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Markets in which collusion is easier to sustain

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1 Markets in which collusion is easier to sustain
(1) Markets dominated by very large firms/suppliers e.g. Saudi Arabia in OPEC (2) Crowded, mature markets E.g. carton box market in the USA (3) Markets where the value of the market as a whole depends on there not being predictable dominance: Customers can gain from collusion E.g. Professional team sports - collusion between sports clubs (the firms) in a league (the market) Folding carton market case study - Sonnenfeld J, Lawrence P. Why do companies succumb to price fixing?. Harvard Business Review [serial online]. July 1978;56(4): Available from: Business Source Premier, Ipswich, MA. Accessed July 23, 2012. Accessible via the UoB e-library/resources and:

2 Revision questions (a) How can the presence of a large ‘producer in a market increase the possibility of cooperation? (b) What kinds of market characteristics are likely to support collusion? (c) How do clubs in league sports collude to maintain competitive balance? For (b) see: Sonnenfeld J, Lawrence P. Why do companies succumb to price fixing?. Harvard Business Review [serial online]. July 1978;56(4): Available from: Business Source Premier, Ipswich, MA. Accessed July 23, 2012. Accessible via the UoB e-library/resources (you will need your login details) and:

3 Some suggested reading
On resolving the prisoners’ dilemma with a dominant player See for example section on Leadership in Chapter 8 of Dixit and Skeath Games of Strategy, Norton On competitive balance in league sports Grimes, P, Register, C. and Sharp, A Economics of Social Issues, McGraw Hill. Chapter 9 Academic papers: Michie, J. and Oughton, C. (2004) Competitive balance in football: Trends and effects, Research Paper 2004 No. 2, Football Governance Research Centre, Birkbeck, University of London. Neale, W. (1964). ‘The Peculiar Economics of Professional Sports’. Quarterly Journal of Economics, 78, February, pp. 1–14.Szymanski, S (2001) Income Inequality, Competitive Balance and the Attractiveness of Team Sports, Economic Journal, 111:F69-F84. Sanderson A (2002) The many dimensions of competitive balance, The Journal of Sports Economics 3(2) Szymanski, S (2003) The Economic Design of Sporting Contests, Journal of Economic Literature, XLI: December: Szymanski, S. (2001). `Collective selling of broadcast rights’. Soccer Analyst. Vol. 3, Issue One. Page Chapters on competitive balance in Sports Economics text books such as: Dobson, S. and Goddard, J. (2001) The Economics of Football, Cambridge University Press: Cambridge. Sandy, R., Sloane, P. J. and Rosentraub, M. S The Economics of Sport, Palgrave.

4 Markets in which collusion may be easier to sustain
Markets dominated by large ‘swing’ producer/supplier – market leaders that can vary output at low cost large influence on price: e.g. Saudi Arabia in OPEC situation may not be really be a PD if large supplier willing to cut output if small producers increase their output above quota but the probability of repetition need not be very high to enforce cooperation Note: opposite scenario to international trade game (re size of players) Cooperation can arise if the group has a large leader, who personally stands to lose a lot from outright competition and therefore exercises restraint, even though he knows that other small players will cheat. Saudi Arabia's role of "swing producer" in the OPEC cartel is an instance of this. But larger leader who will not lose a lot (over the duration of the game) can also “enforce” cooperation by retaliation in e.g. “tit for tat” (a forgiving meta-strategy). See: Benjamin Zycher, "OPEC." The Concise Encyclopedia of Economics Library of Economics and Liberty. 14 July <http://www.econlib.org/library/Enc/OPEC.html>. “OPEC faces the classic cartel enforcement problem: overproduction and price cheating by members. At the higher cartel price, less oil is demanded; output quotas are necessary in that each member of OPEC has an incentive to sell more than its quota by “shaving” (cutting) its price because the cost of producing an additional barrel of oil usually is well below the cartel price. The methods available to engage in such cheating are numerous: sellers can extend credit to buyers for periods longer than the standard thirty days, sell higher grades (or blends) of oil for prices applicable to lower grades, give transportation credits, offer buyers side payments or rebates, and so on. This tendency of individual producers to cheat on a cartel agreement is a long-standing feature of OPEC behavior. Individual producers usually have exceeded their production quotas, and so official OPEC prices have been somewhat unstable. But unlike the classic “textbook” cartel, OPEC is unusual in that one producer—Saudi Arabia—is much larger than the others. This condition has caused Saudi Arabia to serve, from time to time, as the OPEC “swing” producer—that is, the producer that adjusts its output in order to preserve the official price in the world market. One reason the Saudis have so acted is that downward pressure on the official price imposes larger total losses on them than on the other OPEC producers in the short run. The Saudis, in their efforts to defend the official OPEC price, have periodically reduced their sales, at times dramatically, thus reducing their revenues substantially. In 1983, 1984, and 1986, for example, the Saudis produced only about 3.5 million barrels per day, despite their (then) production capacity of about 10 million barrels per day.” “Swing producer is a supplier or a close oligopolistic group of suppliers of any commodity, controlling its global deposits and possessing large spare manufacturing capacity. A swing producer is able to increase or decrease commodity supply at minimal additional internal cost, and thus able to influence prices and balance the markets, providing downside protection in the short to middle term. ….. Examples of swing producers include Saudi Arabia[1] in oil, Russia in potash fertilizers,[2] and, historically, the De Beers Company in diamonds.”

