Monopoly and Monopsony Power in Sports Markets

Two Main Principles

Closed League Principles

. There are two principles that a closed league may pursue influencing team's behaviour both in the goods and inputs markets:

• Monopoly power based on the exclusive right to the team's home territory and the economic principle that the optimal quantity produced (sport) respects the MR=MC condition.
• Monopsony power over players to bind them to teams for as long as the team wants, based on the economic principle that the factor quantity used allows teams to match the marginal revenue associated with the additional input used with the marginal cost. Sports Economics - Monopoly and Monopsony Power 2

Territorial Rights in Closed Leagues

. The first principle, adopted by the closed leagues, is based on the principle of territorial rights.

. This precludes the entry of competing teams who might produce output (matches) that could lure consumers away.

. This gives teams monopoly power in their host cities. Sports Economics - Monopoly and Monopsony Power 3

Reserve System and Monopsony Power

. The second principle concerns the factor market and is based on the reserve system, which kept players as long as the team wanted them.

. The reserve system prevented owners from bidding up salaries to lure away players from a rival team.

. This gives each team monopsony power over its players. Sports Economics - Monopoly and Monopsony Power 4

Monopoly and Profit Maximization

Monopoly Team Profit Maximization

· If a monopoly team maximizes its profits with a MC curve that coincides with the horizontal axis up to the point of stadium capacity and faces a downward sloping demand and RM, its optimal point is B.

· Where MR=MC and QM represents quantity of ticket sold and PM is the price at which tickets are sold. A MC B PM = 100 D O QM Q MR (quantity of tickets) Sports Economics - Monopoly and Monopsony Power 5

Competitive Market vs. Monopoly

· A competitive market would sell Qc tickets where price equals marginal cost (zero in this case).

. In the case a new team may enter the league, being two teams in the same city ticket prices would fall. A MC B PM = 100 D O QM Qc Q MR (quantity of tickets) Sports Economics - Monopoly and Monopsony Power 6

Impact of Free Entry on Ticket Prices

· With free entry, new teams could continue to enter until profit is driven to zero, large cities would have several teams and those teams would charge lower ticket prices.

. The closed leagues would never allow such entry, they carefully protect their monopoly power to prevent new teams from competing. Sports Economics - Monopoly and Monopsony Power 7

Monopoly Effects on Consumer and Producer Surplus

. The monopoly implies, as the main effect, the decline in output and . .. affects the sum of consumer surplus and producer surplus.

. The first one is the net value that flows to consumers because not all consumers are charged the maximum that they are willing to pay.

. The second one is the net value that flows to producers because not all units are sold for the minimum that the producer would accept to sell them. Sports Economics - Monopoly and Monopsony Power 8

Visualizing Consumer and Producer Surplus

· The consumer surplus is represented by the area that lies below the demand curve and above the price set by the monopolist.

· The producer surplus is represented by the area that lies above the marginal cost curve and below the price set by the monopolist. A MC B PM = 100 D O QM Qc Q (quantity of tickets) MR Sports Economics - Monopoly and Monopsony Power 9

Surplus Comparison: Monopolistic vs. Competitive

. In the monopolistic case, the consumer surplus is the triangle ABPM and the producer surplus is the rectangle PMBQMO.

· In the competitive case, consumer surplus is the triangle AQcO and the producer surplus is equal to zero.

· Moving from the competitive market to the monopoly, consumers lose the area PMBQCO.

· The rectangle PMBQMO is gained by the monopolist while the triangle BQCOM is called deadweight losses. A MC B PM = 100 D O QM Qc Q (quantity of tickets) MR Sports Economics - Monopoly and Monopsony Power 10

Open League and Utility Maximization

Characteristics of Open Leagues

· In an open league there are no restrictions for teams to enter and exit from a league.

. While the number of teams in the top division in an open league is fixed, promotion and relegation take away the top league's ability to control the geographic distribution of those teams.

. The teams of an open league do not enjoy the same sustainable market dominance as teams in the closed leagues. Sports Economics - Monopoly and Monopsony Power 11

Pricing Power in Open Leagues

· With no way to limit the entry or exit of competitors, team's ability to charge prices above the competitive level is limited by fan loyalty.

· If fans do not see other local teams as substitutes, their favourite team can rise prices without losing all their support.

. For example, in UK, ticket prices indicate that this market power is substantial. Sports Economics - Monopoly and Monopsony Power 12

Sports Labour Market

Growth in Sports Salaries

· Salaries in the major team sports have shown an extraordinary growth.

