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Monopoly and Antitrust

Monopoly and Antitrust

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Monopoly and Antitrust

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  1. Monopoly and Antitrust

  2. Inefficiency of Monopoly • Competitive Outcome • P = PC = MC • Q = QC • Monopoly Outcome • PM > PC = MC • Q = QM < QC $ A PM B C PC MC D MR QC QM quantity A+B+C A -- B A+B+C A+B -- C Rent-seeking may add to DWL

  3. Price Discrimination • Pricing strategy that attempts to capture more consumer surplus • Types • 1st Degree: • 2nd Degree: • 3rd Degree: • Necessary 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

  4. 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

  5. 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

  6. 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 PS = $10 Charge higher price to group with less elastic demand

  7. Personal Seat Licenses • People pay for the right to buy season tickets • Two-part tariff: entrance fee + per unit charge • Per unit price = MC • Entrance fee = resulting CS PM MC D MR QM QC

  8. Monopsony • Monopoly on the buyer side • Labor Market and the Reserve Clause • BBC and English Soccer

  9. Barriers to Entry • Broadcast contracts • NFL spreads contracts out over CBS, Fox, NBC, ESPN • USFL • Pre-emptive franchise location • AFL vs NFL in Dallas and Minneapolis

  10. 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…

  11. Federal Baseball v NL (1922) • American League (1901 – present) • Boston • Chicago • Cleveland • Detroit • New York • Philadelphia • St. Louis • Washington • Federal League (1914-1915) • Brooklyn • Chicago • Pittsburgh • St. Louis • Baltimore • Buffalo • Indianapolis • Kansas City • National League (1876 – present) • Boston • Brooklyn • Chicago • Cincinnati • New York • Philadelphia • Pittsburgh • St. Louis • US Supreme Court ruled: “baseball was not interstate commerce” • Implication: Baseball is exempt from antitrust laws • Toolson (1953) • Flood (1972)

  12. 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 • 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 • No games on Friday (HS) and Saturday (NCAA)

  13. 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

  14. 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

  15. Cartel Theory • Game Theory “Prisoner’s Dilemma” Dominant Strategy?  Each team would set Low Price Nash Equilibrium Competitive Outcome: (Low, Low) Cooperative Outcome: (High, High) Unstable due to incentive to cheat

  16. 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) • Drew up rules for “off the field” behavior • 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

  17. 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 SMU football 1987-88 SW LA basketball 1973-75 Morehouse soccer 2003 MacMurray tennis 2004-07

  18. 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 filed Antitrust lawsuit against NCAA (1984) • Now many broadcasts – but less revenue!

  19. Competitive Balance The Value of Uncertainty of Outcome

  20. 1949 Yankees beat Dodgers 1950 Yankees beat Phils 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?

  21. Is Baseball Unique? • In 1960s only 2 NBA champions Celtics Champions 1959-66, 1968-69 • Since 1980 only 9 NBA champions Lakers: 1980; 1982; 1985; 1987-1988; 2000-2002; 2009-2010 Bulls: 1990-1993; 1996-1998 Spurs: 1999; 2003; 2005; 2007 Celtics: 1981; 1984; 1986; 2008 Pistons: 1988-1989; 2004 Rockets: 1994-1995 Heat: 2006 Mavs: 2011 Sixers: 1983 • Champs since 1980 • MLB: 20 • NFL: 15 • NHL: 15 • NBA: 9

  22. Leagues Want Competitive Balance • Stimulates interest • Attendance • TV Ratings • Team dynasties? • Are Yankees bad for baseball? • “law of diminishing returns” • Market size effects • What is competitive balance? • Even competition in each game? • Turnover among champions? $ MC MRL MRS Winning percentage WS WL

  23. Measuring Competitive Balance • Between Season Variation • Hirfindahl-Hirschman Index (HHI) • HHI quantifies turnover in champions • Also used to measure monopoly power • Where: ci=#championships by team i; T=#Years; N=#Teams Large HHI means few teams dominate

  24. Championships Chi: 6 LA: 7 Det: 3 SA: 4 Hou: 2 Miami: 1 Boston: 1 Dallas: 1 N =25 years HHI = HHI = 0.187 What is the HHI for the NBA since 1987?

