Monopolies, Cartels, and Antitrust in Professional Sports Leagues

1
Monopolies, Cartels, and Antitrust in
Professional Sports Leagues

• The Sherman Antitrust Act of 1890 facilitates
  competition. In the absence of an exemption, it
  forbids the unreasonable restraint of interstate
  commerce.

2
Definitions

• Monopoly only one firm or seller controls the
  market and sets the price (absence of
  competition)
• Cartel an agreement or collusion among a small
  number of business entities with similar products
  to increase their profits by reducing
  competition, such as through the allocation of
  territories or outputs
• Collusion when rival companies within an
  industry operate fraudulently for mutual benefit
  a cartel is a special case of collusion

3
Professional Sports Teams as Cartels

• Restrict inter-team competition for players, thus
  reducing competitive bidding and holding down
  salaries
• Control the location and relocation of teams
  this is a valuable property right
• Control the national broadcasts of games and
  allow teams to control local broadcasts
• Owners, or management, earn profits higher than
  the normal rate of return on their equity
  investment.

4
Monopoly Professional Sports Leagues

• Result in major loss of consumer welfare due to
  restrictions on supply through
• Definition and protection of broadcast territory
  exclusive territories give owners market power
• Control over expansion and relocation
  restrictions on output results in the higher
  valuation of teams and higher ticket prices
• Joint negotiations with the national media
• Joint, cooperative ventures relative to
  sponsorships and merchandising

5
Obtaining an Expansion or Relocated Professional
Team Sports Franchise

• Major League Baseball financial statements for
  the club operations for at least five years a
  ballpark with a capacity of at least 40,000
• National Football League approval by the
  commissioner requires that one individual own at
  least 30 and is responsible for the operations
• National Basketball Association application and
  business plan submitted interview of potential
  owner or syndicate representative and audit of
  business plan

Must be approved by 75 of the owners in all
three leagues.
6
Key Exemptions to Antitrust Law

• Federal Baseball Club of Baltimore, Inc. vs.
  National League of Baseball Clubs, 1922 ruled
  that baseball was not engaged in interstate
  commerce and thus was granted a unique antitrust
  status (not an exemption).
• Congress allowed the merger of the National
  Football League and American Football League in
  1966 through an exemption to antitrust laws.
• Congress, through the Sports Broadcasting Act of
  1961, amended antitrust law to allow professional
  sports leagues to pool television rights and sell
  them to broadcasters.
• Leagues can control player draft systems.

7
Media Blackouts of Games

• The Sports Broadcasting Act of 1961 permitted the
  black-out of games in areas where games were
  played.
• In 1973, Congress amended this law to prohibit
  the blacking out of home games that were sold out
  72 hours prior to game time.
• In 1976, this temporary provision expired, but
  the NFL agreed to comply with this provision and
  it is currently a part of national contracts.
• For most NFL teams the black-out rule is a
  non-issue (they sell out their games).

8
Since Black-outs Cause a Loss of Social Welfare,
What Alternatives Exist?

• Legislate against local black-outs desired by
  the networks, but not by the NFL
• Allow additional advertising during NFL
  broadcasts to off-set revenue losses
• Use tax revenue to compensate NFL teams would
  cost non-viewers
• Create a public mechanism for viewer chargers
  pay-per-view available

Why does the NFL want the blackout rule?
9
Cooperation versus Competition

• Cooperation in Professional Sports Leagues
• Foster competition
• Process for the determination of champions
• Salary control, such as through salary caps, and
  restrictions on player movement
• Draft system
• Sharing national broadcasting revenues
• Sharing merchandising revenues
• Restrictions on franchise expansion and
  relocation and ownership changes
• Playing and league rules and their enforcement

10
Minor League Baseball and Antitrust

• Although removing the unique status relative to
  antitrust laws for Major League Baseball would be
  in the publics best interest, it would not be in
  the publics best interest to apply antitrust
  laws to Minor League Baseball.
• Over 180 teams, each with a contractual
  affiliation with a MLB team
• Marginally profitable teams, usually in small
  cities, are viable only because of subsidies from
  MLB through holding down player costs.

11
Cooperation versus Competition

• Competition would change the economic balance of
  power from the owners and players to fans and
  taxpayers.
• More televised games with less revenues to
  leagues and owners
• Lower player salaries
• Lower ticket prices
• More teams with every financially viable location
  having one or more
• In the absence of relocation threats, owners and
  teams could not extract public subsidies
• Team profits and franchise values would fall

12
What Would Pure Competition Bring?

• More
• Teams
• Competitive balance
• Lower or less
• Ticket prices
• Media costs
• Public subsidies
• Player salaries
• Profits
• Franchise values

• However, economic competition cannot be
  self-sustaining without a change politically.
• A break-up of existing leagues, by enforcing
  existing antitrust laws, would be required for
  competition to flourish.

