NCAA History

1
NCAA History

• NCAA National Collegiate Athletic Association
  (named in 1910) was formed in response to the
  rise in injury and death in college football.
• The promotion of safety expanded in the years
  that followed to include
• The elimination of professional athletes in
  college sports.
• Review the Sanity Code of 1948 and the Committee
  of Infractions (1954)
• Control over broadcast of NCAA games
• Broadcast revenue from college football rose from
  1.15 million in 1962 to 59 million in 1992.
• The larger schools, though, protested the
  distribution of revenues.
• Hence the move to multiple divisions in 1973.
• What model fits the NCAA? The Cartel

2
Cartels, in general

• Joint Profit Maximization Charge the same price
  and earn the same profit as a monopolist. This
  profit is then divided among the firms.
• Elements of the Standard Cartel Model
• Supply and Demand for the Market
• Supply and Demand for the Perfectly Competitive
  Firm
• Output and Price for the Market and Firm if the
  market is competitive.
• Output and Price for the Market and Firm if the
  market is controlled by a cartel
• KEY IDEA A cartel is inherently unstable. The
  individual firm always has an incentive to cheat
  on the cartel agreement.

3
The NCAA Cartel

• Cartel stability is undermined by the following
• Heterogeneity in revenue generation
• Monitoring and enforcing rules
• Cartel is maintained via barriers to entry
• To be a Division I-A football program you must
  have
• a minimum number of male and female varsity
  sports
• a stadium with 30,000 seats
• average more than 17,000 paid attendance
• Both the College Football Association and
  Collegiate Professional Basketball League are
  efforts to undermine the NCAA cartel

4
NCAA and Television

• The NCAA Television Plan for 1983 allowed two
  networks (ABC and CBS) to air 14 telecasts
  annually. Each network could show national and
  regional games, but over a two year period 82
  different teams must be shown. Each team could
  not appear nationally more than four times, with
  six total appearances allowed.
• Why these restrictions? NCAA argued competitive
  balance
• In 1984 the Supreme Court ruled that the NCAA
  Television Plan, which restricted appearances on
  television, was a violation of the Sherman
  Anti-Trust Act.
• Impact of removing NCAA control over television
• Number of televised games increased.
• Improvement in competitive balance? Review Berri
  (forthcoming)
• The rise and fall of the College Football
  Association (1977-1997)

5
NCAA and the Amateur Athlete

• College athletes are not paid. Why?
• The NCAA argues competitive balance.
• Economists argue for the increased profits from
  lowering the price paid for inputs.
• How does the NCAA lower the price of labor?
• Recruiting controls
• Limiting athletic scholarships
• Freshman eligibility increases the potential
  number of years available
• The National Letter of Intent ends the
  expenditure on recruitment by imposing a two year
  penalty on athletes who change their minds.
• Most importantly, compensation to athletes are
  limited to the cost of attending the school.

6
Impact of Paying College Players

• The Competitive Balance Argument
• The Amateur Athlete Argument
• Are college athletes viewed as amateurs?
• The Temporary Underpayment Argument
• Are athletes only temporarily underpaid?
• Less than 1 of college athletes ever become
  professionals.
• The majority of college athletes come from the
  lower levels of the income distribution. Hence,
  the nature of the labor market results in a
  transfer of income from the poor (the athlete) to
  the wealthy (the University).
• How could athletes gain adequate compensation?
• Unionization
• Compensation funds
• Impact of paying players?
• Fewer non-revenue generating sports
• Declines in the salaries paid to coaches.
• Fewer players leaving college early or avoiding
  college entirely

7
College Football Playoffs

• The Bowl System 1902-1994
• The Bowl Championship Series 1995-present
• A Division I-A Playoff System
• A playoff system would clearly enhance NCAA
  revenues
• Problems
• Playoffs lengthen the football season
• Playoffs may eliminate the bowl system, or at
  least, limit post-season participation for many
  teams. Currently 40 teams play in bowl games. A
  16 team playoff would eliminate post-season
  participation for 24 teams.
• How will the revenue be distributed? 93 of NCAA
  revenue comes from the post-season basketball
  tournament. Will a football playoff be a cash
  cow for the NCAA, but not as lucrative for the
  major programs?

8
Does the NCAA Earn Profits?

• Most college sports lose money. The evidence,
  though, suggests otherwise.
• How much do athletes cost?
• Review the stated cost per athlete
• Review the NCAA rule that payments should not
  exceed the cost of attending the school.
• What is the marginal cost of admitting an
  athlete?
• Sports also serve to promote the school. Such
  promotions enhance both admissions and the
  ability of the school to gain financial
  contributions. This impact tends to be ignored
  by schools in assessing the profitability of
  athletic programs.

9
An Alternative View of CartelsGame Theory

• Game Theory the study of how individuals make
  decisions when they are aware that their actions
  affect each other and when each individual takes
  this into account.
• History Introduced in 1944 by John von Neumann
  and Oskar Morgenstern in The Theory of Games and
  Economic Behavior.
• The work of von Neuman and Morgenstern was
  expanded upon by John Nash.

10
Introduction to Game Theory

• A game is a situation in which a decision-maker
  must take into account the actions of other
  decision-makers. Interdependency between
  decision-makers is the essence of a game.
• In games people must make strategic decisions.
  Strategic decisions are decision that have
  implications for other people.
• Nash Equilibrium - a collection of strategies one
  for each player, such that every player's
  strategy is optimal given that the other players
  use their equilibrium strategy.

