It deals with the hypocrisy of a man earning $1.8 million (and more than double anyone in his organization) decrying the capitalist process of assigning pay based on market value, instead of paying solely based on effort.
As a tease, it struck me that embedded in Bowlsby’s predictions are the following two mutually inconsistent statements:
The world of college sports highly values the contributions to the campus of the men who play sports that don’t generate TV money, and it believes that if they are no longer part of the community, the community will suffer.
If rules prohibiting Football/Basketball athletes from getting pay are loosened, the first thing the world of college sports will do is stop funding the (already partial) scholarships of the men who play those non-money sports.
Those are not rational, consistent statements. It’s easy to say you really love something someone else is paying for. What you pay for shows what your priorities are. If you don’t value them enough to fund them with your own money, you don’t value them very much at all.
If you don’t believe me,try explaining to your significant other/spouse why you very much value her/his [whatever], but not enough to pay for it with your own money. Especially if you’re pulling a cool $1.8 mill out yourself. See how that flies.
There is zero reason why, in the event that the power conferences decide to form their own (a) set of rules within FBS, (b) distinct subdivision within D1, (c) their own division within the NCAA’s auspices, or (d) a new, fully distinct governing body that the basketball tournament in March needs to change.
Imagine the most extreme scenario, (d), where literally the five power conferences flat out leave the NCAA and form, say, the Power Conference Athletic Association (PCAA — conveniently could also be the Professional Collegiate Athletic Association if the show started fitting). We know they would be able to command a hefty licensing fee to broadcast an end-of-year tournament with the better half of the schools. But it might not command as much as the current march Madness that includes another 30-40 schools out of the 290 or so schools that comprise the rest of D1.
On the other hand, with the P5 gone, the remaining 27 D1 conference would certainly not be able to command as much money as the NCAA currently does for march madness, since virtually every winner (other than schools that would be left behind and scrambling to join the P5, primarily UConn) would have left.
Indeed, it’s arguable that that the sum of the two separate licensing fees would be worth less than the current joint product.
And therein lies the source of the ridiculousness of the claim that the current configuration would die.
Imagine this. The P5 face a choice. Stay exclusive and keep 100% of a smaller pie for the PCAA Exclusive Tourney. Or, host the PCAA Invitation, an annual challenge between the best of the PCAA and a select set of NCAA teams. Set up a PCAA committee that invites, oh, say, 10 good teams from the rest of D1 (i.e, from the NCAA) and then also the conference winner of each small conference tournament whether they are good or not. Offer to pay them enough money for an appearance (and more for a win) that it makes saying yes more lucrative than staying behind in what’s left of the NCAA tournament.
The pie grows. Each invited non-PCAA school may get less money than they would if the NCAA never divided, but that world is gone (in my hypothetical). They are getting far more than if they refuse an invitation. So to say no, they would have to choose the less profitable, less fan-friendly option.
For the PCAA members themselves, they would make more money because even after paying the invited non-PCAA teams, the surplus is all theirs. Why assume a surplus? Well, if not, then the whole idea that the Cinderellas are what make March Madness valuable to CBS is false. If viewership is really enhanced by the mix of big and small schools, the PCAA will have enough to invite the small and pocket the surplus. And so then for them,also, not inviting the small schools would be a choice for a less profitable, less fan-friendly option.
No I am not saying that hard heads and irrationality might not rule the day. The NCAA currently has a rule preventing teams from playing non-NCAA oppoonents. That would have to change. if the scenario outlined above occurs, not changing that rule would be a form of seppuku. But don’t put it past an organization built on platitudes and monopoly rent dissipation to make an irrational decision not to evolve. I’m just saying that to the extent a solution is sought, it is right there for everyone to see, and just up to the business people to make happen.
Now before you start to say that it is impossible for schools with different sets of rules on number of scholarships or the maximum value of a scholarship to play each other, please remember that currently:
FCS football teams play against FBS football teams despite different numbers of scholarships and despite the fact that most FCS athletes get less than a full scholarship.
The Ivy League does not give any athletic scholarships, but participates in the FCS playoffs and in March Madness.
The whole idea of a Cinderella in basketball is that we know the players at Kansas get far more in all sorts of ways than the players at Bucknell, and even though Kansas’s self-reported basketball revenue from 2013 ($16,412,415) is more than 8 times larger than Bucknell’s ($2,025,127), and their expenditures are more than 5 times as large.
In golf and tennis we have zero problem with the idea of an “open” tournament, featuring pros and amateurs. We usually cheer on the amateur even though we know it’s unlikely he’ll win it all. Just beating a few of the pros is victory enough. Same too with the Cinderellas in a basketball tournament. Knowing Mercer didn’t ultimately win it all didn’t make their victory over Duke less fun.
The PCAA Invitational would be a popular, successful open tournament featuring the best of the PCAA and the NCAA. There would be upsets. Dominant teams from the power conferences would almost win. Just like today’s March Madness.
And just as it could work with a full on divorce between the PCAA and NCAA, so too it would be even easier to manage under any of the less extreme scenarios. it comes down to the fact that if cooperation makes the pie larger, then the rest is just fighting over who gets the biggest slice. Which is what is really going on now.
More truth telling about Title IX, this time from schools themselves
Despite the frequently voiced (albeit breathless) claim that Title IX funding might be hurt by increasing compensation to male football and basketball athletes, I’ve frequently tried to explain that’s not how Title IX would work. For example, see:
Anyway, since I know none of you believe me without confirmation (as is your right!), here’s what a recently field amicus brief by Baylor, Rice, SMU, Stanford, Tulane, USC (west), Vanderbilt, and Wake Forest (available here: http://mynlrb.nlrb.gov/link/document.aspx/09031d45817cd706 )says about this issue:
If scholarship football student-athletes are determined to be employees for purposes of the Act, and through collective bargaining receive greater benefits for themselves, the proportionality mandate of Title IX will require that colleges either increase the benefits to female student-athletes proportionately, or decrease the benefits provided to male student-athletes in other sports. Depending on the extent of the additional benefits obtained by the unionized football student-athlete “employees,” universities may be required to do both: decrease the number of scholarships in other male sports and increase the benefits provided to female student-athletes. (page 12)
In other words, the schools are complaining that Title IX is going to make them spend MORE on women’s sports and/or less on men’s sports, not that it will make them spend less on women’s sports.
Presented without comment (from NCAA's NLRB filing)
"When parents take the long, quiet ride home after saying goodbye the first semester, they want to feel confident that the college or university is working diligently to create the most rewarding educational experience possible. This feeling is as true for the parents of a student-athlete as parents of any other student. University leaders have determined that converting student-athletes into paid professionals — injecting a different structure and a different set of motivations for attending college — would destroy their ability to provide a rewarding educational experience for these students and their classmates." — Brief of Amicus Curiae National Collegiate Athletic Association in Support of Northwestern University, page 18.
Middle manager provides housing allowance perks to his staff
Oh sorry, this is college football. So it’s actually “Scandal! Director of Football Operations helps Football Athletes with their rent!”
Busby allegedly gave players discounted or rent-free housing, free meals and other gifts. The report says Busby favored offensive players at skill positions. Several players were contacted by the paper, but none said they received improper benefits from Busby or anybody else at the school. Some of the players contacted did say that they “heard” of players receiving benefits, but none went into any detail.
This is what the world looks like when collusion happens out in the open:
Pac-12 university presidents have sent a letter to their colleagues at the other four major football conferences calling for sweeping changes to the NCAA model and autonomy for those leagues.
A copy of the letter was obtained by The Associated Press on Tuesday night. It was sent last week to the other 53 university presidents from the Southeastern Conference, Big Ten, Big 12 and Atlantic Coast Conference.
Spurred in part by Northwestern football players’ move to unionize, the Pac-12 presidents outlined a 10-point plan for reform that includes many proposals commissioners have been advocating for several years, including a stipend for athletes.
The NCAA is working on a new governance structure that will allow the five wealthiest conferences to make some rules without the support of smaller Division I schools.
Let us look less to the sky to see what might fall
"Where will this all lead? I know that many suggest we are going down a slippery slope that will have no moral boundaries. To those who truly harbor such fears, I can only say this: Let us look less to the sky to see what might fall; rather, let us look to each other… and rise."
Making analogies between a household and other sectors of the economy can be dangerous, so let me give the standard “don’t try this at home, kids” warning. I was talking to a reporter from Syracuse yesterday and trying to come up with the right analogy to explain why a business might engage in management-by-accounting that is perfectly benign for its own purposes, but that may confuse an outside who think the accounting represents economic reality.
The example I gave him was if your family has a swear jar, where ever member of the family has to put some coins into the jar if they swear at the dinner table. I explained that to the kid with a small allowance, the “cost” of putting money into the jar was high — every swear might equate to a lost candy bar. The goal is to manage the child’s behavior by imposing a cost on activity you want to disincent. But then I asked whether the family as a whole is better or worse off if the money is in the jar or int he kid’s pocket, the answer is either that the family is in the identical position, or arguably the family is actually better off because the money has been transferred from a kid inclined to spend his money foolishly to the jar, where perhaps it will get saved up for a wiser parental purchase.
In this example, the child is the athletic department and the jar is the university as a whole. But it fails as an analogy because swearing is an unnecessary bad behavior the parent is trying to stop 100%.
So as a second analogy, let’s think about a family trying to teach their teenager about the value of money and of hard work. It’s a family with two economists for parents so admittedly, they are a little weird, and they decide for the summer to put a price on every service they provide to the teenager. They charge rent, they charge for food in the fridge, they charge for the service of cooking the food, etc. They make him pay a sort of tuition charge for the privilege of attending the nice public school in the good school district they moved into. They also pay for chores, and the teen has a decent job that brings in money too.
From the perspective of the kid, the food costs whatever his/her parents charge for it. They may be going to Costco and buying ramen in bulk for 10 cents a pack, and then charging $1. Housing costs whatever it costs — to the parents, the room would just go empty if the teen moved out (or maybe one of them would set up a drum kit in the room and rekindle a passion for percussion) and so there is no real cost to them of giving the teen space in the host, but to the teen, the $100/mo rent is a huge, looming cost.
In reality, the real costs are what the parents are shelling out and the real revenue is what the teen is bringing in from his job. The allowance they give him for his chores is not real revenue, and the payments he makes from room, board, tuition, etc. don’t necessarily reflect the actual cost to the household of those expenditures. Figuring out what the family’s cost of that nice public school is a very hard exercise — it probably involves looking at comparable homes in lesser schools districts, amortizing the difference in cost over the years of schooling, netting out the increased resale value at the end of the schooling process, figuring out the appropriate discount rate for the time value of money. It’s a lot of work. But the short-cut of assuming the amount the parents are charging their teenager is a good proxy for the actual cost is a bad one — there need not be ANY relationship.
The parents are picking prices to manager their child’s conduct without having to run his/her life. They might make studying math come with a payment to the student because that’s conduct they want to encourage (even though it generates zero dollars to the household, at least in the short- or medium-run). They might make coming in after curfew a very expensive activity. They are “managing by accounting” in some sense — giving the teenager autonomy but then constraining that autonomy through accounting practice that imposes artificial costs on some conduct.
Anyway, this analogy, like all analogies, is imperfect. Some colleges face opportunity costs when they let in an athlete — they may be space-constrained so that adding one more football player will mean one fewer violinist can come, and perhaps violinists pay more for dorm space. But for schools where the dorm room would otherwise be empty (e.g., a school with room that is trying to expand), this might not be a bad one. And as you can see, trying to judge the profitability of the teens conduct based on the fact that he/she takes all of his summer job wages and spends some of them on real purchases (like buying gas for the car he/she also pays rent to his parents to use) and then also on activities within his family’s rules (like the rent the parents charge on the car) mixes together real costs and fake costs and distorts the picture.
Is the teenager profitable to the family? That’s an answerable question but looking at the payments imposed by the family on family members is not going to help you answer that questions. The teens outside revenue, the teen’s outside spending, the family’s true costs of providing all the services they are charging for, the forgone revenue to the family from housing the teen rather than (potentially) renting out the room — these are what you need to answer the question. The transfer payments among family members aren’t helpful, unless they are specifically engineered to mimic the true cost. And that’s a difficult process you don’t just stumble into by putting down the list price of a product if the list price is not the real cost to the family.
