Musings on Sports Economics

Letter to Editor in response to Seth Davis

(Biographical note: my name is Andy Schwarz and I am a Sports Economist.  Among other things, I was one of the economists who initiated the White v. NCAA case related to full cost of attendance scholarships and more recently I was one of the economists who wrote the letter to the DOJ that helped start the government’s antitrust investigation of the BCS.  Much of what I write here is based on my paper “Excuses, Not Reasons: 13 Myths About (Not) Paying College Athletes” published in the Proceedings of the Santa Clara University Law School’s Sports Law Symposium.)

Dear Sports Illustrated:

In the wake of Taylor Branch’s Atlantic article, “The Shame of College Sports” Sports Illustrated published an opinion piece by Seth Davis, in which Davis laid out why he felt most college football players are overpaid.  Though Mr. Davis is very knowledgeable about college sports, his analysis was flat wrong when it comes to economics.

Specifically, Davis wrote:

Left unsaid is the fact that the players do have access to the fair market. If they want to be compensated for their abilities, they can simply turn professional. Yes, the NFL and NBA have draft age minimums, but those rules were put in place by the leagues, not the NCAA. Does that not fall under the rubric of the “fair market”? Since the NFL won’t accept a player who is not yet three years removed from his senior year in high school, the “fair market value” for a freshman or sophomore in college is actually zero. Yet, the NCAA is still “compensating” those players with a free education and other expenses, even if they are among the 98 percent who will never make a dime playing football. If anything, most of these guys are overpaid.

Davis correctly explains that (1) that athletes are receiving compensation in the form of an athletic scholarship (worth probably $30,000 to $50,000 per year, depending on the school, though this may overstate what it costs many schools to provide) and (2) other than the schools in the NCAA, there is virtually no demand for college athletes as athletes.  At this point, he veers from fact into economic nonsense.

Davis concludes that because the NCAA has gathered all sources of demand for college athletes under its control, college athletes have little value and most of them are overpaid.  Instead, what Davis has shown is that the NCAA has monopoly[1] power in the industry.  Because virtually all of the sources of demand have agreed that they will not pay college athletes more than a scholarship, this has created an ironclad, industry-wide pay cap.  With respect to athlete compensation, this makes the NCAA a very successful cartel. 

Davis confuses a market where a single cartel controls prices with a “fair market.” The NCAA maximum allowable athletic scholarship is not a free market offer because cartelized industries are the antithesis of free markets.   The lack of outside demand is proof the NCAA cartel is a success;  it has cartelized 100% of the industry.  That’s not a defense, it’s an indictment.

There is an easy test of whether or not the current scholarship offer is a fair market one – imagine a world with no NCAA rule prohibiting athletes from getting more than a scholarship.  In the absence of that rule, could Davis, or your readers, imagine Auburn offering a $10,000 per year stipend, on top of the current scholarship, to a recruit leaning towards Alabama?  Might Michigan try to steal a recruit or two from Ohio State by offering $25,000 graduation bonuses?  That’s what economic competition in a free market would look like.  And the very fact that the NCAA feels it needs to hold such a world at bay is evidence that there is pent-up demand for athletes that would result in higher pay, absent the NCAA’s cartel agreement.

Instead, because of the NCAA’s success in keeping direct compensation capped at a scholarship, we see all sorts of other ways that colleges compete for athletes.  They compete to build the best stadiums, practice facilities, weight rooms, and halls of fame.  They pay millions to coaches who are successful at recruiting talent to their schools.  And sometimes they, knowingly or not, allow boosters to sweeten the offer.  We see all of these indirect forms of competition, many of which are inefficient and wasteful, because the scholarship cap is well below the true market value of the best college athletes, and because the demand for talent can’t be held in check completely.

Despite Davis’s claim that most college football players are overpaid, what we don’t generally see is high school football players getting partial scholarship offers from BCS AQ schools.  That’s what the world would look like if players were worth less than a full scholarship, because there is no NCAA minimum scholarship requirement.  It’s a basic economic tenet that in the absence of a minimum wage, you won’t see employers paying more than a competitive wage for workers. 

The same economics hold here, whether you think athletes are employees or not; if college football players were worthless, we’d see teams filled with walk-ons and partial scholarship players, rather than most teams using almost every allowable full scholarship.  When the NCAA wants to punish a school, they take away scholarships.  In a world of overpaid college athletes, losing a scholarship would be profitable, not punitive.

So while the current market conditions can’t tell us how much star athletes are worth to major college programs (because the collusion among schools caps the maximum offer), they do tell us that virtually every BCS AQ football player is worth at least what he’s being paid, simply because school do offer full scholarships even though they don’t have to.

Davis offers up several other economic fallacies.  He accepts on faith the NCAA’s claim that only fourteen schools make money in sports.  Many economists (including me) who have studied the numbers believe it is flat wrong for many reasons, but even if it were true, Davis is confusing football programs with the entire athletic department.  Richly profitable football programs choose to spend lavishly on their other sports.  That’s perhaps a laudable use of their cartel profits, but it doesn’t mean football lost money – indeed almost all BCS AQ team makes a profit from football and collectively their revenues are about one billion dollars more than their expenses.  We should not confuse how schools spend their football profits with how large those profits are.  And the simple fact that the money goes to subsidize other sports doesn’t mean the programs would disappear without that subsidy.  A quick look at the lower half of Division I, Division II or III shows that many schools can afford multi-sports athletic programs without football profits.

Davis reminds us how good the scholarship offer is compared to what smart non-athletic high school students get offered when choosing among colleges.  He’s right that athletes get a better deal than almost all other students on campus.  But that misses the point entirely. The idea is not that athletic scholarships aren’t valuable, but rather that they are far less than the value of what the schools would gladly pay in a free market, if the NCAA didn’t cap compensation. 

Schools don’t and can’t collude on how much they offer Davis’s three children for their academic merit, but then again as smart as they may be, it’s hard to see them generating much revenue as undergraduates.  Schools do collude on how much they offer college athletes for their athletic prowess, and unlike the Davis children, they generate millions. That’s the difference – academic recruits gets what they earn, but athletic recruits get only what a cartel allows them to get, even though without that collusion, they would get everything they get now and much more. That’s how free markets work, but what we see now is anything but free. 

The irony is that Davis and Branch and I actually all should agree that we don’t need any rules against paying players.  Branch and I think we should drop the rule to let market forces kick in and for college athletes to earn what they are worth.  Davis thinks college athletes are overpaid, and if that were true we could drop the NCAA rules prohibiting pay and nothing would change.   Since we’re agreed, let’s drop the rule and see what happens.   I know, and I suspect Davis does too, that the result would be more compensation to athletes. 

So Seth, shall we jointly ask the NCAA to relax the rules and see who’s right?

Andy Schwarz
Partner at OSKR

[1] Technical note: It’s probably Monopsony power, the power that comes from being a single buyer rather than a single seller.  But for this Op-Ed there isn’t room to get quite this technical, so I’ve used the more accessible term, of Monopoly.

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Andy Schwarz

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