Sportsgeekonomics

Musings on Sports Economics

Worth your time: Legal Summary of the O’Bannon decision

Prof.John Wolohan of Syracuse University has written a detailed but accessible summary of the recent O’Bannon v.NCAA decision. You can find it here: http://www.lawinsport.com/articles/intellectual-property-law/item/your-full-review-of-the-o-bannon-v-ncaa-judgment?category_id=124.

I have quibbles on the edges with some of his interpretations, but if you are looking for a quick way to digest the decision, I highly recommend this as a starting point.

Posted by
Andy Schwarz

Worth your time: John Infante on the so-called “autonomy”

John Infante is my favorite “I often disagree but always respect him” college sports analyst.  In this case, I think he has captured the essence of the economics of the market in which there is lots of demand for football of varying quality and lots of supply of players of varying quality.  Namely, that tiers of quality will emerge and that talent will sort out broadly by the value of that talent to generating revenue.  In other words, Infante’s analysis is consistent with the Invariance Principle[1] (from a paper published by Simon Rottenberg in 1956), which was the first sports economics paper and considered by many as the the foundation of the discipline.

I don’t agree with every point in Infante’s analysis, but I strongly agree with the idea that expecting schools to quit playing football if they can’t match the market price for a 5-star athlete is wrong.  Instead, as Infante explains they will stay in the market and acquire fewer stars worth of talent at lower prices.  (again,like they do now)

I recommend it and you can find it here:

http://www.sportingnews.com/ncaa-football/story/2014-08-19/autonomy-will-save-more-football-programs-than-it-kills-hawaii-mid-major-programs



[1] The paper itself is available at http://www.vanderbilt.edu/econ/faculty/Vrooman/rottenberg.pdf

For more on this, see http://www.vanderbilt.edu/econ/faculty/Vrooman/vrooman-econsport-intro.pdf

 ”The economics of sport is celebrating the golden anniversary of its origin in a seminal paper by Rottenberg [1956], where he presages the Coase theorem [1960] in a cogent argument about the impact of free agency on the baseball players’ labor market. According to Rottenberg’s invariance proposition, free agency would yield the same talent distribution as the reserve system in American baseball. The difference was that free agency would weaken monopsonistic exploitation of players trapped in the reserve system, and allow them to be paid their marginal revenue product. The theoretical foundations of the economics of sport are found in the elegant mathematical proofs of El Hodiri and Quirk [1971], in public policy awareness of Noll [1974], and for Europe, in Sloane’s [1969] early discussion of the European football market. The modern awakening of sports economics came when Quirk and Fort [1992] published a popular version of Quirk’s early models, followed by two separate adaptations of the model to the new realities of the rapidly changing American sport-scape [Fort and Quirk, 1995; Vrooman, 1995].”

Posted by
Andy Schwarz

We are not in the Wild West

Having just returned from a father-and-son road trip that included a trip to Deadwood, SD, I just wanted to clarify one thing.  In the *actual* Wild West, what made things so scary was the absence of law enforcement.  People had to take the law into their own hands, and violations of the law were plentiful. 

In contrast, in a world in which the NCAA as well as  “… its respective officers, servants, employees, agents, and licensees, and all persons in active concert or participation with it, including its member schools and conferences,” (plus anyone who receives the injunction via service) is prohibited from fixing prices, what’s scary is not that lawlessness will run rampant, but actually the opposite — that violations of the law will now be punished.

To continue the metaphor, the people who are worried now are those who for years have thrived in the wild west — those who have violated the law with impunity, and in taken the law in their own hands.  They are now scared because their natural lawless habits are going to be punished if they don’t change their ways.  In other words, it is the gunslingers, not the peaceful citizens of Deadwood, for whom the new era is scary.

[I’ll note that according to School Bus Dave who took us on the Kevin Costner Bus Tour of Deadwood, one of the theories for why Wild Bill Hickok was shot was for this very reason — the town of Deadwood was afraid he might bring with him an enforcement of the law and so many of them made their living through illegal activities (gambling, prostitution, claim jumping) that they wanted to make sure that the West *stayed* wild so they could continue their non-law-abiding ways]

I’d recommend pushing back on people when they say enforcement of federal law is ushering an era akin to the Wild West.  I think the concern people are expressing is an actually a worry that the New Sheriff in Town is actually a sheriff, and the new rules being imposed are actually the law.

Posted by
Andy Schwarz

Team Reform spotted in the wild

"Nearly everyone recognizes the corrupting effect of money on college sports" — Tom McMillen.

This quote comes from commentary written by former Congressman and Maryland basketball star, Tom McMillen.  McMillen also explained:

"There has been no real effort to curb the massive spending in college sports, which is financially and morally bankrupting our institutions of higher learning."

