Musings on Sports Economics

Follow-up thoughts on my Deadspin Article on Price vs. Cost & Oil Pipelines

Deadspin was nice enough to publish an analysis I did on the deceptive interaction between two items on college athletic departments revenue and expense report, the so-called “Direct Institutional Support” and the so-called expense “Athletic Student Aid.”

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.

Texas has a way of moving profit off its books too, which I’ve documented elsewhere

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.

Posted by
Andy Schwarz

But No One Forced Them to Work at eBay

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.

Two Other articles on this theme:

Posted by
Andy Schwarz

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.


 “It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players.”

Becker, Gary  “The NCAA: A Cartel in Sheepskin Clothing,” Business Week, September 14, 1987.


“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)

Posted by
Andy Schwarz

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.

Posted by
Andy Schwarz

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:

Secretary of Education Arne Duncan on Meet The Press

"… 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.”

Stanford Coach David Shaw

"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, …"

University of Connecticut:

"…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?

Posted by
Andy Schwarz

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.

Posted by
Andy Schwarz

Quiz: Can you tell the difference between a profitable and unprofitable industry?

A profitable industry typically has new firms entering, new hires, wages rising. An unprofitable industry has firms exiting, layoffs, stagnant pay.

How here is a quiz.  One of these industries is unprofitable and one is profitable:  College Sports and Print Journalism.

Which is which?

Here are two articles to help you decide:

College Sports:

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.

Print Journalism:

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,, 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.

The newsroom is not unionized.

Posted by
Andy Schwarz

Good Reads: Travis Waldron, Dan Wetzel, and Tim Dahlberg

Travis Waldron gets at some of the problems with the recent Meet the Press “debate” namely improper question and it was missing (at least) one side of the argument:

Dan Wetzel exposes how Ohio State is paying for wins, just whom you’d expect:—athletic-director-gets—18-000-bonus-210331816.html  He ties this in to the same meet the press arguments.

I particular like this sentence:

It about free markets for the bosses but not for the players, who can neither individually nor collectively negotiate anything.

It reminded me of a post I made a while back called Capitalism for All, Socialism for College Athletes.

Tim Dahlberg ties the wrestling in to other issue of voice:

Posted by
Andy Schwarz