This isn’t really about my morning with Judge Ken Starr at all. It is about Baylor and Title IX. But it did start with the fact that I received the great honor to testify before the Committee on Education and the Workforce of the U.S. House of Representatives (you know, Congress!). I spent around two and a quarter hours in this House Committee hearing, testifying two seats away from Judge Ken Starr (yes, the Bill Clinton and Monica Lewinsky guy), who was also testifying to the same Committee. If you’re the kind of person who likes watching 2-hour-plus C-Span archives, go for it: http://www.c-span.org/video/?319264-1%2Funionizing-student-athletes.
I apologize in advance for the bags under my eyes, it’s a combination of genetics and the fact that the hearing started at 7am California time.
I want to write about something Judge Starr said toward the end of the hearing. Congressman John Tierney (D-MA) asked Judge Starr a question starting at 2:15:37 of the hearing, about why Baylor’s financial aid to women was not in alignment with Baylor’s women’s sports participation. Tierney explained that in 2012-13, Baylor spent 56 cents for men’s financial aid and only 44 for women’s, but that the participation rates would indicate the funding should be more like 42 cents to men and 58 to women, in order to comply with the financial aid portions of Title IX (See my full primer on Title IX In Its Own Words if you want to understand more on this). Rep. Tierney asked Judge Starr to explain, and this is my transcription for that portion of the testimony of the Honorable Kenneth Starr, President of the University of Baylor:
“Well, that is a very fluid and dynamic process, so it may change from year to year, but if there is in fact a disparity, and I accept what you’ve said, it has to be addressed, so we have to come forward with explanations as to why there may be a temporary disparity. We recently created two new women’s sports with scholarships in order to address the disparity, so we have for example created equestrian with a number of scholarships for women. We have created acrobatics and tumbling.”
Rep. Tierney then asked:
“Are you saying, you believe this is a temporary issue, you’re saying this isn’t a year to year thing, are you saying that with some knowledge of the facts, or are you just guessing?”
Judge Starr continued:
“Well, I don’t know the specifics of those, that specific disparity, so that is information to me. What I do know is the academic department, the athletic department does have to focus on this with our Title IX compliance officer, we have a Title IX compliance officer, who reviews all these kids of issues….”
The rest of this article writes itself. Because Title IX data is available to the public through the Department of Education’s website, I grabbed Baylor’s Title IX compliance data from 2004-5 through 2012-13. The final year is the year that Rep. Tierney asked Judge Starr about and where Judge Starr implied, but never quite said, was just a temporary issue. See if you can guess whether the disparity, where male athletes receive more funding than is proportional to the number of male athletes, is temporary or pervasive:
I suspect you’re not surprised. I probably would not have bothered to write this if Judge Starr’s guess had been correct. But Judge Starr wasn’t just wrong, he was wildly wrong, and Baylor’s compliance on financial proportionality has gotten worse in every year since 2004. In that first year, women received slightly more than a proportional amount, and likely close enough to count as being “substantially proportionate” as is required by the Department of Education (1.4% isn’t that far from 1%). But every year thereafter, men received a disproportionate amount of funding and that disparity has gotten worse. Yes, this “temporary” disparity has gotten worse every year including the last three years, which according to Baylor’s website, are all under Judge Starr’s tenure as Baylor’s president.
So either Judge Starr doesn’t know much about the facts of his athletic department’s poor compliance with the Title IX’s financial aid requirements or else he does know and just chose to misrepresent the information. Either way, I would think that would make him a bad choice to be testifying about Title IX to Congress.
Let it not be said I am afraid to admit an error in those (hopefully rare) cases when I make one.
During my testimony yesterday I said that the editor-in-chief of the Stanford Daily earns $45,000 per year. That was an error, of magnitude but not of concept. Based on information I’ve been given since my testimony I’ve learned that $6,000ish is the more typical salary earned by the editor in chief.
The reason I thought the pay rate was high was because I looked on glassdoor.com:
I was my belief that these are student-held positions. I have since learned that some are and some are not. The reason I thought they were student positions is because the Stanford Daily website more-or-less says the paper is entirely student-run: (my highlighting below for emphasis):
The Daily’s staff is comprised of more than 200 student writers and editors.Membership is open to any registered Stanford student and no experience is required. Prospective staffers should stop by the Lorry I. Lokey Stanford Daily Building at 456 Panama Mall, between Memorial Church and Old Union, or e-mail the editor in chief at firstname.lastname@example.org.
There are always positions open for writers, graphic artists, photographers, online editors, and advertising staffers. Click here for a list of current openings.
However, as an UPDATE,I received a very nice letter from Miles Bennett-Smith the current COO of the Stanford Daily. Here are the things he told me:
The COO position “is never held by a student prior to graduation. I believe there was once a GSB [the business school at Stanford] student in the 1980s who attempted to hold the position while still in school, but he quickly was forced to resign.
The VP of Sales role (which is now part-time) “is currently held by a student. Prior to being a part-time position, it was never held by a student. It is currently paid on an hourly basis.”
"Members of the ad staff are paid on an hourly basis; a commission system is added with a high minimum threshold to incentivize exceptional performance."
It is all taxed under FICA, no stipends, just hourly wages.
"The sports editors are paid, just as news editors, opinions editors and the rest of the editorial staff (about 50 students)."
The Daily’s total payments to Stanford students “Varies, but +/- 50K is a good estimate right now in our current business model.”
Bennett-Smith added: “… it’s important to note that many of these things can be changed by any given COO. I changed the VP of Sales to part time, because I felt it was better for our operations and business model. It could be changed again by another COO. And we could change to an ‘award’ system to pay writers and editors, which would not be FICA taxed. Just to think about.”
Here’s snippet from the Daily’s financial report from 2011, listing the (student) Editor-in-Chief’s pay:
So I apologize for my error as to the AMOUNT the editor in chief is paid, but I was not not at all wrong to say that many students working for the Stanford daily are paid, and in fact the Sports Editor who covers the football team is paid an hourly wage even if the athletes on that team are not.
The important point remains that a student-run paper, with a fully student editorial staff is compensating its students with hourly wages to do a typical on-campus student activity. I hope that won’t get lost in the fact that I made a quantitative but not qualitative mistake.
(as another aside, one of my roommates in college worked for the Stanford Yearbook and was paid a commission for each advertisement space he sold in the Palo Alto community)
I took the Metro from Capitol Hill to the airport. It turns out they charge you an extra dollar per ticket if you get a paper ticket rather than having an electronic ticket.
I am sure a lot people think this is because it costs more to print those tickets, and it probably does cost more — probably on the order of a penny a piece.
What’s the other 99 cents? Price Discrimination. Charging different prices for the same good/service unrelated to the cost of providing the good/service. (Note, despite the nasty sounding name, price discrimination is generally legal and can be quite pro-competitive. Dan Rascher and I have a Chapter in the Oxford Handbook of Sports Economics (Vol. 2: Economics Through Sports) on price discrimination.)
Think about who buys paper tickets in Washington DC versus having an electronic pass. Tourists. Tourists who often don’t have a car and for whom skipping the Metro probably means a taxi ride. Since taxi rides are more expensive than for a local to use his/her own car, the extra dollar to ride the subway isn’t likey to change tourist behavior. Since tourists have a lower price elasticity, the profit maximizing price for them is higher than for locals, and the $1 paper surcharge allows a nice example of price discrimination.
(For the record, I consider this 2nd degree price discrimination, which is defined as a situation where you give consumers a menu and let them sort themselves out).
Yes, this is how an economist thinks while riding the subway.
Before the Committee on Education and the Workforce
United States House of Representatives
May 8, 2014
Hearing on Big Labor on College Campuses: Examining the Consequences of Unionizing Student Athletes
Chairman Kline, Ranking Member Miller, and Members of the Committee, thank you for allowing me to testify on these issues related to College Football. My name is Andy Schwarz. I’m an economist who specializes in antitrust economics and the economics of college sports. I am a partner with the firm OSKR, but I testify today solely on my own behalf.
Text of My Full Written Testimony to the House Education/Labor Committee
Expanded Written Testimony of Andy Schwarz
Before the Committee on Education and the Workforce
United States House of Representatives
May 8, 2014
Hearing on Big Labor on College Campuses: Examining the Consequences of Unionizing Student Athletes
Chairman Kline, Ranking Member Miller, and Members of the Committee, thank you for allowing me to testify on these issues related to College Football. My name is Andy Schwarz. I’m an economist who specializes in antitrust economics. I have also spent a good part of my career studying and writing about the economics of college sports. I am a small business owner, a Stanford, Johns Hopkins, and UCLA graduate, and a proud Californian. Among other things, I am the author of “Excuses, Not Reasons: 13 Myths About (Not) Paying College Athletes.” I am a partner with the firm OSKR, but I am speaking only for myself, and not for my firm or any of our clients.
I wanted to follow up on a few things. The first is that the quote I gave from Iowa’s Rick Klatt is actually much more informative about the iffy accounting process than I realized at first. Here’s his quote again:
"The AD is writing a check for every scholarship athlete that we extend a scholarship to," he said, adding that the athletic department also pays the university for utilities and the university hospital for medical care. Athletics do not receive any direct financial support from the university’s general fund, either."
I focused on the scholarship part, but take a moment to look at the rest. Klatt explains that one of the expenses on the Iowa Athletics budget is a charge for Utilities. Now I do not know this for a fact, but I suspect it’s not part of the normal budgeting process for other departments on campus to pay for their utilities. Maybe this happens, but I doubt the History department is being charged by the university for its water usage or electricity or heat. Usually there is going to be an operations budget for the university as a whole and it’s recognized as as a general expense.
So why would the Athletic department be singled out for a Utility charge if it’s not charging other departments (and again, I don’t know if Iowa is charging the Admissions Department for their utilities and if they are, this is somewhat moot)? Why? Well, because by adding expenses to the athletic department budget, they reduce sports profit and increase non-sports profit via accounting.
This is not an Iowa-only phenomenon. Kristi Dosh (@SportsBizMiss on twitter) has a great section in her must-read book Saturday Millionaires (which I recommend highly even though I think her Chapter 3 is totally wrong!) where she explains that Ohio State is able to move more than $30 million of sports profit onto the books of the university by turning that money into athletic expenses. Among my favorite of the examples she gives is that Ohio State charges the football team an annual $1 million charge for Library Services. As much as Ohio State football players are known for excessive book usage, I nevertheless doubt their impact on the system is costing $1 million, and so this is just a naked way of moving $1 million of football profit off the athletic department books and onto the university’s ledger.
In 2009-2010, Texas had 91 football players on scholarship, using a total of 81 full-time equivalencies. The University of Texas charged the Longhorn’s program $3,057,790, which equals $37,750 per full-time football scholarship.
In that same year, Texas reported that the value of an in-state full scholarship was $18,948 and that the out-of-state value was $39,413.
To the best of my knowledge, the UT football team had 111 players on its roster that year, of which 8 came from out of state. I don’t yet know how many of those 8 were on scholarship, but if we take the most generous assumption (in Texas’s favor) that all 8 were on full scholarship, then the cost of those scholarships that year should have been:
8 * 39,413 + 73 * 18,948 = $1.7 million, which is a far cry from $3.1 million.
To get to $3.1 million, you need to have 74 of the scholarships be for out-of-state students and 7 be for in-state (i.e., over 90% out-of-state, even though the football team is over 90% in-state).
Why would the school do this? Well, it’s a quick and easy way to move $1.4 million ($3.1 - $1.7 = $1.4) of profit off of the athletic department books and on to the general university ledger. Hey Presto! Poof goes the Profit! Voila! etc.
So I wanted to be clear that the buy/sell gimmick inherent in the payment of full retail prices by the athletic department for “athletic student aid” combined with the return-trip payment of so-called “Direct Institutional Support” is not the only way that schools take sports profit and make them look like expenses in order to shift that profit to other parts of the University. (These new examples aren’t the only ones either — too many examples, not enough time!)
As a second follow-up, I also got some emails from some Iowa folks asking what it is I have against the athletic departments in that state given that two out of three of my pieces on Deadspin have focused on quotations from Iowa athletic department employees. And I wanted to just say that I have driven through Iowa on more than one occasion, that I have friends who say nice things about Iowa City and Ames (and to apologize to one emailer for my having confused the two cities in my haste to reply to one email), and that I would love to go see some sports at both schools when I have the opportunity. But if I catch anyone from an FBS school out sportsplaining to the public why accounting gimmickry is reality, I will try to call it out. Iowa just happens to have said it out loud when I was listening.
