Antitrust, and Competition Policy Reference Chapter 12

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Antitrust, and Competition Policy(Reference
Chapter 12)
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Like Congress, the Antitrust Division of the
Department of Justice is susceptible to political
pressure not to upset sports, and so a large,
influential monopoly remains unregulated and de
facto immune from antitrust prosecution by the
government. --Roger Noll and Andrew Zimbalist,
Sports, Jobs, and Taxes, 1997.
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Overview

• Sports team owners enjoy special antitrust
  advantages not enjoyed by other industries.
• Owners and players enjoy the benefits of this
  special status while fans and taxpayers pay the
  costs.
• The rational actor model helps explain why owners
  enjoy these benefits.
• It is unlikely that this special status will be
  revoked.
• Competition policy can play an important role in
  fixing market power problems in pro sports.

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Special Antitrust Status

• The antitrust laws
• Firms cannot exercise or extend their market
  power without regulation.
• The Federal Trade Commission monitors compliance.
• The Department of Justice prosecutes offenders.

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Special Antitrust Status

• The antitrust laws
• Pro sports leagues are confusing entities under
  the law.
• Owners act together, as a league, to enhance
  their individual economic welfare.
• Confusing because

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(From Lecture 4)Joint Venture Cooperation

• This type of cooperation is NOT required in order
  to make league play happen
• Territory definition and protection.
• Expansion and relocation.
• Negotiations (TV, labor, and host cities).
• But it is upheld repeatedly, legally speaking.

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Territory Definition and Protection

• The Franchise Agreement
• Why is a sports team NOT like McDonalds?
• Most analysts agree that protection of exclusive
  territory creates market power.

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Territory Definition and Protection

• Results?
• Higher prices and restricted output relative to
  more economic competition.
• Increased variation in profit because
• Market power allows owners to actually collect on
  willingness of fans to pay for quality in
  different markets.

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Expansion and Relocation

• Expansion and relocation
• Factors into the growth of league value.
• Can impact the value of existing territories.
• Decided jointly be current owners.

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Expansion and Relocation

• In any expansion or relocation decision by a
  league, there are
• Direct financial issues the expansion fee.
• Practical considerations brand building.
• Strategic issues believable threat locations.

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Troublesome Antitrust Issue

• If a pro league can wield its power, it can
  preclude rivals through location and expansion.

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Remember These?

• 1914-15 Federal League
• 1960-69 AFL IV
• 1967-76 ABA
• 1972-79 WHA

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But also there were these

• 1932-50 African American Leagues.
• Dozens of Hall of Famers.

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And these.

• 1908-1957 Pacific Coast League.
• Also producing Hall of Fame talent.

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And this No NFL Team in LA?

• Houston v. Los Angeles in the last expansion.
• Which has the higher expansion fee?
• Practical considerations?
• Strategic Considerations?
• All things considered
• Houston can certainly make sense over Los
  Angeles.

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Where Is the Competition?

• Single dominant league result
• Still, all in all, it appears that leagues have
  managed to expand sufficiently to deter entry
  while still preserving enough vacant sites to
  make move threats believable...
• - Quirk and Fort (Hard Ball,1999, p. 136).

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Franchise Moves and Antitrust

• The antitrust laws have been used against leagues
  to allow teams freer movement between locations
  (the Raiders case).

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Franchise Moves and Antitrust

• Congress has held repeated hearings on the issue
  of league power over team location.
• But never intervened directly to reduce that
  power.

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Mergers and Antitrust

• Mergers typically have been carefully reviewed by
  the Federal Trade Commission and often denied.
• Just the opposite has occurred in pro sports.
• Either no intervention or outright facilitation.

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Mergers and Antitrust

• Occasionally with the blessings and help of
  Congress
• Formal exemption of the AFL-NFL merger in 1966.
• Halas, Rozelle, Hunt.

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Negotiations

• TV rights fees, labor relations, host city
  subsidies.

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Negotiations

• Reminder The question is
• Are joint negotiations required in order to make
  league play happen?

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Joint Venture Activity Negotiations

• Negotiations are characterized as joint venture
  activity because they do not have to be done by
  leagues, as opposed to individual teams.

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Negotiations

• Basic economic and business intuition
• Negotiations are turned over to leagues rather
  than individual owners because owners consider
  themselves better off doing it that way.

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Broadcasting and Antitrust

• Recall Chapter 5
• Nothing requires leagues to negotiate the
  broadcast agreements of their member owners.
• But they do, presumably to the benefit of owners.

