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Monopoly and Antitrust. Inefficiency of Monopoly. Competitive Outcome P = MC Q = Q C Monopoly Outcome P M > P = MC Q = Q M < Q C. $. A. P M. B. C. MC. D. MR. Q C. Q M. quantity. A+B+C. A. --. B. A+B+C. A+B. --. C. Rent-seeking may add to DWL. Price Discrimination.
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Inefficiency of Monopoly • Competitive Outcome • P = MC • Q = QC • Monopoly Outcome • PM > P = MC • Q = QM < QC $ A PM B C MC D MR QC QM quantity A+B+C A -- B A+B+C A+B -- C Rent-seeking may add to DWL
Price Discrimination • Pricing strategy that attempts to capture more consumer surplus • Types • 1st Degree: • 2nd Degree: • 3rd Degree: • Conditions • Market power • Segment the market • Prevent resale Charge each consumer the highest price they’re WTP Quantity discounts Charge prices based on price elasticities
First Degree Price Discrimination • Monopolist is able to capture CS …and eliminate DWL by selling until P = MC CS PM PS DWL MC D MR QM QC
Second Degree Price Discrimination • Offering discounts based on the number of games attended • Offering discounts based on the number of people in your group PM MC D MR QC QM
Third Degree Price Discrimination • Segment market into groups with differing elasticities • Adults • Senior citizens • Profit max rule: MRA = MRS = MC • MRA = PA[1 – 1/EA] Example: EA = 3 ES = 5 MC = 8 PA = $12 Charge higher price to group less elastic demand PS = $10
Personal Seat Licenses • People pay for the right to buy season tickets • Two-part tariff: entrance fee + per unit charge • Per unit price = MC = $10 • Entrance fee = resulting CS = $145/game $5,945 for 41 game PSL $300 P = 300 – 0.02Q MR = 300 – 0.04Q π= $2,102,500 $525,625 $155 MC = 10 $1,051,250 $525,625 MC $10 Seasonticketrights.com MR D 7250 14,500
Monopsony • Monopoly on the buyer side • Labor Market and the Reserve Clause
Are the Detroit Lions a Monopoly? • Relevant Market? • Broader the definition, the lower the market power • Natural Monopoly? • High fixed costs; low MC Economies of scale • ATC = TC/Q = [FC + VC]/Q ≈ AFC + MC • Public Good? $ ATC MC Quantity
Barriers to Entry • Broadcast contracts • NFL spread contracts out over CBS, Fox, NBC, ESPN • Pre-emptive franchise location • AFL vs NFL in Dallas and Minneapolis • Limit pricing
Antitrust Law • Sherman Act (1890) • Section 1: prohibits cartels (or “trusts”) • 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. • Section 2: attacks monopoly itself • 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…
Baseball’s Battle of the Leagues • Federal League’s 1914-1915 challenge to the AL-NL American League New York Yankees Chicago White Sox Washington Senators Boston Red Sox Cleveland Indians Detroit Tigers Philadelphia Athletics St. Louis Browns Federal League Baltimore Terrapins Brooklyn Tip-Tops Buffalo Blues Chicago Whales Indianapolis Hoosiers Kansas City Packers Pittsburgh Rebels St. Louis Terriers National League Boston Braves Brooklyn Dodgers Chicago Cubs Cincinnati Reds NY Giants Philadelphia Phillies Pittsburgh Pirates St. Louis Cardinals
Federal Baseball v NL (1922) • US District Court (1914) • Judge Kennesaw Mountain Landis • Delayed ruling for a year • All Federal League teams were bought out except one • Baltimore Terrapins filed suit against NL because of reserve clause • Supreme Court (1922) • Ruled baseball was not interstate commerce • Result: Baseball is exempt from antitrust laws • Toolson v. NY Yankees (1953) • Flood v. Kuhn (1972)
Contrast with NFL • Radovich v NFL (1957) • Blacklisted for playing in AAFC • NFL lost at Supreme Court no legal monopoly power or monopsony power • Tried to retain monopsony • “Gentleman’s Agreement” until early 1960s • “Rozelle Rule” imposed when that broke down • Mackey v NFL (1976) • Players’ Association negotiated deal that allowed Rule to continue • Tried to establish monopoly • Got limitedexemptions for TV and merger with AFL • No games on Friday (HS) and Saturday (NCAA)