"…big money sports will go on corroding the core educational purposes and values of our colleges…"

I try very hard in my writing not to create straw men, or caricatures of other’s arguments, but I think I captured McMillen’s view of money and of the goals of NCAA reform when I described “Team Reform” in a recent piece I wrote for Deadspin:

I think the theory behind de-commercialization is that if the product isn’t selling quite as well, there will be less incentive for schools to provide the product at any cost, and as a result the economic pressure to pay more for coaching, facilities, and even players will decline. As will, goes the theory, the incentive to invite in athletes unable to perform academically or to provide them with phony educations designed to keep them eligible just so they can continue to generate revenue through athletics. At core, it is rooted in the idea that money itself is a corrupting force to academia and that absent the lure of filthy lucre, the administrators of college campus would return to their quasi-parental role of educating young men, independent of their ability to generate revenue as athletes. It is rooted in paternalism, in that assumes the problem is that the men and women who run campuses are letting money divert them from their duty to serve in loco parentis for these young, unmolded, uncorrupted men.

But as I explained, this focus on money as the root of all evil misses the real problem:

In America, we’re supposed to value hard work and money well-earned. Corruption is what you get from violating the law, not from earning what you’re worth in the marketplace.

Tom McMillen is classic Team Reform.  I hope his proposed Presidential Committee has some representation from Team Market.

And yes, I  hereby volunteer.  :-)

Posted by
Andy Schwarz

Judge’s Ruling & Injunction in O’Bannon case

Here are the three rulings issued today, along with a 2000 Paper that I co-authored explain 14 years in advance, why today’s ruling was correct. 

Timing being everything in life, I was sitting in a chain Mexican restaurant in Elko, Nevada on day 2 of a 9-day roadtrip with my son when my email buzzed that there was an entry in the O’Bannon case docket.  I grabbed it and saw it was a holding in favor of the plaintiffs.  My son and I hit the road and he had the duty of reading it to me as we drove towards Salt Lake City, where we now are.  I plan to read these in detail, but in case you want to do so as well, they are presented below.

Enjoy!

Ruling: https://drive.google.com/file/d/0BxM4wdtZ5uI-dTR0akNjTlRhTlU/edit?usp=sharing

Injunction: https://drive.google.com/file/d/0BxM4wdtZ5uI-VlVXdXNWRXhxdHM/edit?usp=sharing

Clerk’s Order: https://drive.google.com/file/d/0BxM4wdtZ5uI-WHNtMjNTd2dIQkE/edit?usp=sharing

Rascher & Schwarz Article explaining why this should have happened, published in 2000:

https://drive.google.com/file/d/0BxM4wdtZ5uI-TFhyZFdCOXNlekE/edit?usp=sharing

(Yes, this is a bit of a gloat link here, please forgive me my exuberance!)

Posted by
Andy Schwarz

Preparing my new hashtag

In the fabulous movie “This is Spinal Tap,” Fran Drescher plays a character named Bobbi Flekman, self-nicknamed “the hostess with the mostest”

At one point she goes from being all fake smiles to trying to explain a business decision and she says “Money talks and Bullshit walks

I’m going to start using #MTBSW as my new short-hand for whenever I see someone claim something economically irrational or, conversely,do something economically rational after claiming they would not do it.  If a school says they are too poor, and then spends large amounts of money, or if a school claims it would join division iii if forced to do x, but then doesn’t, they will get the #MTBSW hashtag.

I say this because over the next couple of years, as rules changes and (possibly) Court injunctions change the landscape, it feels like we’re going to need a short way to quote the insighful wisdom of Bobbi Flekman.

Posted by
Andy Schwarz

Short sports economics test

Imagine tomorrow the NFL CBA changed so that instead of getting approximately 50% of revenue, athletes got 25%. What would happen to ticket revenues, tv licensing fees, and cable bills to consumers. Extra credit for mentioning David Ricardo in context.

Posted by
Andy Schwarz

Questions from Congress

I received the following questions from Congressman Kenny Marchant (R-TX) with a due date of Aug 18.

[UPDATE!  Chairman Kline’s office was kind enough to give me an extra week to accommodate my family vacation plans, for which I am grateful]

image

Feel free to tweet me or add a comment below as to how I should respond.  Please don’t be hurt if I don’t reply to every comment on this one — I have a lot of other obligations between now and the 18th and so I am mostly just going to bang this out quickly, but I will look to see if any of the suggested comments are helpful.

Posted by
Andy Schwarz

Antitrust and Labor Law, Bookends of the Social Compact

Perhaps there is no more oxymoronic expression than “a thoughtful comment to an online article” but it actually happened in response to my recently published How Not To Reform The NCAA.  A few commenters said they did not share my Pollyannaish view of market outcomes.  It made me realize that much of what I said in that article, and in general about the suppressed labor market in college sports is very context dependent.  I do not think laissez faire approaches work best in all labor markets.  As an example, I strongly support the minimum wage and I think one of the worst symptoms of the income inequality that is emerging in 21st-century America is driven by the ways in which labor is forced to work at very low (or zero or even negative) wages at entry-level jobs, even though that is often a purely market outcome that can emerge when supply outstrips demand.