The DOJ just announced that eBay has agreed to an injunction against illegal, anti-competitive behavior. I’ll let the DOJ explain in its own words:
What did eBay do? In our lawsuit we alleged that executives at the highest level of eBay and Intuit, including eBay’s former CEO Meg Whitman and Intuit’s founder and executive committee chair Scott Cook, entered into an agreement that prevented the companies from recruiting employees from each other and, for a time, prevented eBay from hiring any Intuit employees.
eBay agreed to a settlement that includes “an immediate halt to the illegal conduct and instituted strong and broad prohibitions against any recurrence.”
The DOJ explained:
eBay’s agreement with Intuit served no purpose but to limit competition between the two firms for employees, distorting the labor market and causing employees to lose opportunities for better jobs and higher pay,” said Bill Baer, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The proposed settlement resolves the department’s antitrust concerns and ensures that eBay will not engage in similar conduct in the future. …
These actions by the Antitrust Division remind us all that the antitrust laws guarantee the benefits of competition to all consumers, including working men and women. The agreements we challenged here not only harmed the overall competitive process but, importantly, harmed specialized and much sought after technology employees who were prevented from getting better jobs and higher salaries. Stifling opportunities for these talented and highly-skilled individuals was bad for them and bad for innovation in high-tech industries.
So for the “No one forced anyone to work at eBay” crowd (or the “no one forced them to play college sports”), you have to recognize that that is not a valid excuse if one side of the market is colluding with competitors to prevent true competition. “Stifling Opportunities” through collusion is illegal. Just ask the Department of Justice.
When Jay Bilas asks, people listen (Literature on college sports economics)
Jay Bilas asked me for a reading list of economic literature on the NCAA as a cartel. This is from a growing list I keep for whenever I get asked that question. if you have any additional recommendations, let me know and I’ll add them:
Arnold, Roger A., “Microeconomics,” 9th Edition. 2008.
“Many universities and colleges have banded together to buy the services of college-bound athletes. In other words, they have entered into a cartel agreement to reduce the monetary competition among themselves for college-bound athletes. The National Collegiate Athletic Association (NCAA) is the cartel or monopsony enforcer…
Barro, Robert J., “The Best Little Monopoly in America,” BusinessWeek, December 9, 2002.
“Finally, we come to the NCAA, which has successfully suppressed financial competition in college sports. The NCAA is impressive partly because its limitations on scholarships and other payments to athletes boost the profitability of college sports programs. But even more impressive is the NCAA’s ability to maintain the moral high ground… So given this great balancing act, the NCAA is the clear choice for best monopoly in America.”
Becker, Gary, “The NCAA as a Powerful Cartel,” The Becker-Posner Blog, April 3, 2011.
“Economists disagree about many things, but they strongly agree that cartels raise prices, lower outputs, and are bad for society. The effect on prices and output of explicit cartels like OPEC are direct and obvious. The harmful effects of cartels that hide behind the smokescreen of good intentions are more difficult to detect, especially when nonprofit institutions are involved. The NCAA is a prime example of such a cartel. It is time that all the NCAA’s restrictions on competition for athletes and sports revenues be declared an unlawful conspiracy in violation of the antitrust laws.”
Blair, Roger D. and Jeffrey L. Harrison, “Monopsony in Law and Economics,” 2010.
“The NCAA behaves like a collusive monopsony in acquiring two crucial inputs: student-athletes and coaches. As a result, it faces the usual problems confronted by all buyer cartels: deciding on payments, imposing hiring quotas, limiting nonprice competition, sharing the resulting profits, coordinating activities, and deterring cheating. The structure of the NCAA is designed to deal with all of these problems. The NCAA’s durability, resilience, and enormous success is proof of its ability to adjust as necessary to cope with the changing needs of its member institutors.” (pp. 190-191)
Brown, Robert W., “Measuring the Cartel Rents in the College Basketball Player Recruitment Market.” Applied Economics, Vol. 26, 1994, pp. 27-34.
“Economists view the National Collegiate Athletic Association (NCAA) as a cartel in college athletics.” (p. 27)
Byers, Walter and Charles Hammer, “Unsportsmanlike Conduct – Exploiting College Athletes,” 1995, p. 376.
“Collegiate amateurism is not a moral issue; it is an economic camouflage for monopoly practice.”
Farmer, Amy and Paul Pecorino. “Is the Coach Paid Too Much?: Coaching Salaries and the NCAA Cartel,” Journal of Economics & Management Strategy, Volume 19, Number 3, Fall 2010, pp. 841–862.
“That the NCAA functions as a cartel is widely accepted and several authors have written about the organization in this context.” (p. 845)
“Our model…captures important elements of the NCAA cartel. One of our key results concerns the effects of the cartel agreement to restrict player salaries on the salary of the coach. In particular, we find that this restriction will raise the coach’s salary, and if the recruiting ability of the coach is sufficiently high, the reduction in player salaries may be more than offset by the increase in the coach’s salary. Although the cartel would not persist in this extreme case, it raises the possibility that a significant portion of the cartel rents are dissipated via higher coaching salaries. Because the teams cannot compete openly via salary offers to the players, they compete indirectly via competition for talented coaches.” (p. 860)
Fizel, John, Elizabeth Gustafson, and Lawrence Hadley, “Sports Economics – Current Research,” 1999
“Koch (1971, 1973, 1978, 1983) offered the earliest, definitive, cartel interpretation. A compelling list of reasons why the NCAA is a cartel, rather than a franchise ‘joint venture,’ is given by Fleisher, Goff, and Tollison (1992) and we do not repeat it here. The idea seems so well-entrenched that economists in the popular press simply take it for granted (Becker, 1985, 1987; McCormick and Meiners, 1987; Barro, 1991) and Noll (1991) does not even pause to discuss it on his way to a full characterization of NCAA cartel behavior. Given all of this, plus the fact that a major argument against the monopsony power of colleges simply holds no water (detailed later), we go with the cartel view” (p.12)
Fizel, John and Rodney Fort, “Economics of College Sports,” 2004
“The majority of analysis of the NCAA discloses monopoly effects in relevant input and output markets affected. Though the results clearly demonstrate a powerful cartel, the organization itself is an anomaly. To date, analysis of the evolution of NCAA’s internal structure that effectively maintains this odd but very effective monopoly is limited” (p. 32).
Fleisher, Arthur A. III, Brian L. Goff & Robert D. Tollison, “The National Collegiate Athletic Association: A Study in Cartel Behavior,” 1992.
Grant, Randy R., John Leadley, and Zenon Zygmont, “The Economics of Intercollegiate Sports,” 2008
“Is there significant evidence of a cartel in college sports? For most economists, the answer is a clear yes” (p. 91).
Grant, Randy R., John C. Leadley, and Zenon X. Zygmont, “Just Win Baby? Determinants of NCAA Football Bowl Subdivision Coaching Compensation,” International Journal of Sport Finance, 2013, 8, pp. 61-67.
“[S]ports economists are particularly aware that marginal revenue product is influenced by the cartel-like market structure of the NCAA. Fleisher, Goff, and Tollison (1992), Zimbalist (1999), and Kahn (2006) provide empirical, historical, and theoretical support for the cartel perspective. One outcome of the NCAA cartel is that it creates rents for its member institutions. Some of these rents come from the monopsonistic labor market created by the cartel. There is no legal price competition for college athletes and the NCAA mandates and enforces price controls in the form of athletics scholarships. Since premier college athletes are not paid their marginal revenue product, there are significant rents left over and coaches may be adept at capturing a porfion of them (Humphreys, 2000).” (p. 67)
Humphreys, Brad R. and Jane E. Ruseski, “Monitoring Cartel Behavior and Stability: Evidence from NCAA Football,” Southern Economic Journal, Volume 75, Number 3, 2001, pp. 1-20.
“Most economists view the National Collegiate Athletic Association (NCAA) as a cartel operating as a monoposonist in the market for athletic recruits.” (p. 1)
Kahn, Lawrence M., “Markets: Cartel Behavior and Amateurism in College Sports,” Journal of Economic Perspectives, Vol. 21, 2007, pp. 209-226.
“Most economists who have studied the NCAA view it as a cartel that attempts to produce rents, both by limiting payments for inputs such as player compensation and by limiting output (for example, Alchian and Allen, 1972; Becker, 1987; Barro, 2002).” (p. 210)
“Computations such as these offer evidence that the NCAA does indeed use its cartel power to pay top athletes less than their market value (Fleisher, Goff, and Tollison, 1992; Zimbalist, 1999).” (p. 212)
Koch, James V., “A Troubled Cartel: The NCAA,” Law and Contemporary Problems, Vol. 38 (Winter/Spring), 1973, pp. 135-147.
“Despite the claims of the National Collegiate Athletic Association (NCAA) that it is a champion of amateur athletics and physical fitness in colleges and universities, the NCAA is in fact a business cartel composed of university-firms which have varying desires to restrict competition and maximize profits in the area of intercollegiate athletics.” (p. 135)
Koch, James V., “Intercollegiate Athletics: An Economic Explanation,” Social Science Quarterly, Vol. 64, No. 2, June 1983, pp. 360-374.
“The Foundation Argument: The NCAA as a Cartel:
… The NCAA is a cartel because it: (a) sets the maximum price that can be paid for intercollegiate athletes; (b) regulates the quantity of athletes that can be purchased in a given time period; (c) regulates the duration and intensity of usage of those athletes; (d) on occasion fixes the price at which sports outputs can be sold; (e) purports to control the property rights to activities such as the televising of intercollegiate football; (f) periodically informs cartel members about transactions, costs, market conditions, and sales techniques (Raiborn, 1982); (g) occasionally pools and distributes portions of the cartel’s profits; and (h) polices the behavior of its members and levies penalties against those members of the cartel who are deemed to be in violation of cartel rules and regulations.” (p. 361)
Lazaroff, Daniel E., “The NCAA in Its Second Century: Defender of Amateurism or Antitrust Recidivist?” Oregon Law Review, Vol. 86, No. 2, 2007, pp. 329-371.
“Commentators have explained that while the ‘original mission’ of the NCAA ‘focused on providing public goods’ by reducing violence and standardizing play, the NCAA ‘quickly turned its attention from standardizing rules to instituting the outlines of a cartel.’” (p. 331)
Monks, James, “Revenue Shares and Monopsonistic Behavior in Intercollegiate Athletics,” University of Richmond, September 2013, pp. 1-21.
“Despite the obvious popularity of college athletics and the huge revenues generated by the sales of tickets, television rights, and merchandise involved in college athletics, the NCAA and the universities involved have managed to operate college athletics as a tightly controlled and highly organized cartel. While sports leagues require a level of cooperation and coordination that is usually anathema to other competitive industries (see Symanski (2010) for a thorough analysis of exempting sports leagues from anti-trust legislation), due to the need to have other teams to play against and the perceived fan interest in team parity, the NCAA has also managed to restrain trade in the name of maintaining amateurism in college athletics.” (p. 1)
Peach, Jim, “College athletics, universities, and the NCAA,” The Social Science Journal 44, 2007, pp. 11-22.
“If there were no NCAA restrictions on financial aid or academic eligibility standards, several things would probably occur. First, alumni would probably donate more to college level athletics programs without the NCAA restrictions. That is, they could donate freely either to the athletes or to the institutions of higher learning with an expectation that the money would be spent to improve their favorite team.
Second, student athletes would probably be paid more than they are paid under the current system. Indeed it is likely that if the NCAA financial restrictions were not in place, colleges and universities would need to compete openly with financial incentives for the services of prospective student athletes.
Third, there is little evidence that the NCAA rules and regulations have promoted competitive balance in college athletics and no a priori reason to think that eliminating the rules would change the competitive balance situation.”
Pindyck, Robert S. and Daniel L. Rubinfeld, “Microeconomics,” Eighth Edition, 2013, pp. 480-481.
“The profitability [of intercollegiate athletics] is the result of monopoly power, obtained via cartelization. The cartel organization is the National Collegiate Athletic Association (NCAA). The NCAA restricts competition in a number of important ways. To reduce bargaining power by student athletes, the NCAA creates and enforces rules regarding eligibility and terms of compensation. To reduce competition by universities, it limits the number of games that can be played each season and the number of teams that can participate in each division.” (p. 481).
Posner, Richard, “Monopsony in College Athletics,” The Becker-Posner Blog, April 3, 2011.
“The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes. Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA’s monopsonistic behavior has thus far not been successfully challenged.”
Rascher, Daniel A. and Andrew D. Schwarz, “Neither Reasonable nor Necessary: ‘Amateurism’ in Big-Time College Sports,” Antitrust, Spring 2000, pp. 51-56.