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 • Montreal Expos moved to Washington – 2005 • Washington Senators to Texas – 1972 • Blocked attempts by Giants, White Sox, & Pirates
NFL Has Been Far Less Stable • 1980: Oakland Raiders sue NFL • Challenged NFL’s right to block move to LA • 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
Nash Equilibrium Cartel Theory • Prisoner’s Dilemma Dominant Strategy? Each team would set Low Price Competitive Outcome: (Low, Low) Cooperative Outcome: (High, High) Unstable due to incentive to cheat
NCAA: An IncidentalCartel • 18 football-related deaths in 1905 • President Roosevelt threatened to take action • NCAA formed to control “on the field” behavior • The Sanity Code (1946) • Rules for “off the field” behavior • Limits to financial “aid” to athletes • “Seven Sinners” refuse • NCAA failed to get 2/3 majority needed to expel the 7 • NCAA in tatters – cannot enforce own rules Boston College The Citadel University of Maryland University of Virginia VMI VPI Villanova
New Life for the NCAA • “Point shaving” scandal breaks out in 1952 • CCNY ruined as national power • Kentucky implicated • UK Coach – Adolph Rupp – likely involved as well • Also found illegal payments to players by Rupp • NCAA failed to respond • Embarrassed SEC suspends UK • NCAA establishes “Death Penalty” • Boycott by other members • UK is suspended for one season SWLa basketball 1973 SMU football 1987 Morehouse soccer 2003 MacMurray tennis 2005 Alabama** football 2002 Baylor** basketball 2004
Applying the NCAA’s Cartel Power • Monopsony Power • Drive down price of labor • Problem: Schools cheat • Monopoly Power • Early TV contract • Limited teams to 3 TV games every 2 years • CFA lobbied for more TV • NCAA created I-A and I-AA; reworked revenue sharing • CFA v NCAA (1984) • Antitrust result: many broadcasts, but less revenue! 1984 proposed NCAA deal: $74m 1984 actual CFA/NCAA deal: $31m Football Bowl Subdivision (FBS) Football Championship Subdivision (FCS)
Competitive Balance The Value of Uncertainty of Outcome
1949 Yankees beat Dodgers 1950 Yankees beat Phillies 1951 Yankees beat Giants 1952 Yankees beat Dodgers 1953 Yankees beat Dodgers 1954 Giants beat Indians 1955 Dodgers beat Yankees 1956 Yankees beat Dodgers 1957 Braves beat Yankees 1958 Yankees beat Braves 1959 Dodgers* beat White Sox 1960 Pirates beat Yankees 1961 Yankees beat Reds 1962 Yankees beat Giants* 1963 Dodgers* beat Yankees 1964 Cardinals beat Yankees Turnover in Champions?
Is Baseball Unique? • In 1960s only 2 NBA champions Celtics: 1959-66, 1968-69 • Since 1987 only 7 NBA champions Bulls: 1990-1993; 1996-1998 Lakers: 1987-1988; 2000-2002 Pistons: 1988-1989; 2004 Rockets: 1994-1995 Spurs: 1999; 2003; 2005; 2007 Heat: 2006 Celtics: 2008 • Similar results for hockey
Leagues Want Competitive Balance • Stimulates interest • Attendance • TV Ratings • Optimal Winning Percent? • “law of diminishing returns” • Market size effects • What is competitive balance? • Even competition in each game? • Turnover among champions? $ MC MRL MRS Winning percentage WL > WS : League wants large market team to win more often WS WL
Measuring Competitive Balance • Between Season Variation • Hirfindahl-Hirschman Index (HHI) • HHI quantifies turnover in champions • Also used to measure monopoly power • Where: fi=#championships by team i; T=#Years Large HHI means few teams dominate
Championships Chi: 6 LA: 5 SA: 4 Det: 3 Hou: 2 Miami: 1 Boston: 1 N =21 years HHI = [62+52+42+32+22+12+12]/21 HHI = 4.4 What is the HHI for the NBA since 1987?