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Broadcasting and Antitrust

• Originally, this practice was held as an
  antitrust violation by the Department of Justice.
• Congress reversed this ruling by passing the
  Sports Broadcasting Act of 1961 that made it
  explicitly legal.

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Players and Antitrust

• In the modern free agent context of pro sports,
  antitrust still matters.
• Players sacrifice individual rights to sue under
  the antitrust laws when unions represent them.

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Players and Antitrust

• The Curt Flood Act (1998)
• As in all other leagues, MLB players now can sue
  if owners stymie collective bargaining using
  tactics illegal under the antitrust laws.
• Decertification still remains a tool to allow
  players to sue individually under the antitrust
  laws.

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Special Antitrust Status Impacts

• Special tax and antitrust status impacts the
  welfare of
• Fans and taxpayers.
• Media providers.
• Owners and players.
• Team sale prices.
• Lets look at each one. Then forecast the future.

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Impacts Fans and Taxpayers

• Special antitrust status reduces antitrust
  scrutiny and facilitates market power on the part
  of team owners and leagues.
• Fans pay in terms of higher prices and less
  sports output to enjoy.
• All of the value of increases in fan willingness
  to pay accrue to the current group of team owners.

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Impacts Media Providers

• Media providers must negotiate with the league
  rather than with individual owners.
• This reduces their bargaining position and raises
  prices.
• A portion of this higher price is passed on to
  advertisers, but not all and media providers
  enjoy lower profits as a result.

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Impacts Owners and Players

• Owners and players are the clear beneficiaries.
• Owners The benefits of enhanced market power.
• Players They earn a portion of that through
  collective bargaining.

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Impacts Owners and Players

• Lets look at owners, first. The result is
  easiest to spot in the value of the asset they
  hold.
• Team Sale Prices

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Impacts Team Sale Prices

• Sale prices are high. In each league, the
  majority of teams sell for more than
• NFL- 370 million
• MLB- 210 million
• NBA- 207 million
• NHL- 148 million

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Impacts Team Sale Prices

• But even more insightful, their values have risen
  at rates greater than the rate of return on a
  diversified portfolio. Rates of return

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Impacts Players

• Since special antitrust status facilitates market
  power for owners, players are worth more to
  owners than in the absence of special status.
• Higher pay as seen here WMP gt W0.

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Forecasting the Antitrust Future

• More of the same?

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Rational Actor Politics Explanation

• Weve been here before

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Competition Policy

• The problem ultimately is the result of the
  choices made by politicians who must face
  reelection.
• Since current special status reflects
  politicians doing the best they can for
  themselves, the chances for change are not great.

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Altering Special Status

• Special antitrust status is a political outcome.
• It will take altered politics to change the
  outcome!
• Those interested in altering the outcome must
  become a political force to be reckoned with.

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Competition Policy Regulation

• Senator Marlow Cook called for regulation of
  sports as early as 1972.

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Competition Policy Regulation

• Federal agency regulation
• In some industries, in the name of the public
  interest, the federal government intervenes.
• Analysts of this type of regulation find it a
  mixed blessing at best.
• Students might want to take a class on regulation
  and industrial organization to draw conclusions!

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Competition Policy Regulation

• Public-utility style regulation
• Local taxpayers typically subsidize the activity,
  e.g., water and power
• Public-utility style regulation might bring owner
  behavior more in line with fan welfare.
• Again, analytical look at this type of regulation
  gives mixed results.

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Competition Policy Regulation

• Outright government ownership (fan ownership)
• The public also own outright their water and
  power production facilities.
• Perhaps a similar approach in sports would
  produce a better result from the perspective of
  taxpayers.

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Competition Policy Antitrust Enforcement

• Breaking up the sports leagues
• Suppose leagues were returned to their
  pre-merger status competing leagues.
• What would we expect?

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Competition Policy Antitrust Enforcement

• With the reduction in market power
• More sports at lower price.
• TV contract prices would fall.
• Competitive balance would be enhanced.
• Highly likely that player salaries would fall.
• No cause for labor-management conflict.
• The end of free agent franchises.
• Some reduced quality in larger markets.

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Summary

• Sports team owners enjoy special antitrust
  advantages not enjoyed by other industries.
• Owners and players enjoy the benefits of this
  special status while fans and taxpayers pay the
  costs.
• The rational actor model helps explain why owners
  enjoy these benefits.
• It is unlikely that this special status will be
  revoked.
• Competition policy can play an important role in
  fixing market power problems in pro sports.