“Each conference, then, could choose a common wage regime, and within that conference, the necessary balance for the creation of a team sport would be maintained, without the need for an overarching super-cartel to control the entire market for college-age athletes”
Rosner, Scott R. and Kenneth L. Shropshire, “The Business of Sports,” 2004.
(p. 472) “The NCAA is a reasonably effective, though somewhat unstable, cartel because it:
(1) sets that maximum price that can be paid for intercollegiate athletes;
(2) regulates the quantity of athletes that can be purchased in a given time period;
(3) regulates the duration and intensity of usage of those athletes;
(4) occasionally fixes the price at which sports output can be sold;
(5) periodically informs its members about transactions, costs, market conditions, and sales techniques;
(6) occasionally pools and distributes portions of the organization’s profits; and
(7) policies the behavior of its members and assesses penalties upon those deemed to have broken the organization’s rules.”
Sherman, Geoffre Neil, “The NCAA as a Cartel: Ensuring Its Existence. A Revisionist History,” Indiana University, 2008
"The focus of this study is on the historical record and evolution of the intercollegiate athletic cartel… With that framework developed, the focus shifts to specific events that strengthened and weakened the cartel and the legal challenges the NCAA has faced. … Finally, analysis of the relevant case law and judicial opinions concerning the NCAA and its function as a cartel will establish the fundamental support for the NCAA cartel at the highest judicial levels.”
Sperber, Murray, “Onward to Victory – The Crises that Shaped College Sports,” 1998.
“In spite of the postwar popularity of intercollegiate athletics, almost every participating school was losing money, leading one economist to conclude that the main motivation for the July 1946 meeting was ‘to cut costs’ by reducing ‘competition for student-athletes among schools,’ i.e., to establish a set of rules on college sports, notably on recruiting expenses and remuneration to athletes; empower a national organization—the NCAA—to enforce the rules; and, by means of this ‘economic cartel,’ manage to ‘control costs’ and achieve profitability” (p. 172).
“One economic historian saw this subtext as the associations’ real agenda in the ‘Purity Code,’ terming it ‘the NCAA’s strongest effort to date to eliminate the cut throat [money] competition among its members for student-athletes’ and a crucial step toward establishing the NCAA as ‘an economic cartel’” (p. 177).
Tollison, Robert D., “To Be or Not to Be: The NCAA as a Cartel,” pp. 339-348 in “The Oxford Handbook of Sports Economics, Volume 1: The Economics of Sports,” 2012, (ed. Kahane, Leo H. and Stephen Shmanske), here: pp.341-342.
“[A] convincing prima facie case that the NCAA is a cartel can be derived from the explicit behavior of the NCAA. The open collusion among schools extends far beyond rules standardization, scheduling, and the like.” (p. 341)
“The available evidence of price fixing, output controls, compensation of athletes below their MRPs, the absence of regulation of brand-name and capital assets, and so on, taken together, indicate cartel behavior.” (p. 342)
Tollison,Robert D., “Understanding the Antitrust Economics of Sports Leagues,” Antitrust, Spring 2000, pp. 21 – 24.
“Commonly, the NCAA is viewed as a benign administrator of the rules of college athletics. This perspective recognizes many of the problems and perverse outcomes that result from NCAA rules and actions; yet these outcomes are usually attributed to the short-sightedness, ignorance, or greed of certain elements within the organization. In contrast, economists generally view the NCAA as a cartel. They hold this view because the NCAA has historically devised rules to restrict output (the number of games televised) and to restrict competition for inputs (student-athletes). Economists have focused primarily on the input market, where monopsonistic aspects of NCAA behavior are evident. NCAA rules concerning recruiting and financial aid are seen as transferring rewards from players to schools and coaches, and the rules are seen as an expression of an agreement among buyers to restrict competition for inputs. These points are well established in the literature, and indeed, it could be observed that the NCAA has obtained much more durable returns on its cartel behavior than other, more notable cartels such as OPEC.” (p 22)
Yost, Mark “Varsity Green: A Behind the Scenes Look at Culture and Corruption in College,” Stanford University Press, Dec 3, 2009
“The NCAA’s front business is amateurism… They have an academic term to describe the NCAA that implies its predatory behavior: it’s called a cartel. And for the remainder of this chapter, that’s how we’ll refer to the NCAA.” (p. 159-160)
Zimbalist, Andrew, “Unpaid Professionals – Commercialism and Conflict in Big-time College Sports,” 2001.
“Big-time intercollegiate athletics is a unique industry. No other industry in the United States manages not to pay its principal producers a wage or salary. Rather than having many competing firms, big-time college sports is organized as a cartel, like OPEC, through the NCAA” (p. 6).
A Contrary View
McKenzie, Richard B. and E. Thomas Sullivan, “Does the NCAA exploit college athletes? An economics and legal reinterpretation” 32 Antitrust Bull. 373, 1987, pp. 373-399.
“This cartel theory relies on the uncritical acceptance of an unfounded presumption that 850 or more colleges can form through the NCAA an effective, workable cartel that can be maintained even without legal restrictions barring entry into the athletic labor markets by other sports associations that permit competitive wage payments to athletes.” (p. 376)
“In other words, the proponents of the cartel theory fail to explain how any effective, exploitive sports cartel can be maintained in the long run in the absence of forced membership or barriers to exit from the NCAA by member colleges and barriers to entry into the sports market by alternative sports associations.” (p. 385)
“There is nothing in our argument that suggests that the NCAA member colleges should not make payments over and above tuition, room and board. Our thesis is simply that market forces can be expected to determine the extent of payment. (As this article was being completed, the NCAA was preparing to consider at their scheduled January 1986 meeting a proposal to allow Division 1-A colleges to make modest payments of $50 to $100 a month to their athletes to cover laundry and similar expenses.) A requirement that the NCAA be forced to allow payments of any particular amount, or through the abolition of rules against bidding for athletes, is misguided.” (p. 376)
A simple generic example of how Title IX might work in a free market
In our hypothetical, there is a valued Product — call it Product M. There is also a law saying that every dollar you spend to acquire Product M, you must also ensure that your spending on various Product Ws is roughly proportional, though you don’t need to spend it all on a single Product W, can spread across many Ws.
Let’s assume Product W doesn’t ever add profit, even though of course in most real-life uses of this hypothetical, it might. You can think of this as being a situation where current spending on Product W is at or above the equilibrium amount, so that additional spending on Product W is not profitable, if that makes things feel more realistic for you.
Product M (in this hypothetical) is purchased in a very competitive bidding market, where dozens of would-be purchasers calculate the benefit of Product M to their overall revenue (and profit) position, and the highest bidder (in some overall sense) wins. While the highest bidder (Buyer 1) obviously needs to outbid everyone, most importantly, to win the bid, the highest bid needs to outbid the second highest bidder (Buyer 2). (This is a little like the old joke that say you don’t have to actually outrun the bear, you just need to outrun the other guy — if you beat the second highest bidder, you automatically beat the third highest, the fourth, etc.) Thus, we can ignore all the other bids and just treat this like a two-person race. And to win that race, you need to bid just a tiny bit more than the maximum amount of value the other firm places of Product M.
Thus, if we ignore the matching law for a moment, the winning bid is something like (Total Profit of Buyer 2 from acquiring Product M) +$1.
Imagine that Buyer 2 places a maximum value of $500,000 on a specific Product M, figuring that adding Product M to its production function would increase profits by slightly more than $500,000. Thus the winning bid might be $500,001, because with that bid, the profit to Buyer 2 of adding Product M to its firm would be negative ( $-1).
[This is a generic hypothetical. Obviously in some uses, it might not literally be $1 — it might climate, or a nicer set of buildings, or closeness to home, or any non-pecuniary benefit. I don’t think this simplification affects the outcome of the analysis, but feel free to email me if you disagree and I might add nuance to a future model. And when I use Profit, you can think of it as “net benefit” if you’re one of those people who thinks the word profit isn’t applicable to other situations that involve costs & benefits, such as non-profits’ purchase decisions. So the idea is if the profit is negative, that’s including *all* of the non-cash benefits too — negative profit here literally means you are worse off, in total, with the product than without it.]
Ok. But now let’s add the law that says for every dollar spent on Product M, you must also spend a dollar on some number of Product Ws. And let’s look at what that does to Buyer 2’s valuation of Product M.
Previously, Buyer 2 figured out that adding Product M would increase profits by $500,000, and so it was willing to spend up to that amount to acquire Product M, but after that, on balance, Product M would cost more than its benefits. But now, each dollar you spend on Product M brings with it a matching dollar of spending on Product W.
Since Product M adds $500,000 to Buyer 2, now the maximum Buyer 2 will spend on Product M is $250,000. This is because that $250,000 purchase of Product M brings with it a second $250,000 of spending on Product W, and so by spending any more than $250,000, Buyer 2 would incur negative profits. For example, spending $300,000 on Product M would bring with it $300,000 of spending on Product W and the total, $600,000 exceeds the benefit of bringing Product M into the fold, resulting in a loss of $100,000. Thus Buyer 2 won’t bid more than $250,000, and the winning bid for Buyer 1 is now $250,000 plus $1.
So the winning bid drops by 50%. But before Buyer 1 gets too excited, don’t forget that buyer also has to obey the law and spend an equal amount on Product W. So Buyer 1 win outbids Buyer 2 with a $250,000 (and a penny, whatever) bid, but then must set aside $250,000 for Product W. The result is that Buyer 1 spends the same amount as it would have in a market without this law linking Product M and Product W, but now instead of the payment going exclusively to the seller of Product M, half of it goes to the makers of Product W.
The law cannot raise the net value of Product M. And the law cannot raise the total best amount of spending on Product M. But what the law can do is, in essence, tax spending on Product M, and give the tax receipts to Product W. This, in turn, depresses the market rate for Product M. Since the tax ends up being 50% of total spending, the result is that the market rate for Product M is cut in half, but total spending remains the same, with the other half going to Product W.
That’s how an auction/bidding market would adjust to the imposition of a law tying spending on one product with spending on another. This is generic economics, but you can think of it as a model for how Title IX would work in a market where (some) male athletes received competitive offers without a specific maximum cap. I used Product M and Product W, but if you want to, you can imagine Product M was Andrew Wiggins and Product W was spending on women’s sports at the various schools that would have been bidding for Wiggins in an open market when he was coming out of high school. The way I describe the law in the example is not exactly how Title IX works — Title IX has not resulted in dollar-for-dollar matches between financial aid spending on men and on women (which is more like 60/40), and it certainly has not resulted in equal spending on men’s and women’s sports overall (which is far closer to 80/20 than 50/50, at least in FBS). But we can imagine it is a true dollar-for-dollar match and the example above then tells you why it doesn’t break the bank.
James Brown and the Rhetoric of Giving vs. Opening Up Doors
James Brown wrote and sang, “I don’t want nobody to give me nothin’, open up the door, I’ll get it myself.”
I’m reminded of those lines whenever I read discussions of the economics of college athletics. People in power are always using words like “give” AND “provide” — as if the debate is about delivering sufficient benefits for subsistence, rather than opening up a framework for athletes to earn what they are worth in an open market.
Some very recent examples, though not the only ones:
"… the common sense middle ground in all these things, making students are fed, making sure it if there’s an emergency at home and mom gets very sick or dad passes away, they have the ability to get home and attend the funeral. some students show up with one little bag of clothes, all they have in the world. there’s some things you can do there.”
"I’m curious what’s really driving it. I’ve seen everything, and everything that’s been asked for, my understanding is it’s been provided. I think Northwestern does a phenomenal job providing for their kids, …"
"…scholarship athletes are ‘provided the maximum meal plan that is allowable under NCAA rules.’"
(I’m sure there are better examples, I might even add them later.)
The very phrasing of the now familiar question “should college athletes be paid?” buys into the paternalism inherent in the current system. The question is not should they be paid, but would they be paid, if the doors were not shut by collective agreement?
We don’t ask whether administrators should be paid; instead we let the give-and-take of salary negotiations figure out what the right pay is. If a willing school wants to pay a willing athletic director half a million dollars, without first clearing it with its competitor schools, we don’t require society to grant permission. In the 1990s, there was a collusive effort to cap the amount that some college basketball coaches could earn, and the courts found it to be illegal because collusion to prevent pay “ultimately robs the suppliers of the normal fruits of their enterprises.”
In essence, the court said — open up the door, let the free market in, and let the coaches do it themselves. And did they!
Management tends to be pro-market, except in the rare cases where in open-market negotiations, labor might have the upper hand. Then the rhetoric invariably shifts to words that imply more of a noblesse oblige attitude. “This is good enough.” “Be happy with what we give you.” “I doubt you’re really all that hungry, and even if you are hungry, it’s good for you.” Instead of market competition, big-time college sports have formed what is essentially an owners union. The owners union decides payment collectively knowing, of course, that competition among themselves would drive the market rate upwards.