5 The case of OPEC Saudi Arabia is very large relative to most other oil producers in OPEC - has a very large share of the market and large spare capacity. Increase/decrease in output has a large influence on price If any country reduces price, increases output this reduces profits of all suppliers but Saudi Arabia loses disproportionately - largest output Only smaller countries gain if unilaterally increase output Saudi Arabia can adjust output to balance the market price- act cooperatively The situation is asymmetric – there is a ‘large’ leader and most of the losses from cheating fall on the leader –so the leader has an incentive to act cooperatively eg Saudi Arabia has decreased output in response to increases by smaller countries such as Libya in the past. (Game is similar to ‘boxed pigs’ in Rasmusen) From Wikipedia, the free encyclopedia Swing producer is a supplier or a close oligopolistic group of suppliers of any commodity, controlling its global deposits and possessing large spare manufacturing capacity. A swing producer is able to increase or decrease commodity supply at minimal additional internal cost, and thus able to influence prices and balance the markets, providing downside protection in the short to middle term. In the long term, however, the price of commodity is subject to major changes over time, particularly tied to the overall business cycle. Examples of swing producers include Saudi Arabia[1] in oil, Russia in potash fertilizers,[2] and, historically, the De Beers Company in diamonds.[3] See also Jeff Colgan The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market November 2011 Dixit cited at: “How might such dilemmas be resolved? If the relationship of the players is repeated over a long time horizon, then the prospect of future cooperation may keep them from finking; this is the well-known tit-for-tat strategy. A "large" player who suffers disproportionately more from complete finking may act cooperatively even when the small fry are finking. Thus Saudi Arabia acts as a swing producer in OPEC, cutting its output to keep prices high when others produce more; and the United”

6 A Market with a large ’swing’ producer
Saudi Arabia Small producer increase output Maintain output (stick to quota) increase output (cheat) 1m, 89bln 25m, 199bln Maintain output (stick to quota) -10m, 90bln 20m, 200bln From Wikipedia, the free encyclopedia Swing producer is a supplier or a close oligopolistic group of suppliers of any commodity, controlling its global deposits and possessing large spare manufacturing capacity. A swing producer is able to increase or decrease commodity supply at minimal additional internal cost, and thus able to influence prices and balance the markets, providing downside protection in the short to middle term. In the long term, however, the price of commodity is subject to major changes over time, particularly tied to the overall business cycle. Examples of swing producers include Saudi Arabia[1] in oil, Russia in potash fertilizers,[2] and, historically, the De Beers Company in diamonds.[3] See also Jeff Colgan The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market November 2011 Dixit cited at: “How might such dilemmas be resolved? If the relationship of the players is repeated over a long time horizon, then the prospect of future cooperation may keep them from finking; this is the well-known tit-for-tat strategy. A "large" player who suffers disproportionately more from complete finking may act cooperatively even when the small fry are finking. Thus Saudi Arabia acts as a swing producer in OPEC, cutting its output to keep prices high when others produce more; and the United” What is the Nash equilibrium?

