous spiral • But competition on the field (in the league) would deteriorate because of competitive imbalance

15. Higher revenue League success Higher wages for better players Improved playing performance Win-wage relationship • Consistent with competitive imbalance due to virtuous/vicious circles in football - tendency for some clubs to become dominant

16. Impact of a deterioration in competitive balance • Competitive imbalance implies that some teams win a lot more often and other teams lose more often so little variance in league positions • Games are not contests they are exhibitions - boring • Attendances and viewing figures for both weak and strong teams can fall • Some clubs will always be unsuccessful and lack of success lowers attendance further • unsuccessful teams lose more fans and consequently can be forced into bankruptcy; Downward spiral • League as a whole weakened – less entertaining (a prisoners’ dilemma) – • consumers/fans potentially gain from competitive balance

17. Competitive balance and entertainment More competitive balance – more uncertainty Units of entertainment CB4 CB3 E1 CB2 E2 E3 CB1 E4 10 Number of matches

18. Risk of Top Slicing and Breakaways • When leagues get unbalanced in terms of revenue distribution e.g. due to viewing power, there is a potential for league instability • due to bankruptcies • Income gaps set up incentives to gamble on success – this is risky • There is usually an argument for a breakaway rival leagues • Premier league • Champions League

19. But can there be too much competitive balance? • Opposite of competitive imbalance is perfect balance: • Each team has an equal chance of beating another then all teams win close to half their games with a small variance due to random factors (luck or bad referees decisions) • Interest in winning the league would still be limited • Fans want their home team to win but with some uncertainty • level of uncertainty is determined by relative playing strengths not luck

20. Decreasing returns to competitive balance More competitive balance generates more entertainment but only up to a point Units of entertainment: E E1 E E2 E3 E4 CB1 CB2 CB3 CB4 Level of competitive balance: CB

21. Implications • Some degree of outcome uncertainty is a necessary feature of competitive team sports and fans want some uncertainty • i.e. match uncertainty, Championship uncertainty and/or no dominant clubs • But fans don’t want too much uncertainty - implies an optimal level of uncertainty that maximises fan interest and revenue and profits to clubs • Fans also like dynasties • So clubs in a league have an incentive to cooperate to maintain some competitive balance (to counter win-wage relationship) • But quality of the league also matters • Leagues can be balanced upwards (+) or downwards (-)

22. Alternative scenarios Quality of performance/entertainment (high) Imbalance but overall high quality Convergence at high level of quality Convergence at low level of quality Imbalance and overall low quality

23. Alternative scenarios Quality of performance/entertainment (high) Imbalance but overall high quality – recent history of the English Premier League (but less so recently?). La Liga Convergence at high level of quality – The Championship. Rugby union e.g. Guinness Premiership. County cricket? Convergence at low level of quality – e.g. New Zealand domestic cricket, non-professional football Imbalance and overall low quality – Scottish Premier League (Demotion of Rangers?)

24. Does local monopoly power reduce the incentive to maintain quality? • Are supporters (e.g. in football) open to exploitation because of local monopoly power, fan loyalty? • Weak bargaining power of customers (Porter’s 4th force) • Do clubs face ‘soft’ budget constraints? If so does this make them inefficient? • Is there a conflict of interest between shareholders and supporters (and supporter shareholders)? • Implications for corporate governance e.g. Shareholder/supporter Trusts (Fan Equity) - backed by government policy in the UK

25. Implications for clubs • Competitive balance benefits fans (consumers) and increases demand so all teams can benefit - including previously dominant teams • Clubs and fans are better off with a degree of collusion involving e.g. redistribution of wealth so that there is more equality, coordination, league rules and guidelines • Problem is the potential conflict between aims of clubs and the league (Prisoners’ dilemma) • implies a tendency for collusion to be unstable i.e. unregulated leagues will be imbalanced • Leagues need to restrain economic competition by acting as cartels – enforcing collusion e.g. through self-regulation

26. Examples of coordinated behaviour used to operate a successful cartel (1) • Sports labour market regulation e.g.: • restrictions on player transfers (transfer fees, reserve rules) - weakened by Bosman ruling but still have transfer windows, • salary caps, drafts, zoning (USA) • Maintains competitive balance or combats player power? (Club monopsony power?) • Importance of unique skills of ‘labour’ give (some) players monopoly power and give clubs incentive to gamble on success by spending on players • Superstar wages

27. Examples of coordinated behaviour (2) • Joint marketing and revenue sharing within a league • League and cup merchandising and sponsorship • Tickets (gate income), • Broadcasting; most successful area of joint selling - the selling of broadcasting rights as a ‘package deal’ • Extraction of monopoly profits from broadcasters through package deals

