Best analysis since: http://www.southparkstudios.com/clips/387407/stu-dent-ath-o-leets
Sportsgeekonomics goes to the Movies — a 90-second preview from the documentary “Schooled: The Price of College Sports” now available at amazon (http://www.amazon.com/Schooled-The-Price-College-Sports/dp/B00EPD3CC6) and I-Tunes (https://itunes.apple.com/us/movie/schooled-price-college-sports/id733105020). Don’t let your girlfriend stare too long at the dashing sportsgeekonomics blogger.
If you’re interested in the antitrust of college sports (and if you’re at my blog, I’d imagine you are), I recommend the order by Judge Wilken that Jon Solomon has attached in full to his article.
Please take advantage of EPIXHD’s offer to let you watch “Schooled: The Price of College Sports” for free. If you stay until the end, you can catch my film debut:
Good antitrust/market economy explanations contained here: http://insiderlouisville.com/news/2013/09/25/mark-coomes-5/
A kid gets super lucky and inherits a 1957 Corvette. He is psyched. He finds out that on the open market, he can get about $60,000 for it. He decides to sell it. Dealer after dealer offers him $10,000 — it turns out they’ve all agreed among themselves to pay not more than $10,000 for classic cars. They meet annually to reaffirm their commitment to paying nothing more than $10,000 for 1957 Corvettes. He needs the money, he has no other assets, so he sells.
His friends, who didn’t have a 1957 Corvette, all tell him to stop complaining that he got screwed, After all, he has $10,000 and they have nothing. He says — “but my car was worth $60,000 and I only ended up with $10,000 because all of the buyers in the country fixed the price.” They tell him they’d trade places with him in a heartbeat.
He didn’t get zero. But he still got screwed because he got less than what his car was worth. The fact that his friends had no car to sell doesn’t mean he should be happy taking a huge hit on the fair market value.
This is a bit simplified but it’s more or less what you need to understand.
Generally speaking, as prices rise, demand drops. So let’s say you can sell 1 copy of your book if you charge $500, but if you lower the price to $50, you can sell 100 copies. Which price would you pick? Well, it depends on your (marginal) costs. If the cost of printing the book is $5/copy, then in scenario 1 you sell 1 copy and have a marginal profit of $495. In scenario 2, you sell 100 copies and have a marginal profit of $50*100 - $5*$100, which is $4,500. So most of us would prefer scenario 2. IF we’re at $50, raising prices to $500 won’t be smart — we’ll lose more money even though our prices are higher.
What if you also need to pay a guy to ship the books and no matter how many books you sell, he’s going to charge you $100. He’s not a marginal cost. In scenario 1, your profit would drop from $495 to $395, and in scenario 2, your profit would drop from $4,500 to $4,400. But it doesn’t change the optimal price.
I picked $50 and $500 to make the point, but the same holds with $50 and, say $60. if $50 sells the optimal amount, then $60 is too high. And it remains too high even if your fixed costs grow from, say, $100 to $200.
Ok, so now imagine you’re running a baseball team (or whatever you want to use as your fantasy sports ownership scenario). Your payroll is $100 million. Paying your baseball stars costs you $100 million if you sell 1 ticket or if you sell 1 million. There is an optimal ticket price that maximizes the profit from selling tickets, but it is more-or-less unrelated to the cost of paying your baseball players because the marginal profit per ticket doesn’t change when your payroll changes. Unless your players get a share of each ticket sale, the cost of those players does not change your marginal profit per ticket and so does not change the optimal price of the ticket.
If you have a team now and you are paying each player $25,000 per year and your team has, say, ticket prices of $50 each,and you picked $50 because that was the best price to charge, if suddenly you double the pay of the player to $50,000 per year, your profits will drop b/c your fixed costs go up, but $50 remains the optimum price. If you raise prices above $50, fewer people will buy tickets. If $50 was optimal before, $60 wasn’t then and isn’t now. Picking $60 now will lower your profit even further.
Honest — this really isn’t disputed. If price x is optimal, changing costs unrelated to the number of units sold is not going to change the optimal price or quantity. (there is one exception, related to going out of business entirely, but that’s a story for different day).
Per USA Today (http://www.usatoday.com/story/sports/ncaaf/2012/11/19/ncaa-college-football-head-coach-salary-database/1715543/), this is the recent salary history of David Cutcliffe, head football coach of Duke.
Cutcliffe was recently interviewed about the distribution of profits in college sports in the context of certain statements by Arian Foster here: http://blogs.newsobserver.com/dukenow/duke-coach-david-cutcliffe-on-the-arian-foster-interview-and-full-cost-of-attendance
Among his quotes: “nobody is really getting rich off of this,”
I guess Mr. Cutcliffe is entitled to believe that $1.5 million and growing doesn’t make one rich. I think my definition of rich is more inclusive than his.
The Washington Post’s Sally Jenkins has written this opinion piece, advocating a free market for college sports: NCAA touts amateurism rules over open market, but which is more corrupt?
Welcome to the free market college sports club, Sally!
By the way, with this post, the Washington Post and the Washington Times (see The free market case against the NCAA chokehold on college sports) now agree.