7 A Market with a large ’swing’ producer
Saudi Arabia Small producer increase output (cheat) Maintain output (collude) 1m, 89b 25m, 198b Maintainoutput (collude) -10m, 90b 20m, 200b May even raise output if others cut output From Wikipedia, the free encyclopedia “Swing producer is a supplier or a close oligopolistic group of suppliers of any commodity, controlling its global deposits and possessing large spare manufacturing capacity. A swing producer is able to increase or decrease commodity supply at minimal additional internal cost, and thus able to influence prices and balance the markets, providing downside protection in the short to middle term. In the long term, however, the price of commodity is subject to major changes over time, particularly tied to the overall business cycle. Examples of swing producers include Saudi Arabia in oil, Russia in potash fertilizers, and, historically, the De Beers Company in diamonds.” See also Jeff Colgan The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market November 2011 Dixit cited at: “How might such dilemmas be resolved? If the relationship of the players is repeated over a long time horizon, then the prospect of future cooperation may keep them from finking; this is the well-known tit-for-tat strategy. A "large" player who suffers disproportionately more from complete finking may act cooperatively even when the small fry are finking. Thus Saudi Arabia acts as a swing producer in OPEC, cutting its output to keep prices high when others produce more” Saudi Arabia’s dominant strategy is to show restraint so there is no prisoners’ dilemma

8 Repetition and collusion
small producer ‘cheats’ by exceeding quota gains a payoff of 25 million compared with 20 million But Saudi Arabia can enforce collusion by threatening to retaliate in the next time period by also increasing output e.g. meta strategy = tit-for-tat then the small country’s gain is completely wiped out over the 2 time periods total payoff 25m – 10m = 15m if cheats instead of 20m + 20m = 40m if colludes So no incentive to cheat Cooperation can also arise if the group has a large leader, who personally stands to lose a lot from outright competition and therefore exercises restraint, even though he knows that other small players will cheat. Saudi Arabia's role of "swing producer" in the OPEC cartel is an instance of this. But larger leader who will not lose a lot can also “enforce” cooperation by retaliation in “tit for tat”

9 Crowded, mature markets
The USA folding-carton industry in the 1970s 450 box making companies – only one controlled close to 10% of the market - but in 1976, 47 of 48 executives in 22 companies found guilty of price fixing – the largest case of its kind Key features supporting collusion: Overcapacity (paperboard production) – halt to supermarket expansion and substitute containers Undifferentiated products – no unique product Business culture – norms of collusion, contact with competitors (trade associations), loose ethics And price elasticity of demand Sonnenfeld and Lawrence – Harvard Business Review Sonnenfeld J, Lawrence P. Why do companies succumb to price fixing?. Harvard Business Review [serial online]. July 1978;56(4): Available from: Business Source Premier, Ipswich, MA. Accessed July 23, 2012. Accessible via the UoB e-library/resources and:

10 Benefits of collusion? Is collusion always a ‘bad’ thing?
Static analysis of monopoly (oligopoly collusion) ignores some alternative scenarios supernormal profits could be invested to generate cost reducing innovations that benefit consumers collusion can generate benefits in other ways for consumers e.g. to balance against monopoly power elsewhere, to combat tendency to monopoly, standard setting, security of supply, prevent damaging competition E.g. the organisation and regulation of league sports Dynamic considerations associated with Schumpeter and the idea of creative destruction Benefits of collusion: balance against monopoly power e.g. of upstream suppliers in another country, or downstream buyers Or collusion by workers in unions to balance against monopsony power of employers

11 Collusion in Professional league team sports
Clubs and leagues involved in joint production - ‘collusion’ is good for consumers Contextual considerations Objectives not limited to profit maximisation (Sport or Business?) Fan loyalty/brand loyalty (club monopoly power): implications for corporate governance Players’ talent (monopoly power): regulatory implications Neale,1963 – the peculiar economics of league sports CB implies: Incentives for redistribution – competition via cooperation

12 Joint production and competitive balance in leagues
The league product can be viewed as a joint product (competition and cooperation) Aim of league is to maximise units of entertainment provided by the league; benefits all clubs But aims of individual clubs include: Profit maximisation, promoting (own) sporting excellence, utility maximisation (winning) A league product and a joint product (competition and cooperation) – league is like the industry, clubs are firms Fixed number of clubs (firms) Articles of association Incentives to maintain competitive balance through collective league bargaining revenue sharing

13 Contextual considerations: Sport or Business?
Objectives: profit or glory (utility) or even entertainment? Are these the same, if not, which of these do you think is most relevant in (a) Professional Football in Europe and elsewhere (b) US sports (c) Singapore? What differences might there be between the behaviour of sports clubs more focussed on glory and clubs more focussed on profits? If clubs focus on glory or both glory and profits, does this mean that they are not profit maximisers? Is there any conflict between aims of clubs and the aims of the league? Implications for financial performance, management strategies, accounting practices and how we measure success See sports production function/efficiency literature Focus on performance rather than simply profits suggests that standard model of the firm will be less useful