· The average MLB salary was approximately 36 times per capita GDP in 1991, while it became almost 84 times per capital GDP in 2016.

. In Europe, the average salary of the Real Madrid football team was more than 5.6 million euros in 2016, more than 200 times the average personal income in Spain. Sports Economics - Monopoly and Monopsony Power 13

Sports Labour Market Model

· The sports labour market, like any other market, is represented by a demand curve and a supply curve: teams demand work and players offer work.

. This model can explain the general forces affecting the employment and wages of professional athletes when the labour market is perfectly competitive, as in the case of free agents (the European case).

. However, this assumption does not hold in many cases, such as the monopsony power of teams in the US. Sports Economics - Monopoly and Monopsony Power 14

Sports Labour Supply Curve

· Players choose how much to work based on the benefits and costs of an hour of leisure time, which is the opportunity cost of an hour of earnings, i.e. the wage earned.

· As wages increase, workers experience an income (workers want more leisure and work less) and a substitution effect (workers want to work more).

· In general, the substitution effect is stronger than the income effect, so higher wages lead workers to supply more labour, so the labour supply has an upward slope. w S W1 W2 - The quantity of labour provided by a player is set for a given season. The wage is thus the amount paid per season. L0 L1 L Sports Economics - Monopoly and Monopsony Power 15

Sports Labour Demand Assumptions

Assuming that:

· Firms produce an output using two inputs: capital (K) and labour (L), then the production function is Q = (K,L)

. All markets are perfectly competitive.

· Firms maximise the profit, i.e., the difference between revenue and cost by choosing L, so that the marginal revenue from employing one more worker equals the marginal cost of employing one more worker. Sports Economics - Monopoly and Monopsony Power 16

Profit Maximization and VMPL

. Moreover, assuming that K remains constant, the profit function may be written as: T = pQ(L) - [FC +VC] = pQ(L) - FC -wL

· From the maximization we obtain: Δπ AQ AL -- W=0 ΔL =

· So, we have PMPL = W

· In other words: VMPL = MC Sports Economics - Monopoly and Monopsony Power 17

Marginal Revenue Product of Labour

. If the output market was not competitive, then MR # p and the optimal condition will become: MR * MPL = w Marginal revenue product of labour (MRPL) = Marginal cost

· The demand of labour coincides with the value of marginal product of labour or MRPL.

· Comparing the two cases, we have that the D' is lower because MR <p w D' DŁ w J I I I I LM LC L Sports Economics - Monopoly and Monopsony Power 18

Sports Labour Market Equilibrium

. In equilibrium, the quantity of labour and the wage level are given by the intersection of the supply and demand curves.

· Given the supply curve, the optimal quantity of labour chosen in the sports sector will be greater in competitive markets than in a monopoly. w S DL WC I WM I I I LM LC L Sports Economics - Monopoly and Monopsony Power 19

Sports Labour Market and Monopsony

Reserve Clause and Player Salaries

· The labour markets in closed leagues deviate from the assumption of competitive model.

· Introducing the reserve clause, a team could prevent a player from selling his services to others for as long as it wanted to keep him.

· With no other employer able to bid away the services of their players, teams drove down player's salary. Sports Economics - Monopoly and Monopsony Power 20

Players Associations and Collective Bargaining

· The monopsony power, conferred on owners by the reserve clause, left major league baseball players in an extremely weak position.

· To improve bargaining power, players formed Players Associations (the first was the Major League Baseball Players Association in 1953) to negotiate collective bargaining agreements with the leagues.

. These associations are similar to unions that are organization of workers to act collectively to improve workers' wages, benefits, and working conditions. Sports Economics - Monopoly and Monopsony Power 21

Monopsony Market Characteristics

Recalling the monopsony market:

· The unique buyer is a price-maker . ... and the monopsonist can buy more only if he is willing and able to pay a higher price. Sports Economics - Monopoly and Monopsony Power 22

Marginal Expenditure in Monopsony

· Because a monopsonist usually cannot know exactly how much each seller is willing to charge, he is generally unable to price discriminate and must pay a higher price for all the items he buys, not just the additional items.

· The cost of buying a little more, the marginal expenditure (ME), is thus greater than the cost of the additional purchases because the monopsonist must spend more on both the marginal unit and all preceding units. W ME The ME lies above the supply curve SL E W* MR=DL L* L Sports Economics - Monopoly and Monopsony Power 23