  25. 1950s AL Champions Yankees (8); Indians; White Sox  HHI= .660 NL Champions Dodgers (5); Giants (2); Braves (2); Phillies  HHI= .340 2000s AL Champions Yankees (4); Red Sox (2); Angels; Tigers; White Sox; Rays HHI=.240 NL Champions Cardinal (2); Phillies (2); Marlins; Diamondbacks; Giants; Astros; Rockies; Mets HHI= .140 Baseball and the HHI

  26. Competitive Balance • Within Season Variation • “evenness of competition” • standard deviation • average distance that observation lies from mean • Actual: σW = • Ideal: σI = • Ratio: R = σW / σI T = number of teams G = number of games R > 1 indicates imbalance

  27. Dispersion of Winning Percentage for 2011 or 2010-11 Season

  28. 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  πNY= $7.2m KC: RG = $18m and C = $16  πKC= $2.0m πNY = 0.6(36) + 0.4(18) – 28.8 = $0 πKC = 0.6(18) + 0.4(36) – 16 = $9.2m

  29. Attempts to Promote Competitive Balance • Salary Caps • Luxury Taxes • Soft caps: • “Larry Bird exemption” • Injuries/Bonuses Yankees: (212.75-178)(.40) =$13.9m

  30. “Change is needed and that is reflected by the fact that over a billion dollars has been paid to seven chronically uncompetitive teams, five of whom have had baseball’s highest operating profits,” the Globe quoted Henry as saying. “Who, except these teams, can think this is a good idea?” John Henry Owner, Boston Red Sox December 2009

  31. Attempts to Promote Competitive Balance • Reverse Order Drafts • Schedule Adjustments • Promotion and relegation Incentive to lose late in season?

  32. Winning Percent Payroll Impact of Strategies • What is correlation between payroll and winning? ? Correlation coefficient = +1.0 ?

  33. Impact of Strategies • Correlation between payroll and winning: 2010-11 • Coase Theorem • Initial allocation of player rights does not affect distribution of talent Simon Rottenberg’s “Invariance Proposition”

  34. Baseball’s Reserve Clause • Reserve Clause: players are the property of the team that drafted them • Free Agency: players can negotiate with any team New York Texas Revenue = $20m Revenue = $40m Salary = $1m Salary = $1.1m Reserve Clause Revenue = $20m Revenue = $40m Salary = $21m Free Agency

  35. Impact of Strategies • Low correlation between payroll and winning • Coase Theorem • Initial allocation of player rights does not affect distribution of talent • Reserve clause is no different than free agency • Reverse order draft should have no long-term effect

  36. Public Finance The Market for Sports Franchises

  37. 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)

  38. 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

  39. What Power do Teams Have? • Monopoly Power • All-or-Nothing Demand Curve • Winner’s Curse

  40. Monopoly Power: Limit Output • Leagues slow to expand • By 1953: U.S. demographics had changed • LA 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 (Continental League) • Minnesota, Houston, NY Mets, LA Angels, • Avert Congressional intervention (Senators) • NFL expansion tied to AFL • First expanded (1960) to try to kill it • Next expanded (1966) to merge with it

  41. 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 • How far can you push consumers? • Consumers willing to absorb loss as long as net gain in CS is positive $ A Surplus P1 Loss MC D MR Q1 Q2 Games

  42. Guess how many clips are in the cup ($1 for closest guess) 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

  43. 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

  44. 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 • 2010 Vancouver: $9.2 billion • 2012 London • 2014 Sochi • 2016 Rio de Janeiro

  45. http://this.org/magazine/2010/01/12/alternative-budget-olympics-vancouver-2010/http://this.org/magazine/2010/01/12/alternative-budget-olympics-vancouver-2010/

  46. 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?

  47. Size Matters • Saw that baseball teams seldom sell out • Why? • Optimal size for baseball stadium 30-40,000 • Football has larger optimal size • Used to rent space from baseball teams in off-season • Municipal stadia built when football took off