Scott Sumner  

Basketball teams compete with each other. Basketball team companies cooperate, as they should.

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Matt Yglesias has a post suggesting that if the NBA were "any normal industry" it would not be able to get away with collusive schemes like the NBA draft. For those who don't follow American sports, the new players entering the pro basketball league are picked via a draft and assigned to various teams. This does seem to violate anti-trust rules. Here I'm going to take a contrarian position, although the truth is probably somewhere in between my view and Yglesias's view. I will simplify to make a point.

It's not clear to me how we should think about the pro basketball industry:

1. It's an industry with 30 firms that collude.
2. It's an industry with a single monopolistic firm having a bunch of franchises.
3. It's not an industry at all; it's a group of firms in entirely different industries.

Matt Yglesias seems to hold the first view. I lean toward the second or third. Firms are in the same industry if consumers see their products as close substitutes. In my view going to a Cleveland Cavalier game is not a close substitute for going to a Boston Celtics game. Rather the Celtics are competing against other sports teams in Boston, and indeed other forms of entertainment in Boston, such as movies. It's in the (monopolistically competitive) "Boston entertainment industry."

Now this is where the simplification comes in. What I said is not completely correct. Even though a Boston fan would not go to a Cleveland game, they might watch Cleveland on TV. So in that limited sense they are in the same industry, or at least have been since the onset of TV revenues. I simply don't know how important that factor is. There are all sorts of complications such as the sharing of TV ad revenue that cloud the picture. So to be precise, my claim is that the teams were in completely separate industries until the onset of TV, and are still in mostly separate industries.

Now let's think about option 2. Suppose we think of the NBA as a single firm, which uses inputs from all these teams to produce a product called "games." Notice how far we are from traditional industries like automobiles, where GM and Ford do not cooperate to produce cars. Basketball teams compete in an athletic sense, but they cooperate in an economic sense. I have two problems with Yglesias' claim that any normal industry would not be allowed to do something like the draft. If that were true, then wouldn't it be equally true that any normal industry would not be allowed to collude on output? In other words, the mere fact that the NBA sets up a schedule of games is evidence of a collusive output agreement. Do we really want to apply anti-trust logic to schedules? Should we have a free market where teams (and fans) just randomly show up and hope there is someone else to play that day? I have a hard time imagining the NBA as anything other than a monopoly that organizes output (i.e. that sets schedules.)

My second objection is that it's not clear that other industries don't behave this way. Prior to the 1970s, ATT had a monopoly on phone service. Even today Boeing is the only builder of jumbo jets in America. A young American who wanted to work in the phone industry in the 1960s, or who wants to build jumbo jets today, has only one firm they can work for. If that firm hired them, the firm can assign them to any part of the country it wishes to. Yes, the young jumbo jet engineer could go to Europe and work for Airbus, but the young basketball player can also go to Europe and play in a different league. So if you consider the NBA to be a single firm, a monopoly, then the draft is really no different from the personnel policies of any other monopoly in the US.

To summarize, I have my doubts as to whether basketball firms are even in the same industry. In that case antitrust issues don't apply. If I'm wrong, and they are in the same industry, then I think it makes more sense to view that industry as a single firm that uses inputs from multiple teams to produce a product called "games." And that product can only be produced via collusion. Thus either basketball firms aren't in the same industry, or they are in the same industry, but should be allowed to collude.

None of this has any bearing on the issue of whether players are under- or overpaid, a debate that I find to be mind-numbingly boring. It's just one of those monopoly/monopsony deals where both sides of the negotiation are quite rich. Yawn.


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COMMENTS (15 to date)
Daublin writes:

It's simpler than you make it.

For an industry to exist, the firms in that industry need to establish ground rules for interacting with each other. What's within the rules, and what's against the rules. Such activity is sometimes called market building.

For really big firms, these rules are often established in part via regulatory agencies. If you are in telecom, then you just have to follow the FCC's rules, and so do your competitors. At the same time, you have very high influence over what the FCC's rules are, exactly.

Industry consortiums are also used to establish these ground rules. If you produce film in the U.S., then you have to follow the rules of the MPAA. At the same time, you will typically have a lot of influence over what the MPAA's rules are.

Given this perspective, it is interesting that competitive norms arise at all. Why don't the big boys just collude, in all industries? It's not because of vigorous activity from an uber-capitalist federal government. It must have something to do with how people naturally interact with each other. There's something in our human nature that leads us to agree on rules of engagement and then to play ball.

Yancey Ward writes:

View #1 is simply wrong-headed. The NBA is no different than Disney, or, in a better analogies, the World Wrestling Association or Nascar.

MG writes:

Even when you drill down to the basics -- the game itself, basketball -- you can still find "collusion" if you really want to find it. For example, teams collude by agreeing to play by the rules of basketball, even though some teams could "prevail" more often by tackling, others by using tennis rackets to bat balls away, and certainly all by fielding at least one more player than the opponent...

Jeremy writes:

What an interesting point of view, Scott. I am not from America, but I see news regarding issues like this. Sometimes it almost feels like they're just staging a great big show whose production is a great big secret made up of collusion. The rest of the details? We'll probably never know, but you're right in saying they should be allowed to collude. After all, as the audience, we do want a game that is worth watching.