At the same time, the owners union (and many members of the sports media) often argue “Don’t we give these kids enough already? What else do they want?”
I can’t speak for “these kids” (who are actually all adults) but I can tell you what I think they want, just the same thing James Brown advocated: open up the door to let them get it themselves, whether it’s at a collective bargaining table or in individual negotiations. Competition policy is about is self-empowerment. Currently, 351 independent colleges and universities collectively deny thousands of young men the opportunity to realize their earning potential in a potentially lucrative market. The issue shouldn’t be whether the food allotment they are given cuts off at 7pm or 11pm. It should be whether the door to negotiate the terms of the player-team agreement is open or closed and why that’s so.
The closed door keeps some athletes so poor they qualify for Pell Grants; for some of those athletes, the market price would lift them up, so they would no longer need government assistance. Wouldn’t that normally be an American success story, how a young man turned his unique talents into a well-paying job instead of burdening the taxpayers by staying poor and qualifying for government grants?
I want the young men with these sought-after talents to have the opportunity to realize their earning potential in a lucrative American market that already exists, not to have to go to Europe to do it, not to have the benefit limited to 60 or so per year of the very best. I want the door opened, and then to let them do it themselves.
Instead, what we end up with is athletes, who would earn money but-for the collusive rules prohibiting it, taking federal welfare in the form of Pell Grants.
The doors are closed through collusion. This is not a system any American would design, except those doing the door-closing and letting the rest of us, who pay for the Pell Grants, etc., foot the bill.
Though James Brown was talking about a different era and a different problem, he said it well:
Some of us try As hard as we can We don’t want no sympathy We just wanna be a man
I don’t want nobody To give me nothing Open up the door I’ll get it myself Do you hear me?
The Conspiracy is not the Fault of the Competitive Fringe
This is a post about the current trend to blame the lack of economic competition for college athletes on the NBA or the NFL. But I’m not going to discuss sports specifically. You will have to draw your own parallels. So yes, this is another one of my parables.
In this parable, there are 351 gasoline car manufacturers, plus Tesla. Imagine that every car manufacturer except Tesla got together to fix prices and to ensure that gas mileage was no more than 20 mpg. They did this is the name of competitive equity, saying if they competed on better gas mileage, the less good manufacturers might drop out of the industry. They did this in the name of charity, saying the profits from their high-priced cars were used to fund a series of otherwise commercially unviable thrift stores that employed low-income people who might otherwise not have an opportunity to work. They blamed Federal law for requiring them to pay a portion of their sales revenue in taxes, which made running a Car Department more expensive than if they did not have these Federal obligations to set aside some of their money for others.
In this parable, Tesla only has one small factory and it is making every car it possible can. It doesn’t want to make more cars. It’s offering really nice, expensive-but-worth it, cars. They get better gas mileage and they are a totally better deal for the money. But their factory is really small; it basically can only make 60 or so cars per year. Some of the cars are sold to young men who haven;t even finished college. Some are sold to recent college graduates. A few go to guys from Europe willing to ship the car over to them.
After a long period of this system, people begin to ask why the other 351 car manufacturers didn’t have to compete with each other. Why was every car offered at an agreed-upon price? What was every car 20 mpg? They arguments put the gasoline manufacturers on the defensive, but then they focused grouped the issue and stumbled on a great idea. Blame Tesla!!! The problem is that Telsa only makes 60 cars a year, they said. It’s not that we’re price-fixing the other tens of thousands of cars, or that we’re all agreeing on the features of the car we make. No! The problem is that Tesla is not aggressively growing the number of cars it makes and stealing business from us. The problem is that Tesla is perfectly content to make profits in the shadow of our price-fixing conspiracy, and that if you are made at us for fixing prices or limiting options, your anger is misguided. It’s Tesla’s fault!!!
If Tesla just sold to the best of our customers, we’d have fewer high-quality customers and so it would seem less unfair. If Tesla actually opened a second factory and made a slightly less high-quality Tesla and sold to more of our customers, it would be even better! Yeah, it’s Tesla’s fault for not being a stronger fringe competitor, not our fault for cartelizing 99% of all car sales.
Except, no, it’s not Telsa’s fault. Our economic system lets individual firms make individual choices. And it also lets firms, acting with their unions, make decisions that might limit their competitive efforts in other markets. But our economic system does not excuse collusion among many firms just because one fringe competitor choose not to take advantage of the market opportunities left open to them by collusion.
With its limited capacity, Tesla can only sell 60 cars. If it sells one to a current gasoline customer, someone else won’t get one. If kid with only one-year of college buys one, some kid with 2-years of college won’t. For every person who gets a better deal, some else is getting forced back into the clutches of the colluding gasoline car manufacturers.
Yes, if Telsa opened a second factory, it might put pressure on some of the higher-end car manufacturers to offer better gas mileage or better prices. But it’s not Tesla’s jobs to solve the problems created by the gasoline car monopoly. It’s not Tesla’s fault the collusion exists, and it’s not Tesla’s fault that the people buying gasoline cars are forced into the grips of a monopolist. Put the blame for abuse of monopoly on the creation of that monopoly power, through collusion. Looking anywhere else, and you’re falling for the cartel’s latest focus-group-tested spin.
An analysis of what the NCAA labels “generated revenue,” such as money schools collect from TV rights, ticket sales, sponsorships and donations, shows it is the major driver of revenue growth in college sports. Among the 55 public schools in the major conferences, generated revenue amounted to $4.5 billion in 2012-13, an increase of $734 million, or 19%, in just four years.
But another category grew even faster — the total pay for coaches in all sports rose 26% in the major conferences over the same period. And while more and more basketball coaches are landing huge deals, they still trail their football counterparts, 50 of whom made at least $2 million for the 2013 season, according to a database released by USA TODAY Sports in November.
In a grim day of reckoning at the state’s largest newspaper, the owners of The Star-Ledger today said they were eliminating the jobs of approximately 167 people, including 25 percent of the newsroom.
The sweeping job loss was part of a plan announced last week in an effort to greatly reduce costs and combine resources by consolidating the operations of The Star-Ledger, along with its sister publications in New Jersey and its online partner, NJ.com, which also announced cutbacks today.
The Star-Ledger, which has won three Pulitzer Prizes and several national awards, currently has 750 employees, of which approximately 500 are non unionized. None of the cuts announced today will affect unionized personnel, who are covered under existing labor contracts.
The cuts will mean the loss of 40 of the 156 reporters, editors, photographers and support staff in The Star-Ledger newsroom, which had already seen a parade of people leaving in recent weeks over concerns about the paper’s future and the continuing fiscal pressures affecting newspapers across the country. One of those leaving voluntarily had been slated to be cut.
Under Title IX, the total amount of financial aid available to male and female athletes must be “substantially proportionate” to their overall participation rates. Paychecks would presumably be held to the same standard. If, for instance, a court ordered a university to give a share of its television revenue to male players, an equitable percentage would have to flow to female athletes.
Similarly, should the courts decide that elite athletes are entitled to stipends in addition to scholarships, colleges would have to distribute money proportionally between the sexes.
There would be no cause for bankruptcy in either case. Like any business confronting a new expense, colleges could reduce overhead or raise prices. Right now, the highest-paid public employee in many states is the football coach. That may not be possible once players get a cut.
Title IX might not come into play at all if the N.C.A.A. allowed athletes to negotiate licensing agreements independently. Money would flow to athletes directly, and the colleges would not be involved. Although the vast majority of athletes would earn nothing, a few stars would get sizable paychecks.
None of this is to say that the end of amateurism, if it ever arrives, will be seamless. Colleges will have to make some tough choices. But they should be putting their energy into preparing for that possibility, instead of dreaming up reasons to stop it.
In my own writing, I’ve discussed this a bunch. Here are three spots:
Hypothetical: you run a major college sports conference. You believe that paying athletes more than a GIA (or alternatively, full COA) will lower interest in your sport and thus reduce revenues. The current rules mandating a maximum GIA level go away, the sky is the limit.
Discuss: what level of compensation does your conference choose to offer? If it is above the point where demand for the product decreases, explain the underlying economic model that predicts demand-reducing actions as an equilibrium.
This is what non-collusive competition for students looks like
In real life, law schools compete for the best students by offering them, gasp, money in addition to scholarships to come and help the school up its game:
Question: I was accepted to University of Chicago Law with no scholarship and UT-Austin law with 60,000 plus in-state tuition. I plan on practicing in Texas (Houston/Austin/Dallas). Would you choose UChicago over UT?
No one worried about whether UT first agreed with Chicago over how much to give this student. No one worried about all of the complexities of figuring out what this student was worth. Chicago decided to offer him nothing more than the chance to pay for and earn a prestigious Chicago degree. Texas decided that to compete with that, they needed to offer more. Problem solved, the market way.
Taxation of College Sports is NOT at issue in the debate over market-based competition
The paper I wanted to write, but found it has already been written
Spoiler: If you’re going to write an article claiming that paying athletes is going to result in colleges or the NCAA paying taxes on their sports earnings, you’re basically wrong. Even if college sports were totally taxable, there’s little chance of anyone actually owing any tax.
If you follow me on twitter, you may have seen me arguing one of my pet peeves, which is that I do not buy the argument that the tax-status of the NCAA or of major college football programs is an impediment to market-based compensation for college athletes. In essence that argument goes something like this:
1) Section 501(c)(3) of the tax code is explicitly reserved for promotion of “amateur” sports.
2) Absent amateurism, the NCAA and its member schools’ sports programs (or more narrowly, their college football and/or men’s basketball programs) would become taxable.
3) Thus donations, ticket sales, broadcast revenue, etc., would all be taxed,
4) Bringing college sports to, at the least, a much lower level of profitability or, in the extreme, vaporizing college sports to a virtual nothing.
I’m exaggerating a bit (though not that much), but as one example of this argument [absent the Herpes joke!], consider this excerpt from a blog post by Kristi Dosh, in which she explains her version of this argument (which also appears in her book “Saturday Millionaires”):
The real cost, however, is in the athletic department losing its tax exemption under Internal Revenue Code Section 501(c)(3). Currently, athletic departments (which are generally a separate legal entity from the university), athletic foundations/booster clubs and bowl games enjoy tax exempt status because they “promote amateur athletics,” an exempt purpose under the Code. If college athletes were compensated and found to be employees, revocation of this tax-exempt status would surely follow.
This would also be the case if college athletes, instead of being compensated by the athletic department, were allowed to profit from endorsements. It would only take a finding by the Internal Revenue Service that these athletes were no longer amateurs (ad I’m sure they’d hate to add another revenue source). And if college athletes are no longer amateurs it’s not just athletic departments who lose their 501(c)(3) status, it’s bowl games as well.
In addition to the taxes each athletic department would have to pay on any income, they’d likely lose large amounts of revenue as a result of donors no longer being able to make tax-deductible contributions. How would that impact athletic departments, which rely heavily on donor contributions to survive? A CFO at one FBS school told me a “very conservative estimate” would be athletic departments losing 50% of their current donations. I polled ten athletic department executives in total and the range was 25-50 percent.
Kristi and I have argued over this issue before. In a moment of agitation, I’ve told her consider this to be “concern trolling” where the actual issue isn’t a big deal but in the guise of making sure people are aware of the (overstated) ramifications, the author makes it seem like change is impossible. Kristi basically told me that if I was so smart, I should go write a paper on it. [Though she said it much more nicely than that!]
Professor Colombo starts out with an important warning for those who might dive in without actually understanding tax law:
Unfortunately, most of the folks who opined on the subject [of the NCAA’s tax exemption] revealed virtually no knowledge of the actual law surrounding tax exemption for the NCAA or, more broadly, exemption for universities engaged in Division I football and basketball
Despite that warning, I’ve decided to turn this blog post into a sort of annotated book report, to summarize Prof. Colombo’s analysis, and offer it up to any would-be analyst of the economics of college sports. I know almost as little as the next economist about the intricacies of the tax code with respect to non-profits and tax exemption, but (rather than stay at a Holiday Inn Express), I have read Professor Colombo’s paper and I am prepared to help the world gain its wisdom.
Here’s what Professor Colombo’s excellent paper explains (with my own gloss provided in italics):
There is an important distinction between an organization as a whole losing its tax-exempt status under 501(c)(3) and that same organization remaining exempt on the whole, but having certain lines of business subject to the Unrelated Business Income Tax (known as UBIT).