1950s AL Champions Yankees (8); Indians; White Sox HHI=6.6 NL Champions Dodgers (5); Giants (2); Braves (2); Phillies HHI=3.4 1990s AL Champions Yankees (3); Indians (2); Blue Jays (2); Twins; Athletics HHI=2.1 NL Champions Braves (5); Reds; Phillies; Marlins; Padres HHI=3.2 Baseball and the HHI • Conclusion of HHI measure: • League Championships less concentrated in 1990s
Competitive Balance • Within Season Variation • “evenness of competition” • Standard deviation • Average distance that observation lies from mean • Actual: σA = • Ideal: σI = • Ratio: R = σA / σI T = number of teams G = number of games R > 1 indicates imbalance
Attempts to Promote Competitive Balance • Revenue Sharing • Indirect method of redistributing players • Two conditions: • Teams must benefit financially from improving performance • Players must be able to move among teams Example: 60-40 Gate split NY: RG = $36m and C = $28.8 π = $7.2m KC: RG = $18m and C = $16 π = $2.0m πNY = 0.6(36) + 0.4(18) – 28.8 = $0 πKC = 0.6(18) + 0.4(36) – 16 = $8.2m
Attempts to Promote Competitive Balance • Salary Caps • NFL (2009): $123m • NBA (2008-09): $56.7m • NHL (2008-09): $56.7m
2009 NFL Salary Cap Numbers (Cap = $123m) Source: http://www.profootballtalk.com/2009/02/11/team-by-team-cap-numbers/
George Steinbrenner Attempts to Promote Competitive Balance • Salary Caps • NFL (2009): $124m • NBA (2008-09): $56.7m • NHL (2008-09): $56.7m • Luxury Taxes • MLB (2008): tax on amount over $155m threshold goes into league pool • Soft caps: • “Larry Bird exemption” • Contract restructuring Yankees (222.2-155)(.40) = $26.9m Detroit (160.8-155)(.225) = $ 1.3m
Attempts to Promote Competitive Balance • Salary Caps • NFL (2009): $124m • NBA (2008-09): $56.7m • NHL (2008-09): $56.7m • Luxury Taxes • MLB (2008): tax on amount over $155m threshold goes into league pool • Reverse Order Drafts • Incentive to lose late in season? • Schedule Adjustments • Soft caps: • “Larry Bird exemption” • Contract restructuring Yankees (222.2-155)(.40) = $26.9m Detroit (160.8-155)(.225) = $ 1.3m
Impact of Strategies • Low correlation between payroll and winning
Impact of Strategies • Coase Theorem • If property rights are well-defined and transactions costs are low enough, then private bargaining can result in an efficient allocation of resources
Reserve Clause vs Free Agency • Reserve Clause: players are the property of the team that drafted them • Free Agency: players can negotiate with any team New York Seattle Revenue = $12m Revenue = $40m Salary = $1m Salary = $1.1m Reserve Clause Revenue = $12m Revenue = $40m Salary = $12m Free Agency
Impact of Strategies • Coase Theorem • If property rights are well-defined and transactions costs are low enough, then private bargaining can result in an efficient allocation of resources Rottenberg’s Invariance Proposition Initial allocation of player rights does not affect the final distribution of talent
Public Finance The Market for Sports Franchises
No teams entered, exited, or changed cities Construction of “old” parks Change: Boston Braves Milwaukee (1953) St. Louis Browns Baltimore Orioles (1954) Philadelphia A’s Kansas City (1955) Brooklyn Dodgers Los Angeles (1958) NY Giants San Francisco (1958) Golden Age of Baseball: 1903-1952 Shibe Park (Phil) Fenway Park (Bos) Forbes Field (Pit) Comiskey Park (Chi) Navin Field (Det) Wrigley Field (Chi) Yankee Stadium (NYY) Ebbets Field (Brk)
Dodger Blues? • Before the move • Most profitable team in MLB • Alone accounted for 47% of NL’s profits • Key Lessons • No city “safe” • Starts involvement of cities • Before 1950 – only 1 stadium publicly built • By 1980 – almost all were
What Power do Teams Have? • Monopoly Power • All-or-Nothing Demand Curve • Winner’s Curse
Monopoly Power: Limit Output • Leagues slow to expand • By 1953: U.S. demographics had changed • Los Angeles had no baseball teams – St. Louis had 2 • Baseball & Football moved rather than expand • NFL did absorb 5 teams from rival leagues • MLB expanded (1961-62) • Prevent new league (PCL and Rickey) • Minnesota, LA Angels, NY Mets, Houston • Avert Congressional intervention (Senators) • NFL expansion tied to AFL • First expanded (1960) to try to kill it • Next expanded (1966) to merge with it
All-or-Nothing Demand Curve • Firms generally can’t set both price and quantity • Standard monopoly pricing sets price at P1 and allows buyers to buy Q1 • Consumers earn surplus • Firm earns profit • Teams confront cities with an all-or-nothing choice: Point A • Consumers willing to absorb loss as long as net gain is positive • How far can you push consumers? $ A Surplus P1 Loss MC D MR Q1 Q2 Games
Guess how many clips are in the cup Each clip is worth $0.03 Write down your bid (and name) on a piece of paper Average bid usually lower than actual money value of clips Winning bid will generally exceed money value Why did winner overbid? Most bidders are risk averse Not all bidders have same expectations Only most optimistic bidder wins the prize Does winning the auction become the goal itself? Paper Clip Auction
Winner’s Curse • Buyer overbids due to uncertainty over value of prize • V = • Who wins? • Winner expects greatest payoff – could be: • Best suited to exploit opportunity • Most optimistic • Most intent on winning per se • Olympic “competition” for host site V = bidder’s value Bt = benefits of prize r = interest rate
Case in Point: The Olympics • 1976 Montreal: C$1.6 billion • Debt ~C$1.0 billion paid over 30 years • 1984 LA • Only city to bid on 1984 Summer Olympics • $200 million profit! • 2004 Athens: $15 billion • 2008 Beijing: $42 billion • 2012 London: $19 billion?
Stadium Economics • What’s true about each facility in Era #1? • Name of owner/builder • “park” or “field” • In Era #2? • Reflects source of funding • Municipally built • In Era #3? • Naming rights • $2m per year • What do firms get for naming rights? What’s in a Name?