One of my friends and mentors as an economist, Doug Zona, once told me a simple way to explain how prices get set in an economy.  Price and quantity are set by three things: demand, costs, and strategic interaction among firms.  As demand goes up, price tends to rise as well (and likely quantity as well, all else equal). As costs go up, prices rise but quantity demand will tend to drop as price increases. And depending on how vigorously or not firms compete (and whether they are buyers or sellers in the market), price will rise or fall accordingly.  And that’s basically it.  So when I look at a labor market and I see low wages, there are basically three categories of symptoms:  demand/supply issues, cost issues, or collusion issues. 

The first and the last of these are salient here.  When labor supply outstrips demand, price (wages) will tend to go down, even under vigorous competition among employers.   And on the other end of the spectrum, where demand outstrips supply, really only collusion among employers can serve to keep wages from rising.

That’s not confined to labor or sports markets, but it does help explain why I think Labor law and Antitrust law are the equivalent of the out-of-bounds lines on the sports-economic playing field, one designed to prevent wage suppression when sports labor supply is too high for demand and one where it is too low.  Examples will help make this clear.

The case of demand for sports-labor exceeding supply is all around us, especially as college football season is gearing up for another late summer and fall of fabulous Saturdays.  Starting-quality FBS-level football talent is fairly scarce and so even though there is no minimum required athletic scholarship (I’ll use the NCAA term “grant-in-aid” or “GIA” throughout this article to mean athletic scholarship) in FBS per NCAA rules, it is extremely rare to see anyone who plays FBS football get anything less than the maximum-allowed GIA. And similarly, even though FBS rules only require a team to have 70 players receiving a GIA, it is rare to see fewer than 80 full GIAs given and more common to see all allowed (85) GIAs given by almost every team, year after year.  As a matter of economics, this is strong evidence that demand for talent outstrips supply.  if this were not the case, we would see a lot of schools making 70 full GIA offers and then skimping on the other 15 players — using walk-ons, offering 10% scholarships, etc.  but they don’t and this is because the cost to the team of replacing one highly-rated full GIA-worthy player with a less-qualified athlete is higher than the cost of that scholarship, and competition (such as it is) from other teams drives up the price.

Anyone (and I’m thinking of you in particular, Seth Davis, but there are plenty of others who share this view) who tells you that most athletes on an FBS football roster who get “paid” more than they are worth to a team is ignoring these basic economic facts - in essence they are saying they believe that teams are persistently acting irrationally, and I just don’t think that’s how thriving profitable industries work.  Put it this way — if the last 15 full GIA players are a cost-burden to a school, but somehow they feel compelled, irrationally, to make full GIA offers, why are schools so concerned with avoiding a 3 or 5 or even 10-GIA penalty.  If the last 10 recruits on a team aren’t worth a full GIA, the Reggie Bush sanctions that USC experienced ought to have given them a leg-up on their competition. No one thinks that’s true.  And the fact that it is not true is further evidence that even the last guy getting a GIA is worth every penny, and likely more.

Ok, but I’ve written tons about this over the last three or four years, and if I haven’t convinced you yet, nothing short of the market emerging and proving me right is likely to convince you.

Today’s new insight is to think about what happens when firms don’t *need* to collude to keep down prices, because the interplay if supply and demand allow employers, acting unilaterally, to suppress wages. Lots of examples have been in the news lately — unpaid interns, underpaid cheerleaders, and even minor league baseball players.  But it’s not a new phenomenon to anyone who has read John Steinbeck  or even Patrick Hruby.  When labor and talent isn’t scarce, relative to demand, wages will tend to go down and when people are desperate for work, either because they will literally starve without it, or because they see that work as a shot at a better career in the long-run, and  working for free has a higher long-run payoff than refusing to do so.

This is a sufficiently common phenomenon that we have laws against it.  The Minimum Wage exists, primarily, because of a recognition that the equilibrium wage in many professions will be below the societally acceptable minimum we want a worker to receive for a hard day’s work.  It’s a recognition that under certain supply & demand conditions, pay will be pushed down below what we think the baseline should be.

Minimum Wage laws do distort the market outcome, at least on the margins.  Probably our labor markets are a little less efficient (in the economic sense) than it would be without them.  But social-economic-political policy is not solely informed by efficiency and when we as a nation pass laws to better emphasize other goals, like a statement that working a full day should be sufficient to stay out of poverty, that’s a valid exercise of collective political will to shape economic policy.  We are a republic, and we capture (generally) the will of the people through legislation.

And thus back to the bookends. We have laws to protect labor when demand exceeds supply and we want those coveted workers to reap the fruits of their effort and skill— the antitrust laws.  (See, as just one example of this, the recent high-tech worker cases settled by the DOJ). This is the case where the market would be the friend of labor but (absent law enforcement) collusion among employers prevents that outcome.   And on the other end of the demand/supply spectrum, we have laws to protect labor from the market itself, when market conditions so favor employers that the equilibrium wage is below what we consider the proper floor.

So it’s not that I am Pollyannaish about ALL market outcomes.   It’s just that when I see excess demand for labor, I am confident that trust in the market is sufficient to do the heavy lifting of getting us to a fair allocation of the profits of the labor.  When there is excess supply, different prescriptions are needed to solve the resulting ills.  Markets aren’t panaceas, but  not every problem requires a cure-all if a cure-it exists.

Posted by
Andy Schwarz