I mention this first because I think it gets confused in the public eye. In essence, there are two questions, first whether the organization as a whole remains an untaxed non-profit and then whether some of its activities can be taxed, even if the organization is a non-profit.
This matters, I think, for the question of charitable contributions by alumni to the sports program of their favorite team. For example, if the school remains a non-profit, then donations will remain tax-deductible, EVEN IF the football program’s TV revenue were determined to be Unrelated Business Income subject to the UBIT.
The NCAA as an organization is treated differently than its member schools. The NCAA itself is covered by the special amateurism clause of 501(c)(3) but colleges and universities do not need to avail themselves of that section of the law, because they qualify as charitable educational institutions. Indeed, the special NCAA clause was only added in 1976, whereas the exemption for educational institutions has been around much longer.
Right off the bat, it’s important to recognize that what this means is that the tax exempt status of every college and university sponsoring FBS football is utterly unrelated to whether it pays its athletes in the form of the current Grant-in-Aid, or moves to a more market-oriented form of compensation. Colleges and Universities draw their tax-exempt status from their role as fostering education, which applies to the entire University, and even the most football-revenue-focused school out there (LSU) only derived 14% of its revenue from football. That’s an astoundingly large number, but even still, 86% of its revenue is coming from other sources (and most of those are truly educational). So it might be the case (though it isn’t) that football revenue is taxable, but the tax-exempt status of the University as a whole is not seriously in doubt.
Colombo also adds that even though he disagrees with the finding, the Tenth Circuit has already ruled that for the purpose of UBIT applying to March Madness advertising revenue, the NCAA tournament is UBIT-exempt because it is not “regularly carried on”:
Though I would argue that the opinion is just flat-out wrong in its analysis, the Tenth Circuit essentially held in 1990 that the NCAA men’s basketball tournament was not “regularly carried on” for purposes of taxing the advertising revenue that resulted from the sales of advertising in the NCAA tournament commemorative programs.102 The court seemed to compare the NCAA’s sale of advertising for its tournament to the sales of advertising by sports magazines such as Sports Illustrated, which of course occur year-round, rather than seasonally.103
In other words, in the same way that baseball is not “commerce” (despite being a gignatic business) with respect to the antitrust laws (and thus immune from those laws, at least in some aspects), March Madness is not “regularly carried out” and thus not subject to the UBIT law. Sometimes the law is stranger than fiction!
For the schools, the question of whether various sources of football and basketball revenue are unrelated business income hinge in part on whether the profits are used to further their educational mission. Colombo explains in excellent detail how it is clear that many IRS precedents, there is an argument that because college football and basketball is distinct from the pure college element of college, it ought to be taxed via the UBIT now, independent of whether athlete pay is set by collusive fiat or an open market.
But then Colombo explains that the IRS has not treated college sports this way at all, and in fact these questions have been tested under the tax code repeatedly, and in every case, the answer has been that these are not subject to the UBIT tax. Moreover, because the question for a college or university is whether it supports education rather than whether it supports amateur sports, that answer did not hinge on the amateur status of the athletes.
As Professor Colombo writes:
Perhaps the biggest impediment to applying the UBIT to Division I football and basketball revenues at this time, however, is the legal precedent involved. These precedents go back as far as the UBIT itself: the House Ways and Means Committee report on the UBIT legislation straightforwardly stated that a university “would not be taxable on income derived from a basketball tournament sponsored by it, even where the teams were composed of students of other schools”;118 later, the same report stated “income of an educational organization from charges for admissions to football games would not be deemed to be income from an unrelated business, since its athletic activities are substantially related to its educational program.” Probably in part because of this legislative history, the IRS has ruled several times in many different contexts that college athletics are an “integral part” of the educational program of a university (and therefore clearly “substantially related” to a university’s educational program). Although the IRS briefly considered attempting to tax the revenues from the sale of broadcast rights to college football bowl games in 1977, the Service quickly reversed itself, and ultimately issued two formal rulings that such revenues were not subject to the UBIT.
Since then, the IRS has basically given up on any attempts to tax revenues associated with college athletic programs, with the exception of revenues that the IRS considered nothing more than payments for advertising, such as “sponsorship” payments that are now regulated by statute. … In 1991, the IRS issued two Technical Advice Memoranda that held that “sponsorship fees” paid by a business to a college, university or independent bowl association were taxable because they represented essentially nothing more than payments for advertising. … Congress responded to this initiative by amending the UBIT rules to eliminate “corporate sponsorship payments” from UBIT.
So, what matters from the IRS perspective is not whether the athletes’ compensation is capped at a GIA or allowed to be set via the market. Rather, the IRS focuses on whether the activity is substantially related to its education program. One could argue that all this means is that the athletes must remain students, or that the compensation must include a scholarship, but it seems hard to see how the question of whether the money NBC pays to Notre Dame for the right to broadcast their home football games is or is not an integral part of the educational program of the University of Notre Dame would change if those Notre Dame players each got $25,000 upon graduation for every year they were on the school roster, as just one example.
Maybe this is obvious, but what this means is that these questions aren’t hypothetical. We actually know what the answer is because the cases have been litigated and in each case the answer was that as long as the college sports revenue is well-integrated into the educational mission of the school, it’s not subject to the UBIT. Those decisions were not about amateurism, and so a change in the definition of amateurism, or even a complete abandonment of amateurism would not seem to matter, as long as the “College” part of College football or basketball remained in place.
Colombo also addresses the NCAA’s specific situation, which is distinct from that of its member schools. From my reading of Colombo, he would acknowledge they may be more vulnerable to a change in the law, since they are not an educational institution, but rather they do get their tax-exempt status under the portion of 501(c)(3) focused on fostering “national or international amateur sports competition.” Colombo doesn’t specifically ask whether paying athletes would change this status, but I would suggest that the bulk of the NCAA’s activity, even if FBS football and D1 basketball were to adopt a free-market compensation system would remain the promotion of amateur sports. So they might stay tax exempt, but clearly a case could be made that absent a change in the law, the NCAA would have its TV broadcast profits subject to the UBIT.
This is the final point, one which I have been making for a while on my own, that Professor Colombo explains so well.
Even if schools or the NCAA itself were found to owe UBIT on the college football or college basketball earnings, the odds of any tax actually being owed are slim to none. Here’s Professor Colombo’s view:
Moreover, even if the UBIT applies to big-time college athletics, it may well be a paper tiger: it is likely that when rigorous tax accounting methods are applied to the revenues and expenses involved, coupled with some perfectly-legal creative overhead allocations that data indicate almost certainly are used by charities to offset any income otherwise taxable under the UBIT, no profit will be left that would actually be subject to taxation.
Colombo explains that this is true both for the NCAA and for schools themselves. He writes:
With respect to the NCAA, it is unclear whether application of the UBIT would actually result in any tax impact. As noted above, the IRS has the ability under the UBIT to “fragment” revenues for UBIT purposes. Thus the IRS might attempt to apply the UBIT to, say, only the NCAA Men’s Basketball Tournament revenues or football licensing revenues. But the NCAA does not keep these revenues; instead, it distributes them to member schools after deducting its expenses. Under standard tax doctrine, the distribution of these revenues to member schools likely would be a deductible business expense (the “fee” that the NCAA must pay to member schools in exchange for the right to market their athletic “product” during the year, akin to a publisher agreeing to pay an author current royalties124). The result is that there likely would be little or no “profit” subject to tax under the UBIT even if it applied. …
One could safely assume that the vast bulk of this revenue, therefore, is generated by Division I football and basketball, probably mostly from the CBS Television contract for the Division I men’s basketball tournament. If the UBIT applied to this revenue, however, the NCAA would get to deduct all its regular business expenses directly attributable to the income and an appropriate portion of its overhead in order to determine its taxable income. … Thus the likelihood that the NCAA would actually pay any tax under the UBIT is remote; minimal tax planning could easily insure that the NCAA has no net business revenues to tax.
Colombo then focuses on the many account tricks that would be available to colleges and universities if somehow their revenues became subject to UBIT (again, despite the fact that these issues have been settled by the IRS already for reasons unrelated to the amateur status of the athletes):
With respect to individual universities operating big-time athletic programs, the picture is similar. Although some schools report net positive revenues from football or basketball programs, these revenues are rarely subject to the kind of rigorous cost accounting used in the business world. …
A recent story in the Chronicle of Philanthropy surveyed 91 large charities filing UBIT returns; the authors noted that 51% of the charities reported zero or negative taxable income and were able to reduce $419.1 million of gross income into a collective $3 million deficit after allocating deductions and overhead.133 The NCAA and universities conducting big-time college athletics hardly are less sophisticated, and have even greater opportunities for aggressive cost allocation given the large capital investments and overhead costs of running their athletic programs. Accordingly, it is highly likely that if the IRS applied the UBIT to individual football or basketball program revenues (either at the NCAA or university levels), it would find no net profit from these programs to tax after factoring in depreciation on athletic facilities and a reasonable apportionment of overhead. As a result, I doubt that the general counsel of, say, the University of Michigan would cower much in the face of a threat by the IRS to apply the UBIT to Michigan’s football program.
So, the bad news is that the paper I wanted to write has already been written. But the good news is that if you care very deeply about the NCAA or your favorite college or university maintaining its tax exempt status, to the point that all other potential injustice pales in comparison with your dear old alma mater paying taxes on earnings from sports, you can rest easier tonight.
Even if the antitrust laws are more vigorously enforced and schools and the NCAA are no longer able to collude on player compensation, good old Uncle Sam still has plenty of love for the colleges and universities that play major college sports, and the odds of schools, or even the NCAA, paying taxes are, and will remain, basically nil, even if schools forgo collusion and compete with respect to athlete compensation.
So, Hooray for Tax-free Football!
As an addendum, I should add Kristi Dosh is correct that in some cases, including Kristi’s alma mater of Florida,the athletic department has been constituted as a stand-alone non-profit. I disagree with her that that is the norm, but it does happen. To the extent that practice puts a school at a disadvantage, tax-wise, to other schools, I suspect we’d see that practice come to an end in a heartbeat.
See Colombo pp. 4-9, where he contrast the two sets of requirements and explains (on p.7) that “Even if an organization is tax-exempt under Code Section 501(c), it may be required to pay the corporate income tax on net revenues from “unrelated” businesses.”
 See Colombo, pp. 9-10: “Prior to 1976, the question whether the NCAA as an entity was engaged in a charitable purpose (as opposed to universities conducting athletic programs) might have carried some doubt.…But in 1976, Congress made clear that promoting amateur athletics is, in fact, a prima-facie charitable purpose by passing an amendment to 501(c)(3) that specifically declares fostering “national or international amateur sports competition” as a charitable purpose.”
Violation: Three current student-athletes received food in excess of NCAA regulation at a graduation banquet. The three had graduated from the school but returned for an additional season of competition. The players were provided pasta in excess of the permissible amount allowed. Resolution: The three were required to donate $3.83 each (the cost of the pasta serving) to a charity of their choice in order to be reinstated. The department provided rules education to applicable athletics department staff members.
In this post Gary Barta (Iowa) and Jamie Pollard (Iowa State) explain how
(a) they know perfectly well how to price differently when the market requires it.
(b) they recognize that competition allows employees to earn their full market value and that if competition were ended by NCAA-wide agreement, collusively set pay would be lower.
(c) That Iowa transfers $10 million dollars from Athletics to the University in the form of GIAs (which almost always contain a healthy dose of profit in addition to covering any costs). (See this piece for one such example)
(d) how the market rate for non-revenue volleyball coaches has been inflated by the cartel rents (i.e., money they don’t pay athletes) sloshing around college programs. This is a form of Gold-plating and it is a classic way to take profits and turn them into accounting losses. FBS schools are awash in gold-plating of their non-revenue sports!
(e) That coaches and facilities spending is justified because it used to recruit talent they cannot recruit with direct market payments.
(f) that the indirect benefits of college sports include massive economic benefits to communities and because coaches, rather than athletes, are competing in a market economy, they capture some of that benefit.
I wonder why they don’t tell the reporter that coaches’ pay is too complex to differ by sport, to differ between Division I and Division III, to differ among Division III athletes, to explain that the University can’t afford to pay market rates for coaches and so they have to collude, that after they pay their male coaches there is no money left for women’s scholarships under Title IX, etc. No, they just deal with the market realities and fit within the rules and adjust. Turns out $456,992 can buy a lot of market savvy when it needs to be turned on.