Brian writes:

Scott,

You've got it exactly right. Another way of seeing that antitrust issues shouldn't apply is to note that a basketball team by itself produces nothing of value. No one will pay to watch a single team scrimmage, and even then it wouldn't be a single team anymore. The value, the product as you say, is in the competition displayed between two teams in a single game. Cooperation among the various franchises produces that value in a way that's not very different from how multiple departments in a single corporation work together.

One might argue, of course, that teams should be free to sign whatever players they want (rather than be constrained by the draft)--that player recruitment shouldn't be part of the cooperation--but it's clear that such "collusion" is aimed at creating a better, more competitive product. The basketball product would be awful if two or three teams had all the all-stars and the rest were left with journeymen. The draft scheme where the worst teams have a shot at the best players ensures that teams at least have a chance to be competitive.

Another way to look at it is to ask what would happen if one company/person owned every NBA franchise. I don't know if the NBA rules allow for that, but it's at least imaginable. Would the product be any different than it is now? The answer is no. That suggests that the NBA is more like a single corporation than a series of competing businesses in a single industry.

JPC writes:

It's also notable that the consumer effect of collusion is kind of ignored. At a metagame analysis level, the consumer surplus could well be maximized in a system of colluding franchises, and the draft could well be one of the mechanisms that cause this.

Put simply, having some degree of parity among the league as a result of labor market collusion(draft, salary caps, luxury tax, etc) could well allow for a larger market than otherwise, with a competitive edge coming to the NBA relative to the other modes of entertainment in a given city.

I'd love to hear others' thoughts on this, though, but just throwing the idea out there.

James writes:

Maybe I've misunderstood the story below, but Yglesias seems to have failed to do basic research. Sports leagues "get away with" this because they have unionized labor (silicon valley does not), and labor law trumps anti-trust law:

Judges Rule Against Clarett

I was surprised this story/fact didn't get much attention at the time. I assumed it was because it was a well known fact that was new to me, but it looks otherwise now. iirc, what I found with some searching at the time is that labor and anti-trust laws have contradictions, and the judiciary's standard response to this is to favor the most recently passed law. Decisions on this issue have asked the legislature to clarify the law, without response.

You may think what the leagues are doing is inefficient or immoral, but it seems clearly not illegal.

Andrew_FL writes:

I can't be a violation of Anti-trust law. Sports teams are exempt from Anti-trust law, as a part of the law.

Pajser writes:

It is cooperative of clubs. Like taxi drivers cooperative. Yes, it is monopoly because it is not enough to have better organization and more money than wealthiest NBA club to successfully enter the market. NBA must allow it.

If NBA is single company, it wouldn't be monopoly any more. Everyone with enough money to start new basketball association could have fair chance.

Scott Sumner writes:

Everyone, Lots of good comments. I am traveling today so I'll just make one point. I do understand there is some sort of antitrust exemption. I believe Yglesias was suggesting there wasn't much justification--although I 'm not certain that was his point.

In any case, I agree with most of the comments.

Joel Aaron Freeman writes:

Calling an association of firms "a single firm with franchises" is playing with words. It's philosophy and metaphysics. Let's stick to economics. Do these firms share assets? Do they share profits? Are they all subsidiaries of each other? No, no, and no.

The NBA is clearly a cartel. If a new basketball company arises, they can be denied entrance into the cartel and driven out of business. Think about what would happen if the Southern Confederacy of basketball teams broke away from the NBA to start their own association? The NBA is a monopolistic entity, and would certainly use its market power to attack a rival, upstart.

If the cartel was abolished, what would happen? I imagine bidding wars for players would be much more common. The drafting process seems to me like a gentleman's agreement, similar to David and Goliath dueling so nobody has to fight a war. We all agree to a set of disputation rules in order to minimize our casualties.

In most industries there are a lot of workers to choose from and few businesses to do the choosing. Athletics is weird because the relationship is reversed. The function of the cartel is probably to suppress player salaries.

Given that most players do fine on the salary front, that's fine with me.


[comment edited with permission--Econlib Ed.]

Frank Neuville writes:

In my view, I think the best way to view American sports leagues, isn't as either 30 teams that collude, or as one league, maybe with 30 venues. Instead, sports leagues should be considered as shape shifters, entities with the ability to reorganize themselves, in ways that allow them to best respond to situations as they arise. Sometimes they are partnerships, sometimes they are corporations. sometimes they are competitors, other times they are in collusion. Sometimes they are one, at other times they are many. One of the frustrating things in dealing with sports teams, in issues like building stadiums is that you are never actually sure who it is sitting across the table. Are you dealing with the local franchise? Or are you dealing with the league as a whole, calling the shots from the behind the scene?

I have little understanding of what "normal" might be in an economic context, but like any industry the teams of professional sports leagues will work together in furtherance of their common interests. They all favor public funding of arenas, just as car companies favor the building of interstate highways.

Steve Sailer writes:

They loot taxpayers by local monopolies. You don't have to be good at owning: Donald Sterling, for example, has gotten rich off being a thoroughly lousy owner.

Floccina writes:

NCAA basketball competes with the NBA (I prefer watching NCAA ball). One interesting note is that the NCAA puts a cap on player compensation but not on coach compensation. I think we would all be better if antitrust stayed completely out of sports. The athletes might be paid much less but the ticket might be significantly cheaper.

Floccina writes:

NCAA basketball competes with the NBA (I prefer watching NCAA ball). One interesting note is that the NCAA puts a cap on player compensation but not on coach compensation. I think we would all be better if antitrust stayed completely out of sports. The athletes might be paid much less but the ticket might be significantly cheaper.

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