14 Conflict between clubs and leagues
The essence of sport is competition and it is in the interests of sports clubs to compete on the field (as well as off it?) But more successful clubs have more fans, sell more tickets, merchandise etc.. and in the long-run: Earn higher revenue and profits and attract the best players They then become even more successful; Virtuous spiral But competition on the field (in the league) would deteriorate because of competitive imbalance At basic level a league with only one team would have no competition; the teams need at the very least to be able to cooperate enough to play each other But individual clubs want to maximise profits/revenue/success Cooperation is institutionalised through professional sports leagues Attract best players by paying higher salaries

15 Win-wage relationship
Consistent with competitive imbalance due to virtuous/vicious circles in football - tendency for some clubs to become dominant Higher revenue Improved playing performance League success Higher wages for better players Positive relationship between league performance and relative revenue explained by (1) a positive relationship between revenue and wage expenditure Increases in wage expenditure sustained by increases revenue (2) a positive relationship between wage expenditure and league performance Need for improvement in corporate governance? The success and related revenue of clubs depends on their playing performance performance depends on the quality of players and this will be reflected by the their transfer fees and/or wages since…. Player fees and wages depend on performance but fees and wages also reflect the past revenue of clubs which depends on their past success – past players, wages etc (Their ability to pay) IMPLIES CURRENT REVENUE DEPENDS ON PAST REVENUE Current success Sc = Sc(Pc: current performance) Current revenue (given season) Rc = R(Sc :success (current)) Current and past Fees/wages F/W = F /Wc (Rp : past revenue, Pp : past performance of players)) – investment in players and Cost function Current performance Pc rewarded by ::current club wages and fees + other factors: hedonic wage function - and if perfect info etc then current performance will be reflected by current wages/past fees Success is a function of performance and past success and unmeasurables reflected by wages/fees and revenue + a bit of uncertainty/luck room for getting it wrong etc

16 Impact of a deterioration in competitive balance
Competitive imbalance implies that some teams win a lot more often and other teams lose more often so little variance in league positions Games are not contests they are exhibitions - boring Attendances and viewing figures for both weak and strong teams can fall Some clubs will always be unsuccessful and lack of success lowers attendance further unsuccessful teams lose more fans and consequently can be forced into bankruptcy; Downward spiral League as a whole weakened – less entertaining (a prisoners’ dilemma) – consumers/fans potentially gain from competitive balance Argument for competitive balance So CB good for league and good for clubs

17 Competitive balance and entertainment
More competitive balance – more uncertainty Units of entertainment CB4 CB3 E1 CB2 E2 E3 CB1 E4 10 Number of matches

18 Risk of Top Slicing and Breakaways
When leagues get unbalanced in terms of revenue distribution e.g. due to viewing power, there is a potential for league instability due to bankruptcies Income gaps set up incentives to gamble on success – this is risky There is usually an argument for a breakaway rival leagues Premier league Champions League Search for CB in a Breakaway league is a will-o’the wisp

19 But can there be too much competitive balance?
Opposite of competitive imbalance is perfect balance: Each team has an equal chance of beating another then all teams win close to half their games with a small variance due to random factors (luck or bad referees decisions) Interest in winning the league would still be limited Fans want their home team to win but with some uncertainty level of uncertainty is determined by relative playing strengths not luck Relative playing quality is measured by dispersion in league positions League positions indicated by win/loss ratios, points won etc ie PLAYING SUCCESS But dynasties are also popular boring If perfect CB each team has a 50% chance of winning each match Too much CB not good either

20 Decreasing returns to competitive balance
More competitive balance generates more entertainment but only up to a point Units of entertainment: E E1 E E2 E3 E4 CB1 CB CB CB4 Level of competitive balance: CB

21 Implications Some degree of outcome uncertainty is a necessary feature of competitive team sports and fans want some uncertainty i.e. match uncertainty, Championship uncertainty and/or no dominant clubs But fans don’t want too much uncertainty - implies an optimal level of uncertainty that maximises fan interest and revenue and profits to clubs Fans also like dynasties So clubs in a league have an incentive to cooperate to maintain some competitive balance (to counter win-wage relationship) But quality of the league also matters Leagues can be balanced upwards (+) or downwards (-) Optimal level or uncertainty or variance in league standings Fans’ interest reflected in attendances, viewing figures) #But leagues may also benefit from a few dominant teams Historical value of success - dynasties Scully – page 25 ‘The economics of Sports Leagues’ Chicago 1995 Relative playing quality is measured by dispersion in league positions League positions indicated by win/loss ratios, points won etc PLAYING SUCCESS Playing strengths determined by expenditure on players Expenditure on players determined by revenue Greater equality of playing strength implies more competitive balance (CB) Relative playing strength can be measured by dispersion in league positions But dynasties are also popular