First, I just wanted to point out how much of a straw-man some of the Barta logic is. His first question is whether Division III would have to play be the same rules as Division I. (“Do you pay the Division III football player as an employee?”)
But as I hope would be clear, Iowa’s A.D. doesn’t need to decide D-III questions to act on his own regarding his own students. In a world where Iowa faced a choice as to whether and how much to pay its recruited athletes to choose Iowa over, say, Missouri, the choices that Division III schools make wouldn’t matter and certainly don’t need to be decided before Iowa can make its own best business judgment.
Since taking the job in 2010, Arizona’s athletic director Greg Byrne says he actively has to push students to not only get to the game, but also stay there once they arrive. After he saw defections at halftime, the message on the back of shirts given to the students called the Zona Zoo this year was as blatant as he could make it: “Zona Zoo STAYS the entire game.”
He moved the band closer to the student section, brought in a group of people called the Zona Zoo Crew to keep people at the game and then actually decided to give away cash prizes, which students could only claim their prize after the game ended.
For its first two home games, the school gave away a total of $5,000 that was to be equally split among 10 student fans. Even that wasn’t a complete success, as three of the $500 prizes went unclaimed.
Two former top executives at Japan’s Diamond Electric Mfg. Co. Ltd. have agreed to plead guilty and serve more than a year in prison for their roles in a global plot to hike the price of ignition coils, the U.S. Department of Justice said Friday.
The idea that you can always choose not to deal with a price-fixer, and thus it’s ok to price fix just isn’t consistent with the law. No one put a gun to anyone’s head and made them buy ignition coils from Diamond Electric Mfg. Co. Ltd., but now two people are going to jail for price fixing.
Slightly More Complex Title IX analysis: Is football associated with more or less spending on women's athletics
Previously, I put out a simple chart showing that in 2011-12, D1 with football averaged 75 more women playing sports, showed $500,000 more in the list price of scholarships for women, and listed $2.7mm more in expenses for women’s sports, in total, than schools without football.
That chart looked like this:
I also took a look at the same figures on a per-participant basis, which showed the following:
Being a curious person, I wondered whether FCS schools, the portion of Division 1 with football but outside of the top (FBS) tier, acted more like their football peers in FBS, or like their non-football peers in Division 1. I kind of suspected that the answer was that FCS looks more like the non-football schools, biut here is the data-driven answer, where I’ve added four sub-categories capture the distinctions within FBS and between FBS and FCS:
and for the sake of completeness, here is the same analysis on a per-participant basis:
With this breakdown, it’s pretty clear to see that FCS schools tend to fall mid-way between FBS and no-football schools in terms of participants, but fund those women’s scholarships far less generously than FBS or even schools without football. The result thus stands out when you look on a per-participant basis. Within FBS, as you’d expect, the schools in the (then) six power conferences have substantially more female athletes, provide a higher nominal value of scholarships, and spend far more in total on women’s sports.
Questions for the reader:
Does having a football team *cause* a school to have more slots open for women to participate in intercollegiate sports?
Does having a football team have any bearing on the amount of scholarship aid given to female athletes?
Which drives overall funding of women’s sports, football or revenue? How would you extend this analysis to test this proposition empirically?
(Thanks to @LehighFootballNation for suggesting that the spending per participant would also be an interesting way to think about these data.)
Using 2012 EADA data, I divided D1 into schools with and without football. This is what I found:
Without making any statements about causation, this shows that schools with football average 75 more women playing sports, show $500,000 more in the list price of scholarships for women, and list $2.7mm more in expenses for women’s sports, in total, than schools without football.
UPDATE: I got a good comment from @LehighFootballNation who suggested that the spending per participant would also be an interesting fact, and so here it is — you’ll see that the amount the schools list for scholarships (which isn’t the same as what it actually costs) is higher per participant for schools without football, but total expenses are lower.
I get asked about Title IX a lot, and I also see people making claims that I think are false. I also wrote about Title IX in my recent Slate piece, where I made clear that I’m not a lawyer or an expert on Title IX and that much of what I write about is not the law itself, but the empirical data as to how the world where Title IX holds sway actually works.
In this post, I thought it would be helpful to list the key legal points from the Department of Education (DoE) re: Title IX that I use as a framework when thinking about the economics of Title IX. These aren’t my opinions — these are more-or-less verbatim statements by the DoE or a Federal Court. I’ve sourced each one to the DoE policy letter or court case that is the basis for my assertions of how the law has been interpreted in the past.
The Title IX regulation provides that if an institution sponsors an athletic program it must provide equal athletic opportunities for members of both sexes. Among other factors, the regulation requires that an institution must effectively accommodate the athletic interests and abilities of students of both sexes to the extent necessary to provide equal athletic opportunity.
The DOE has made a three-prong test to determine whether a school is compliant. The first prong is the simplest — is the male/female (M/F) ratio of the athletic department “substantially proportionate” to the M/F ratio of the undergraduate population? (as show below, the DoE interprets “substantially proportionate” to be within one percentage point of a comparison ratio).
Alternatively, two other prongs exist to show compliance. One is that all of the demand for sports of the under-represented gender have been met. This usually requires a survey to show that basically there is no member of the under-represented gender (typically a woman) on campus who wants to play intercollegiate sports but is not able to find a space. And the other is a “progress” standard, which basically seems to amount to a requirement that the number of women participating has been increasing (at least increasing monotonically, i.e., either flat or up) each year.
The 1979 Policy Interpretation provides that as part of this determination OCR will apply the following three-part test to assess whether an institution is providing nondiscriminatory participation opportunities for individuals of both sexes:
Whether intercollegiate level participation opportunities for male and female students are provided in numbers substantially proportionate to their respective enrollments; or
Where the members of one sex have been and are underrepresented among intercollegiate athletes, whether the institution can show a history and continuing practice of program expansion which is demonstrably responsive to the developing interests and abilities of the members of that sex; or
Where the members of one sex are underrepresented among intercollegiate athletes, and the institution cannot show a history and continuing practice of program expansion, as described above, whether it can be demonstrated that the interests and abilities of the members of that sex have been fully and effectively accommodated by the present program.
44 Fed. Reg. at 71418.
Thus, the three-part test furnishes an institution with three individual avenues to choose from when determining how it will provide individuals of each sex with nondiscriminatory opportunities to participate in intercollegiate athletics. If an institution has met any part of the three-part test, OCR will determine that the institution is meeting this requirement.
To relate this to my own summary above, (1) is the idea that participation must be proportional to the undergraduate population. DoE expanded on this, saying:
Part One: Are Participation Opportunities Substantially Proportionate to Enrollment?
Under part one of the three-part test (part one), where an institution provides intercollegiate level athletic participation opportunities for male and female students in numbers substantially proportionate to their respective full-time undergraduate enrollments, OCR will find that the institution is providing nondiscriminatory participation opportunities for individuals of both sexes.
… institutions need to comply only with any one part of the three-part test in order to provide nondiscriminatory participation opportunities for individuals of both sexes. The first part of the test—substantial proportionality—focuses on the participation rates of men and women at an institution and affords an institution a “safe harbor” for establishing that it provides nondiscriminatory participation opportunities. An institution that does not provide substantially proportional participation opportunities for men and women may comply with Title IX by satisfying either part two or part three of the test.
(2) is the idea that opportunities have been generally expanding rather than contracting. Per DoE:
OCR will review the entire history of the athletic program, focusing on the participation opportunities provided for the underrepresented sex. First, OCR will assess whether past actions of the institution have expanded participation opportunities for the underrepresented sex in a manner that was demonstrably responsive to their developing interests and abilities…. There are no fixed intervals of time within which an institution must have added participation opportunities. Neither is a particular number of sports dispositive. Rather, the focus is on whether the program expansion was responsive to developing interests and abilities of the underrepresented sex. In addition, the institution must demonstrate a continuing (i.e., present) practice of program expansion as warranted by developing interests and abilities.
(3) is the idea of meeting all demand. According to DoE:
Under part three of the three-part test (part three) OCR determines whether an institution is fully and effectively accommodating the interests and abilities of its students who are members of the underrepresented sex — including students who are admitted to the institution though not yet enrolled. … OCR will determine whether there is sufficient unmet interest among the institution’s students who are members of the underrepresented sex to sustain an intercollegiate team. OCR will look for interest by the underrepresented sex as expressed through the following indicators, among others:
requests by students and admitted students that a particular sport be added;
requests that an existing club sport be elevated to intercollegiate team status;
participation in particular club or intramural sports;
interviews with students, admitted students, coaches, administrators and others regarding interest in particular sports;
results of questionnaires of students and admitted students regarding interests in particular sports; and
participation in particular in interscholastic sports by admitted students.
… An institution may evaluate its athletic program to assess the athletic interest of its students of the underrepresented sex using nondiscriminatory methods of its choosing. Accordingly, institutions have flexibility in choosing a nondiscriminatory method of determining athletic interests and abilities provided they meet certain requirements. See 44 Fed. Reg. at 71417. These assessments may use straightforward and inexpensive techniques, such as a student questionnaire or an open forum, to identify students’ interests and abilities. Thus, while OCR expects that an institution’s assessment should reach a wide audience of students and should be open-ended regarding the sports students can express interest in, OCR does not require elaborate scientific validation of assessments.
So that is how the DoE tests whether a school is providing equality of opportunity with respect to athletic participation. Then, separately, there is a question of proportionate funding. This is not part of the three-part test; rather it takes participation levels as a given (regardless of which prong was used to pass the equality of participation opportunity test) and then asks whether scholarship aid is being provided proportionally to those levels of participation.
In 1998 Bowling Green State University (of Ohio) asked for clarification as to how the financial piece works. The DoE responded that regardless of how you manage to comply with the participation rules, whether by proportionality, progress, or meeting all demand from the underrepresented gender, you also have to ensure that your “scholarship aid” is “substantially proportionate” to your participation. The specific DoE language was put into a letter available at http://www2.ed.gov/about/offices/list/ocr/docs/bowlgrn.html:
This is in response to your letter requesting guidance in meeting the requirements of Title IX, specifically as it relates to the equitable apportionment of athletic financial aid.,
…The Policy Interpretation does not require colleges to grant the same number of scholarships to men and women, nor does it require that individual scholarships be of equal value. What it does require is that, at a particular college or university, “the total amount of scholarship aid made available to men and women must be substantially proportionate to their [overall] participation rates” at that institution. Id. at 71415. It is important to note that the Policy Interpretation only applies to teams that regularly compete in varsity competition. Id. at 71413 and n. 1.
Note also two items I often mention. Title IX “does not require colleges to grant the same number of scholarships to men and women, nor does it require that individual scholarships be of equal value." People make this mistake all the time. But it doesn’t take a law degree to read the DoE’s own policy language and see that the claim that every man and every woman must receive a scholarship of equal value is simply not true. (As I always mention to people, the moment you realize that all football players are on a “full scholarship” and most women athletes are on a “partial scholarship,” you know that isn’t a requirement)
In order to ensure equity for athletes of both sexes, the test for determining whether the two scholarship budgets are “substantially proportionate” to the respective participation rates of athletes of each sex necessarily has a high threshold. The Policy Interpretation does not, however, require colleges to achieve exact proportionality down to the last dollar. The “substantially proportionate” test permits a small variance from exact proportionality. OCR recognizes that, in practice, some leeway is necessary to avoid requiring colleges to unreasonably fine-tune their scholarship budgets.
When evaluating each scholarship program on a case-by-case basis, OCR’s first step will be to adjust any disparity to take into account all the legitimate nondiscriminatory reasons provided by the college, such as the extra costs for out-of-state tuition discussed earlier. If any unexplained disparity in the scholarship budget for athletes of either gender is 1% or less for the entire budget for athletic scholarships, there will be a strong presumption that such a disparity is reasonable and based on legitimate and nondiscriminatory factors.Conversely, there will be a strong presumption that an unexplained disparity of more than 1% is in violation of the “substantially proportionate” requirement.
The other item embedded in this interpretation is that the policy of financial proportionality talks specifically about “scholarships” and “scholarship aid.” Because the issue has never been addressed, there is no specific language (at least that I am aware of — if you know if, by all means, let me know!!) that says anything about payments to athletes outside of “scholarship aid.” So, for example, if athletes were hired as employees and paid a salary, I do not believe Title IX would necessarily require financial proportionality there. Indeed, when Marianne Stanley sued USC because her salary as the women’s basketball coach was lower than the salary of her men’s basketball coaching counterpart, George Raveling, a Federal Court said that as long as the duties of a male coach differ from those of a female coach, unequal pay is ok. Included in this logic was the idea that different levels of revenue-generation can create different pay scales:
We agree with the district court in Jacobs that revenue generation is an important factor that may be considered in justifying greater pay. We are also of the view that the relative amount of revenue generated should be considered in determining whether responsibilities and working conditions are substantially equal. The fact that the men’s basketball team at USC generates 90 times the revenue than that produced by the women’s team adequately demonstrates that Coach Raveling was under greater pressure to win and to promote his team than Coach Stanley was subject to as head coach of the women’s team….
