Musings on Sports Economics

Preparing my new hashtag

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

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

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

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

Posted by
Andy Schwarz

Short sports economics test

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

Posted by
Andy Schwarz

Questions from Congress

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

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


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

Posted by
Andy Schwarz

Antitrust and Labor Law, Bookends of the Social Compact

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

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

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

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

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

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

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

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

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

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

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

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

Posted by
Andy Schwarz

Competition in Action: A Tasty Case Study

Among the jokes told about economists is that we are excellent at predicting the past but a lot iffier on predicting the future. So it’s nice to see plain vanilla economics, the same used by the O’Bannon experts, yield an accurate prediction of competitive behavior, and to predict it *before* it happened.

If you followed the O’Bannon case, you know that a centerpiece of the economic arguments of the Plaintiffs’ argument was that if competition for players’ pay is stifled by competition, non-price competition by other means increases.  Hence, argued Roger Noll and my business partner (and occasional Sportsgeekonomics contributor) Dan Rascher, we see excessive spending on coaches and on facilities because every dollar spent there provides a second-rate way to attract talent, better than doing nothing, but less good than direct compensation.

Anyway, as you may know, the NCAA was recently shamed (or, in some versions of the story, utterly coincidentally decided on its own) to allow unlimited food to athletes, after Shabazz Napier famously told the press during the lead-up to  Final Four that he went to bed hungry some nights.

As economics predicts,once that little opportunity to compete was opened, we should expect to see the process of competition begin to work its magic.  As exhibit A, I give you the new Auburn food-hall-as-recruiting-tool video:

That is just yummy inefficient substitution in action!

And where there’s competition in the NCAA, you can expect collusion in an effort to stop it to follow close behind:

It’s nice to see theory borne our in practice. It’s less nice to see an industry so accustomed to treat the competitive process as a bug to be squashed rather than a feature to be celebrated.

Posted by
Andy Schwarz

Some data for Tim D.

Schools in EADA 2012-13 data listed as D1: 344

  • Schools with fewer than 13 participants: 10
  • Schools with 13-14 participants: 91
  • Schools with 15-17 participants: 210
  • Schools with more than 17 participants: 33

Posted by
Andy Schwarz

By Their Budgets Shall Ye Know Them

My latest deadspin piece is now out:

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.

Posted by
Andy Schwarz

Another silly excuse

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.

Posted by
Andy Schwarz