11
Games to Be Examined

• Prisoner Dilemma Games
• Iterated Strategy Games Not in Book
• Mixed Strategy Games

12
Dominant and Dominated Strategies

• Payoff matrix a matrix that displays the
  payoffs to each player for every possible
  combination of strategies the players could
  choose.
• Dominant Strategy a strategy that is always
  strictly better than every other strategy for
  that player regardless of the strategies chosen
  by the other players.
• Dominated Strategy a strategy that is always
  strictly worse than some other strategy for that
  player regardless of the strategies chosen by the
  other players.

13
Weakly Dominate Strategies

• Weakly dominant strategy - a strategy that is
  always equal to or better than every other
  strategy for that player regardless of the
  strategies chosen by the other players.
• Weakly Dominated Strategy a strategy that is
  always equal to or worse than some other strategy
  for that player regardless of the strategies
  chosen by the other players.

14
Prisoners Dilemma

• Scenario Two people are arrested for a crime
• The elements of the game
• The players Prisoner One, Prisoner Two
• The strategies Confess, Dont Confess
• The payoffs
• Are on the following slide (payoffs read 1,2)
  

15
Prisoners Dilemma, cont.

• Prisoner 2
• Confess Dont Confess
• Confess 4 years, 4 years 0 years, 7 years
• Prisoner 1
• Dont Confess 7 year, 0 years 2 years, 2 years
• Dominant strategy equilibrium In this game, the
  dominant strategy for each prisoner is to
  confess. So the outcome of the game is that they
  each get two years.
• This illustrates the prisoners dilemma games in
  which the equilibrium of the game is not the
  outcome the players would choose if they could
  perfectly cooperate.

16
The NCAA and TelevisionRevisiting the Cartel

• Scenario Two teams need to determine how many
  games to have televised.
• The elements of the game
• The players Florida, Miami
• The strategies
• Televise Many Games, Televise Few Games

17
Miami vs. Florida State

• The payoffs Payoffs read Miami, Florida State
• Florida State
• Many Few
• Many 5, 5 20, 3
• Miami
• Few 3, 20 8, 8
• Dominant strategy equilibrium In this game, the
  dominant strategy for Miami and Florida State is
  Many. So the outcome of the game is 5, 5.
• This is alternative method to illustrate the
  instability of a cartel. Each school has an
  incentive to cheat on any cartel agreement,
  producing a result neither school desires.

18
Iterated Dominant Strategies

• What if a dominant strategy does not exist?
• We can still solve the game by iterating towards
  a solution.
• The solution is reached by eliminating all
  strategies that are strictly dominated.

19
Example of Iterated Dominance

• Across is Michigan, Down is Michigan State

20
Alternative Solution Strategies

• Nash Equilibrium - a strategy combination in
  which no player has an incentive to change his
  strategy, holding constant the strategies of the
  other players.
• Joint Profit Maximization This is the objective
  of a cartel.
• Cut-Throat A strategy where one seeks to
  minimize the return to her/his opponent.
• How does the previous game change when we change
  the objectives of the players?
• This is one of the advantages of game theory. We
  do not have to assume profit maximization. We
  still need to be able to identify the objectives
  of the players.

21
Mixed Strategy

• Pure Strategy is a rule that tells the player
  what action to take at each information set in
  the game.
• Mixed strategy allows players to choose randomly
  between the actions available to the player at
  every information set. Thus a player consists of
  a probability distribution over the set of pure
  strategies.
• Lesson to be learned from Mixed Strategy games A
  player must occasionally play to her/his
  opponents strength.

22
The Football Game

• Scenario A game has come down to a final play.
  The 49ers are on the 2 yard line with 5 seconds
  to go. The current score is 20-16, with the
  Raiders in the lead. The 49ers have two choices,
  run or pass. The Raiders have two choices, defend
  against the run or defend against the passes.
• Players 49ers, Raiders
• Strategy Play Pass or Run, Defend Pass or Run
• Payoffs Probability of success given choices

23
The Football Game, cont.

• There is no dominant strategy, or iterated
  dominant strategy.
• There is also no clear Nash Equilibrium. In
  other words, no combination of actions makes both
  sides happy given what the other side has chosen.
• Hence this is a mixed strategy game.
• Remember, a person is indifferent when the
  expected return from action A equals the expected
  return form action B.

24
Solving the Football Game

• Should the 49ers run or pass?
• E(D run) 70p 20(1-p) 2050p
• E(D pass) 30p 80(1-p) 8050p
• 20 50p 80 50p
• 100p 60
• p .60
• The Raiders are indifferent when the 49ers run
  60 and pass 40 of the time.
• Should the Raiders defend the run or pass?
• E(run) 30p 70(1-p) 70 40p
• E(pass) 80p 20(1-p) 60p 20
• 70 40p 60p 20
• 50 100p
• p .5
• The 49ers are indifferent when the Raiders defend
  the run 50 of the time.

25
Who will win the game?

• The probability that the 49ers will win the game
  the Nash Equilibrium strategies are adopted
  equals
• 0.6 0.5 30 0.6 0.5 70 0.4 0.5 80
  0.4 0.5 20 50
• The 49ers have a 50 chance of winning this game
  when each team adopts their equilibrium
  strategies.

26
The Football Game, new payoffs.

• How does changing the expected payoffs alter the
  probabilities that each team will take each
  action?
• The 49ers have a very good chance of scoring if
  they pass, and the Raiders play run defense.
• Outcome of the game
• 49ers will run with a probability of 4/7
• Raiders will play the run with a probability of
  2/7

27
Who will win the game now?

• The probability that the 49ers will win the game
  the Nash Equilibrium strategies are adopted
  equals
• 4/7 2/7 40 3/7 2/7 90 4/7 5/7 70
  3/7 5/7 50 61.4
• The 49ers have a 61.4 chance of winning this
  game when each team adopts their equilibrium
  strategies.