13
Expansion in Number of Teams in League

• Leagues expand fast enough to deter new leagues
  but slow enough to ensure the existence of cities
  vying for teams.
• The major cost is the division of national
  television revenues among more teams.
• The benefits include receipt of expansion fees,
  potential growth in fans locally and as a
  national television audience, and to appease
  politicians.

14
Options for Addressing Monopoly Abuses

• Divide each of the leagues into smaller leagues
  to inject more competition
• Prohibit leagues from controlling or restricting
  team relocation, thus enabling large markets to
  support multiple teams
• Enforce and change the Sherman Antitrust Act to
  ensure economic efficiencies
• Taxpayers would be better off, although players
  salaries would decline as would owners profits.

15
Antitrust Lawsuits

• United States v. National Football League (1953)
  held that exclusive broadcast territories are
  lawful to protect attendance but unreasonable for
  protecting the value of broadcast rights
• It is not in the publics interest because it
  reduces competition and raises the prices of
  broadcast rights fees.

16
Antitrust Lawsuits

• Radovich v. National Football League (1957)
  sports other than baseball subject to antitrust
  and so cannot blacklist players for playing in
  rival leagues

17
Antitrust Lawsuits

• Denver Nuggets v. All-Pro Management, Inc. (1971)
  NBA not permitted to restrict drafting of
  players until their eligibility had expired
• Could be argued that it is in the publics
  interest for college athletes to graduate first,
  but really fans just want to keep players in
  college so they can watch them help their
  favorite team win.
• Professional leagues prefer to let colleges keep
  players and thus reduce player development and
  scouting costs.

18
Antitrust Lawsuits

• Philadelphia World Hockey Club, Inc. (1972) NHL
  not permitted to tie up all major and minor
  league players for three years and thus exclude a
  rival league
• Not in the publics interest because professional
  sports leagues are not natural monopolies.

19
Antitrust Lawsuits

• Mackey v. National Football League (1976)
  eliminated the unreasonable Rozelle rule that
  imposed punitive compensation on a team that
  signed a player from another team
• Not in the publics interest because it does not,
  as claimed, contribute to competitive balance.

20
Antitrust Lawsuits

• Los Angeles Memorial Coliseum Commission and
  Oakland Raiders v. National Football League
  (1984) disallowed the NFL from preventing the
  Raiders relocation to Los Angeles
• Not in the publics interest since such a
  restriction does not cause owners to act
  responsibly.
• The rule is in the publics interest because it
  deprives owners of monopsonist powers to extort
  subsidies from cities.

21
Antitrust Lawsuits

• McNeil v. National Football League (1992) NFLs
  Plan B that permitted free agency for marginal
  players but precluded competition for the best 37
  players ruled unreasonable
• Even if Plan B enhanced competitive balance and
  allowed clubs to recover player development
  costs, it was too broad to be in the publics
  interest.

22
Antitrust Lawsuits

• Chicago Professional Sports Ltd. v. National
  Basketball Association (1992) NBAs limit on
  the number of Bulls games that could be
  televised nationally on WGN ruled unreasonable
• Even though professional sports leagues are
  permitted to act as joint ventures in selling
  broadcasting rights, this monopoly power does not
  hold when challenged by teams.

23
Antitrust Lawsuits

• Sullivan v. National Football League (1994)
  NFLs rule that precluded the sale of equity or
  ownership of clubs to publicly traded or
  non-profit corporations ruled unreasonable
• Not in the publics interest because cities or
  equity holdings cannot recoup subsidies for
  construction.

24
Antitrust Lawsuits

• Butterworth v. National League (1994) National
  Leagues refusal to allow the San Francisco
  Giants to move to Tampa not exempt from antitrust
  law
• Monopoly leagues when operating free of the
  threats from rival leagues limit the number of
  franchises while extorting public subsidies.
• Individual owners might oppose expansion or
  relocation, even if it would benefit the league,
  unless personally beneficial
• Clubs would only support league expansion if the
  marginal revenue exceeds average current revenue
  (i.e., generally owners prefer a larger piece of
  a smaller pie)

25
Some Effects of Owner Monopsony

• Since there is only one buyer in the market, it
  lowers players pay, in contrast with what occurs
  through rival leagues, free agency, and the
  application of marginal revenue product.
• Collusion in refusing to make offers to free
  agents in Major League Baseball in the 1980s. The
  owners were found guilty and had to pay a 280
  million penalty to the affected free agent
  players.

26
Stakeholders and Antitrust Issues

• Want lower high ticket prices more availability
  of games on television more teams
• Seek highest possible salaries during short
  playing careers
• Seek to restrict player movement to foster
  competitive balance
• Limit franchises to maximize profits
• Want teams
• Want to pay leagues less for broadcast rights
• Want access to geographical areas and
  broadcasting reach at lowest cost

• Fans
• Athletes
• Teams
• Leagues
• Cities
• Media
• Sponsors