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The Industrial Organization of Sports

The Industrial Organization of Sports . Part II: Monopoly and Antitrust. Preliminary:Consumer Surplus. P. Who loves the Sixers? Who likes them? Who doesn’t care? Do you get what you pay for? Limit is pie-wedge What about producers?. D. Q. What’s Wrong with Monopoly? Deadweight Loss.

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The Industrial Organization of Sports

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  1. The Industrial Organization of Sports Part II: Monopoly and Antitrust

  2. Preliminary:Consumer Surplus P • Who loves the Sixers? • Who likes them? • Who doesn’t care? • Do you get what you pay for? • Limit is pie-wedge • What about producers? D Q

  3. What’s 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 Qc D MR

  4. Leagues and Market Power • Leagues based on uncompetitive practices • Baseball’s National League (1876) set mold • Monopoly Power • Territorial rights • Monopsony Power • Monopsony=One 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 • P=MR => P=MC • No DWL • Hard in practice to do $ MC D=MR 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. TOURS OF CASTLE: 150 Kcs Cesky pruvodce: tricet korun How It’s Done:A Sign at Karlstejn

  15. A Sports Application:Personal 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 allto buy 1 more • Marginal Expenditure Curve lies above Supply • Pays less & buys less • Deadweight Loss exists D ME S P* Q*

  18. What’s 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 R&D • 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 last:The 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. Baseball’s 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 Didn’t 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 • “Gentleman’s 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 limitedexemptions for TV and merger with AFL

  30. Impact of Baseball’s 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 NFL’s 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 IncidentalCartel • 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 I’ll 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 NCAA’s 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: NCAA’s 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 • Prisoner’s 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. Thief #1 Confesses Thief #1 Does Not Confess Thief #2 Confesses #1 gets 10 years #2 gets 10 years #1 gets 20 years #2 gets 3 years Thief #2 Does Not Confess #1 gets 3 years #2 gets 20 years #1 gets 5 years #2 gets 5 years 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 • Prisoner’s 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. Brodeur Guesses Low Brodeur guesses High Gagne Shoots Low Gagne scores 40% Brodeur saves 60% Gagne scores 60% Brodeur saves 40% Gagne shoots High Gagne scores 60% Brodeur saves 40% Gagne scores 50% Brodeur saves 50% 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 ain’t” • 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. Conference BCS Conference? Average Net Revenue from Football Atlantic Coast Yes $4.32 million Big East Yes $2.80 million Big Ten Yes $12.80 million Big Twelve Yes $8.30 million Conference USA No -$260,878 Mid-American No -$1.20 million Mountain West No -$52,166 Pacific Ten Yes $6.84 million Southeastern Yes $18.44 million Sun Belt No -904,959 Western Athletic No -$3.81 million Net Revenue from Football:BCS v. Non-BCS Conferences

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