In the instant matter, the uncontradicted evidence shows that Coach Raveling’s responsibilities, as head coach of the men’s basketball team, differed substantially from the duties imposed upon Coach Stanley.
Coach Stanley contends that the failure to allocate funds in the promotion of women’s basketball team demonstrated gender discrimination. She appears to argue that USC’s failure to pay her a salary equal to that of Coach Raveling was the result of USC’s “failure to market and promote the women’s basketball team.” The only evidence Coach Stanley presented in support of this argument is that USC failed to provide the women’s team with a poster containing the schedule of games, but had done so for the men’s team. This single bit of evidence does not demonstrate that Coach Stanley was denied equal pay for equal work. Instead, it demonstrates, at best, a business decision to allocate USC resources to the team that generates the most revenue.3
Other DoE policy statements also focus specifically on “Financial Assistance” and specifically say this only applies “To the extent that a college or university provided athletic scholarships.”
To the extent that a college or university provided athletic scholarships, it is required to provide reasonable opportunities for such awards to members of each sex in proportion to the participation rate of each sex in intercollegiate athletics. This does not require the same number of scholarships for men and women or individual scholarships of equal value.
However, the total amount of assistance awarded to men and women must be substantially proportionate to their participation rates in athletic programs. In other words, if 60 percent of an institution’s intercollegiate athletes are male, the total amount of aid going to male athletes should be approximately 60 percent of the financial aid dollars the institution awards.
Similarly, there is no language discussing the payment of royalties, such as for (say) the use of players’ photographs on trading cards. This doesn’t mean Title IX could be interpreted to mandate equality of royalties (or as two Title IX experts have suggested, perhaps equality of royalty RATES), but it also means that there might be no Title IX implications at all. It is, as they say, an open question.
In any event, to summarize,
Title IX offers three ways to comply with respect to participation,
Substantial proportionality with the male/female ration on campus;
Continued progress in offering opportunities to women;
Meeting the demand for opportunities of all interested women on campus.
Title IX does not require that individual men’s and women’s scholarships be equal.
Title IX does not require equal overall funding to men and women’s sports.
Title IX does require that scholarships/financial aid be substantially proportional to participation.
Title IX is silent with respect to issues of athlete royalty.
Title IX has been ruled not to require equality of pay, esp. when the payment involves different duties or “a business decision to allocate… resources to the team that generates the most revenue.”
So, on the internet, people sometimes say “Correct me if I’m wrong,” but they don’t really mean it. But I really do. If you know a lot about Title IX, and you can point to legal precedent or DoE policy statements or even the policy as implemented by specific schools to contradict or improve any of this, please correct me if I am wrong. I really, really would welcome it. If I am wrong on any of this, help me fix it. With that said, as I am pointing to specific and fairly clearly DoE policy statements and legal precedents, I don’t think I am wrong. But I truly welcome help in refining and improving my understanding, and I will welcome it even more if it can point me to the specific source language on which your interpretation is based. If there is a court decision or DoE policy letter to back up your view, get in touch and I will make an update to this post and give you public thanks and credit.
Welch Suggs, Professor of Journalism at University of Georgia, and expert on college sports issues, pointed out (down in the comments) that while I’ve addressed the participation and financial aid portions of Title IX as it related to college sports, I did not address what he calls the “catchall of ‘treatment.’”
In Professor Suggs’ words:
Treatment covers a wide variety of topics, but the reg basically states (I’m too lazy to look up the exact language) that male and female teams must be treated equitably. This is measured on what’s called the “laundry list” of issues, including access to facilities, practice times, uniforms and equipment, coaching (including coaching salaries), access to tutors, etc.
Prof. Suggs is right, and this is the so-called laundry list from the Title IX regulations:
(2) Provision and maintenance of equipment and supplies;
(3) Scheduling of games and practice times;
(4) Travel and per diem expenses;
(5) Opportunity to receive coaching and academic tutoring;
(6) Assignment and compensation of coaches and tutors;
(7) Provision of locker rooms, practice and competitive facilities;
(8) Provision of medical and training services and facilities;
(9) Provision of housing and dining services and facilities; and
(I don’t know why, but point (1) is blank in the original)
Participation has always been the major issue in Title IX complaints and litigation at the college level, although there have been cases brought that involved treatment issues (the LSU case comes to mind). Treatment, however, has been a major issue in high school cases. A number of complaints have been brought over disparities between baseball and softball fields, for example.
If you need a resource on Title IX, at the risk of tooting my own horn I’d suggest my book A Place on the Team: The Triumph and Tragedy of Title IX. It came out in 2005, but there haven’t been many changes in Title IX policy and practice since then.
Because I can't help myself, 4 years worth of BCS attendance figures
I saw a discussion among Stewart Mandel, Andy Staples, and Dan Wetzel about BCS attendance being up 3%. Mandel clarified that it was calculated as year-over-year growth, except for the National Championship game (which moves around among stadiums of different capacity), where they compared 2014 to 2010, to get a Rose Bowl-to-Rose Bowl comparison.
The answer? A fairer press release would have said “Rebound from last year’s poorly attended Sugar Bowl more than compensated for large drop in Fiesta Bowl attendance, with the rest of the games more or less even.”
The main reason 2014 is up so much is that the 2013 Sugar Bowl was pretty bad. Sugar Bowl attendance in 2014 was up 30.1% because the 2013 game between Louisville and Florida drew only 54,178 to the Superdome. The Fiesta Bowl was down 7.2%. The Rose Bowl was up 1.9% and the Orange Bowl was basically unchanged (7 more people, 72,080 rather than 72,073). The National Championship was up as well, 17.6%, but as mentioned above that’s a trick of the venue. Compared against 2010, the current championship was slightly down by 0.7%.
So it wasn’t false when they said the aggregate was up. But, just to be clear, if you take out the Sugar Bowl from the total, this is the historical trend:
In other words, given that the National Championship itself was slightly down, the real answer is that the Sugar Bowl was so poorly attended in 2013, it’s rebound back to normal made up for the poor attendance at the Fiesta Bowl. The rest is pretty much just noise, a slightly more popular Rose Bowl, slightly less popular National Championship and an even Orange Bowl.
So you drive into a town, looking for a hotel room. You see, I don’t know, maybe 350 hotels in this town. Each one offers you a room (and board, and some educational opportunities as well, maybe a book on tape) for the same price — $10,000 a night. Whoa, you say, that seems pretty steep! Well, says each of the hotel owners, we’ve gotten together to set a common price to make sure you don’t make your selection based on money issues, but rather on which hotel and which book-on-tape best fit your accomodation-and-education needs.
Oh, and by the way, at $10,000, staying in our hotel is a great value. after all, if you were to try to build yourself a little house for the night, the cost of construction workers, materials, building permits, etc., would cost way more than $10,000. That’s how you should value the room.
Then a guy in a furry alpine cap he inherited from his grandfather steps in and says, actually, these hotels compete for other guests all the time and they charge between $99 and $199 per night. A better measure of the value of a good or service is the market price b/w willing buyers and willing sellers, in the absence of collusion, not the cost of a non-participant in the market of replicating the services in an inefficient way.
The guy in the alpine hat then he adds that if price were equal to the cost of self-assembly, then rides in airplanes would be extraordinarily expensive, cars would costs far more then they do now, when you include what it would cost to hire a skilled craftsman to make a one-shot engine, etc. That indeed, the theory that value is measured by the cost of self-provision is more or less anathema to modern economics.
In 2011, I analyzed the decision on Nebraska-Omaha to cut wrestling and decided that one huge flaw in the accounting of schools for minor sports is that they missed the fact that partial scholarships are more like coupons than actual expenses, at least at school that are trying to grow their enrollment:
However, in addition to determining the true costs, it is also critical to determine whether there are any revenues left off of the athletic department’s books that stem from the granting of a GIA. At some level, this would seem impossible – how could giving a scholarship result in revenues, above and beyond the sports-related revenues already recognized on the athletic departments P&L? But the critical thing to remember is that the UNO, like most schools, grants most of their scholarships (across all sports) in the form of partial GIAs. UNO differs from major programs in that it uses partial scholarships for football as well as the Olympic sports, such as wrestling, where the practice is fairly universal.
As any product manager will tell you, if giving a discount can increase total purchases, what looks like an expense (e.g., a 10%-off coupon) is really revenue (the 90% of the price that the consumer paid, but would have spent elsewhere without the coupon). But nothing in the NCAA accounting on which the UNO relies credits the athletic department for any of that revenue. Thus it is critical to properly calculate not just out-of-pocket costs, but also any inflows of cash directly related to the granting of GIAs to football players and wrestlers.
Anyway, I’ve made this same case when I talk to people about why I think the recent decision by Temple to cut some sports may be more about, say, real-estate usage (e.g., boat house on prime riverfront location) than actual reduction of expenses. And now, I see the coach of the men’s gymnastics teams is making the coupon argument too. It’s always interesting to see the people affected by bad accounting try to convince the rest of the world that the economics and the accounting are telling different stories:
Turoff has four scholarships at his disposal to apportion among the 19 gymnasts on the men’s team. He slices off a half-scholarship here and a quarter-scholarship there, but that leaves the equivalent of 15 full-tuition students who are at Temple solely because of the gymnastics team. That tuition by itself offsets the approximately $300,000 annual budget of men’s gymnastics, which is about what the football team spends on chin straps every year. Turoff also does his own fund-raising to meet a required annual goal of $29,000. For the 2012-13 year, he raised $59,000.
Wetzel (and co-authors Josh Peter & Jeff Passan) were most insightful when they asked the WHY question — why does something so unpopular persist. The answer they gave was bascially what economists call a Principal/Agent problem, namely that the people who had been delegated decision making were acting in their own private interest rather than in the interest of their employers:
The truth we tried to elucidate was a story as American as it comes: Men in power refusing to give up what they believed was theirs because they told themselves that lie so many times it became their truth.
A survivalist through and through, Junker threw an opulent multiday party every year in Scottsdale – The Fiesta Frolic – for all the important decision-makers in college sports, picking up travel costs, meals, drinks, golf, everything. ADs and commissioners came with hands out, bellies ready to be filled and swings grooved.
And so the BCS stayed as the ice slowly melted in single malts on the veranda.
Junker was just one of many. The Orange Bowl doled out free Caribbean cruises. The Sugar Bowl had a “subcommittee” on golf. Every bowl director walked around flashing plastic, buying favor with anyone and everyone. The BCS was an exercise in cronyism and hypocritical corruption. The same people with their palms out – college sports leadership – wrote and enforced rules that would excommunicate any of their athletes that took even a fraction of what they did.
When the outside pressure for a better system came, the bowl industry tried to wage a PR campaign, hiring lobbyists, media spokesmen and even Ari Fleischer, the former White House spokesman for President George W. Bush.
The PR assault was a disaster, of course, because not even the most brilliant spinmeister could squeeze such a heaping lump of coal into a diamond. Fans grew to hate the BCS even more with each laughable justification. By the end it wasn’t the crime, it was the comedy.
Eventually, no one wanted the BCS around except the people paid directly by the BCS. Fear of being left behind drove unnecessary conference realignment. Everyone got tired of it. The new generation of college athletic directors make a lot of money, so complimentary rounds of golf don’t hold the same allure they did for the old guard.
Just read your post on the Colleges losing money from bowl games and other myths, and it sparked a question or two. So, how does the net revenue break down for teams within the conference top to bottom. Wake Forest gets the same check from the conference that VT gets from bowl payouts. If VT exceeds the "expenses" allotment then they would net less than Wake. In that analysis it is more profitable to stay home.
maybe in the very short-run, and from a pure accounting perspective, yes, but that misses all of the off-the-expense-sheet benefits of attending a bow: boosted donations, higher attendance, etc. I think if Wake were consistently more profitable than Virginia Tech, we’d see more schools imitating Wake. I am a big believer in what economists call “revealed preference,” meaning that when you see an economic actor choose b/w two options, you can infer it preferred the option it chose. Everytime you see a coach get a raise to stay at his current program, it’s telling you that school thinks winning is worth spending more, not less, on.