Transcript cartels

Chapter 9
The Economics of Professional
Sports: What Is the Real Score?
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
The Professional Sports Business
• Organizational Structure
 Privately owned teams
 Professional sports leagues
 League franchises
• Teams and Players
 Productivity is visible and easily measured
 Salary issues
 Contract issues
9-2
The Product Market
• Cooperation among teams
 Professional sports leagues as cartels
• Baseball’s antitrust exemption
9-3
Characteristics of Successful Cartels
• Cartel members responsible for most of
output generated by market
• Cartel members produce fairly homogeneous
outputs
• Cartel must be able to divide market into
territories controlled by each member and to
establish production quotas
• Cartel must be able to prevent cheating by
members
9-4
Coordinated Behavior
• Revenue sharing
• Joint marketing
9-5
Pricing and Output for Broadcast Rights
1
2
3
4
5
6
7
Units of
Output
Total Cost
($000)
Marginal
Cost
($000)
Price
($000)
Total
Revenue
($000)
Marginal
Revenue
($000)
Profits
($000)
0
0
100
0
1
40
40
100
100
100
60
2
85
45
95
190
90
105
3
135
50
90
270
80
135
4
190
55
85
340
70
150
5
250
60
80
400
60
150
6
315
65
75
450
50
135
7
385
70
70
490
40
105
8
460
75
65
520
30
60
9
540
80
60
540
20
0
10
625
85
55
550
10
275
9-6
Pricing and Output for a Cartel
Price ($000)
D
100
90
80
70
60
50
40
30
20
10
MC
C
A
B
D
MR
1
2
3
4
5
6
7
8
Quantity per unit of time
9-7
The Number and Location of Teams
• Baseball’s attempt to close “smallmarket” teams
• Incentive to relocate teams
9-8
The Stadium Controversy
• Public financing of stadium construction
and renovation
• Justification for public financing
 Satisfy local public’s demand for sports
entertainment
 Status for community  jobs and tax
revenue
 Evidence on impact of sports franchises
9-9
Teams, Players, and Salaries in
Professional Sports, 2008
NFL
MLB
NBA
NHL
Number of Teams
32
30
30
30
Number of Players per Team
53
25
12
23
Average Team Revenue (millions)
$221.56
$182.96
$125.50
$91.56
Average Player Salary (millions)
$1.74
$3.15
$5.36
$1.91
Source: www.rodneyfort.com
9-10
The Employment of Players
• Annual draft of new players
• Exclusive rights to player services for a
period of time
• No “tampering” rules
9-11
Monopsony
• Monopsony – market with only one
employer
• Why are sports leagues monopsonies?
 Immobility of new players who have been
drafted
 Highly specialized skills of players
9-12
Wages and Employment in a Monopsony
1
2
3
4
5
Number of
Players
Wage
($000)
Total Cost of
Labor ($000)
Marginal
Cost of
Labor
($000)
Marginal
Revenue
Product
($000)
0
0
0
1
300
300
300
1500
2
400
800
500
1300
3
500
1500
700
1100
4
600
2400
900
900
5
700
3500
1100
700
6
800
4800
1300
500
9-13
Wage and Employment
Determination for a Monopsonist
Wage $000
MCL
1000
900
800 Monopsonistic
Profit
700
600
500
400
300
200
100
A
1
4
2
3
S
C
B
MRP = D
5
6
7
8
Labor hired per unit of time
9-14
Free Agency
• Reserve clause
• Limited reserve clause and free agency
9-15
Mean MLB Salaries Since Free Agency
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
1976
1980
1990
2000
2008
Source: Major League Baseball
9-16
Labor Disputes
•
•
•
•
Labor unions
Strikes and lockouts
Salary caps
Revenue sharing
9-17
Do Professional Athletes Earn Their Pay?
• How does player performance contribute
to team revenue?
• Fans and willingness to pay
• Does anybody deserve such high pay?
9-18
Illicit Drugs and Professional Sports
• Each sports league has a substance abuse problem
 Bans on “recreational” drugs
 Bans in performance-enhancing drugs
• Economic analysis of why players use performanceenhancing drugs
 Expected benefits versus expected costs
• How to reduce the use of performance-enhancing
drugs
 Forfeiture of salary
 Increase probability of detection
9-19
The Case of Major League Soccer
• MLS a single-entity league
 All teams owned by a single corporation
 Investor-operators
 Broadcast rights, licensing, merchandizing
centrally controlled
 Employment contracts between player and league
 League allocates players to teams
• Is MLS a monopsony?
• WNBA
9-20