28. Joint selling of television rights • Requires exemption from competition laws for collective selling to preserve collective nature of the game • Conflict between exclusive and collective selling • revenue sharing implies that successful clubs subsidise less successful clubs

29. Case study: Restrictive Practices Court CaseCollective sale of TV rights by PL (1999) • Case referred to RPC by Director General of Office of Fair Trading (OFT), exclusive and collective selling • OFT argues that PL behaves like a cartel, restricting output, raising price • TV companies and PL on same side (defence) • OFT lost case, first time OFT has ever lost a case in RP court

30. Redistribution rules • Different redistribution rules impact on league balance • Premier league redistribution from Broadcasting Revenue • 50:25:25 redistribution rule • + match sharing rule; each club appears a minimum number of times • still gives more money to leading clubs via merit and facility (appearance payments) • More progressive redistribution could make income more equal; More CB • See Jeanrenaudand Kesenne “The economics of sport and the media”

31. Joint selling of TV rights and vertical integration between clubs and broadcasters • For competitive balance also need to prevent vertical mergers between clubs and broadcasters • distorts bidding process (under collective sale of rights) • under individual sale of rights it is a form of market foreclosure • could lead to monopoly control over gate and TV access • if a case of vertical integration precipitates other takeovers it could lead to greater inequality and lowered quality

32. Case study: Monopolies and Mergers Commission Inquiry into BSkyB’s attempted takeover of Manchester United • Monopolies and Mergers Commission Report (1999) British Sky Broadcasting plc and Manchester United PLC: A Report on the Proposed Merger, Cm 4305, The Stationery Office. London • Attempted takeover/merger referred to MMC by DG of OFT • MMC Panel Chaired by Chair of MMC • Panel recommended that the proposed merger be blocked on competition grounds and adverse effects on quality of football

33. Examples of coordinated behaviour used to operate a successful cartel (3) • Redistribution of revenue from supranational leagues to national leagues or from top national leagues to lower national leagues • E.g. through cup competitions, shared attendance revenue

34. Other methods used by sports leagues to operate successful cartels • Elimination of competition (rival leagues) • Exclusive rights to sports stadiums/arenas/geographic/territorial areas • Agreement on division of monopoly power • Outputs are close substitute; Entertainment with same rules and regulations, schedules • Power to prevent cheating • Contractual powers to enforce league rules (FA, UEFA)

35. Have these measures been successful? • Evidence on competitive balance uses measures of industry concentration • Standard deviation of win % • Measures of championship wins • N Firm/club Concentration Ratio in terms of points won; • Cn = total points won by top n clubs divided by total points of all e.g. C5 or C4 • Herfindahl Index (sums of squared shares of total points); H • weights larger shares more heavily • Increases in SD, Cn or H measures imply less competitive balance • For EPL estimates from Michie and Oughton(2004) indicated a decrease in competitive balance

36. Source: Michie and Oughton (2004)

37. Source: Michie and Oughton (2004)

38. If competitive balance is declining does it matter? • Factors other than the level of competition affect attendance demand • Income, population, history, broadcasting coverage, quality of performance • Some of these can reinforce competitive imbalance • Population effects protect big clubs even if rest of league suffers • Historical success protects clubs that have been successful in the past

39. Summary • Benefits to league (clubs and fans) of co-ordination/collusion to maintain competitive balance are still in conflict with individual club motives • still a Prisoners’ dilemma so a tendency to imbalance • reinforces need for strong (self) regulation of leagues and players’ labour markets plus some revenue sharing • Can be justified to fans (customers) • Conflict with policy makers (eg EU single market, labour market mobility)

40. Discussion • Use examples to discuss whether collusion between firms/suppliers is more likely to be sustained if (a) there is a large ‘swing’ producer and (b) customers as well as suppliers can gain from coordinated behaviour • What other industry characteristics are likely to support collusion?

41. Appendix: other evidence on trends in competitive balance – for personal interest only

42. Pre and post Bosman changes in national championship winners and top 4 clubs National Championship Winners and Top 4 clubs in Europe: 1983/4-2008/9 Carmichael and Thomas, forthcoming

43. Pre and post Bosman changes in European championship winners and finalists European Cup/Champions League Winners and Finalists: 1983/4-2008/9 Carmichael and Thomas, forthcoming

44. Sports leagues are not just another business – peculiar economics (Neale,1963) • Corporate governance issues in industries with fan equity and local monopoly • Monopoly power of players may require payroll and salary caps to control player wages particularly superstar wages • Club/league and fans’ interests for leagues to act as cartels • e.g. through collective selling of TV rights, revenue sharing, prevention of breakaway leagues, coordination via institutional constraints (e.g. labour market) • But some bigger leagues are becoming less balanced - it’s still a prisoners’ dilemma