22 Alternative scenarios
Quality of performance/entertainment (high) Imbalance but overall high quality Convergence at high level of quality Convergence at low level of quality Imbalance and overall low quality

23 Alternative scenarios
Quality of performance/entertainment (high) Imbalance but overall high quality – recent history of the English Premier League (but less so recently?). La Liga Convergence at high level of quality – The Championship. Rugby union e.g. Guinness Premiership. County cricket? The possibility of higher quality + balance increases with increasing revenue streams but also needs progressive redistribution Convergence at low level of quality – e.g. New Zealand domestic cricket, non-professional football Imbalance and overall low quality – Scottish Premier League (Demotion of Rangers?)

24 Does local monopoly power reduce the incentive to maintain quality?
Are supporters (e.g. in football) open to exploitation because of local monopoly power, fan loyalty? Weak bargaining power of customers (Porter’s 4th force) Do clubs face ‘soft’ budget constraints? If so does this make them inefficient? Is there a conflict of interest between shareholders and supporters (and supporter shareholders)? Implications for corporate governance e.g. Shareholder/supporter Trusts (Fan Equity) - backed by government policy in the UK Soft budget constraints: term first used to describe state owned enterprises in socialist economies (e.g. Kornai, 1979 and 1980 talking about Hungary). More generally the ideas is that enterprises face soft budget constrained if they can count on surviving even after chronic losses and this expectation (e.g. of being bailed out) marks their behaviour. Soft budget constraints are a source of inefficiency. Essentially it means the enterprise is not really constrained/

25 Implications for clubs
Competitive balance benefits fans (consumers) and increases demand so all teams can benefit - including previously dominant teams Clubs and fans are better off with a degree of collusion involving e.g. redistribution of wealth so that there is more equality, coordination, league rules and guidelines Problem is the potential conflict between aims of clubs and the league (Prisoners’ dilemma) implies a tendency for collusion to be unstable i.e. unregulated leagues will be imbalanced Leagues need to restrain economic competition by acting as cartels – enforcing collusion e.g. through self-regulation The possibility of higher quality + balance increases with increasing revenue streams but also needs progressive redistribution Implies the aim of the league is to maximise units of entertainment, Collusion is good for football! No welfare loss. It’s a PD! But leagues may also benefit from a few dominant teams Historical value of success - dynasties And other determinants of demand e.g. Price Market size Population size Playing performance Win/loss record, points won What’s on TV Weather Quality of the stadium Significance of the match Leagues are formal organisations of individual clubs; formalise, mechanism for cooperation; contract to play each other and abide by rules e.g rules for buying players Rules made in interests of sport not individual clubs In the USA In the US major league baseball is legally free from the restrictions of antitrust law and there is limited protection in other sports Clubs called league franchises as controlled by leagues; when a team admitted to a league and allowed to compete 1992 US Supreme Court Ruling Sports Broadcasting ACT 1961: clubs don’t compete for broadcasting time and other legislation eg re league mergers The Football Merger Act 1966) Explicit recognition that professional sports teams can only survive profitably if the league survives

26 Examples of coordinated behaviour used to operate a successful cartel (1)
Sports labour market regulation e.g.: restrictions on player transfers (transfer fees, reserve rules) - weakened by Bosman ruling but still have transfer windows, salary caps, drafts, zoning (USA) Maintains competitive balance or combats player power? (Club monopsony power?) Importance of unique skills of ‘labour’ give (some) players monopoly power and give clubs incentive to gamble on success by spending on players Superstar wages Clubs would argue that monopoly revenues captured by players – if no regulation

27 Examples of coordinated behaviour (2)
Joint marketing and revenue sharing within a league League and cup merchandising and sponsorship Tickets (gate income), Broadcasting; most successful area of joint selling - the selling of broadcasting rights as a ‘package deal’ Extraction of monopoly profits from broadcasters through package deals In the US gate receipts are shared NFL gates shared 60:40 to home team Regulation of merchandising e.g. logos, trademarks to discourage counterfeiters and promote entire lines for league members Monopoly rents from broadcasting; theory implies less sold at higher price; higher profits to league but its really Bilateral monopoly as broadcasters are monopsonistic e.g. Sky controls demand

28 Joint selling of television rights
Requires exemption from competition laws for collective selling to preserve collective nature of the game Conflict between exclusive and collective selling revenue sharing implies that successful clubs subsidise less successful clubs Equal shares in broadcasting revenues promote CB (as in most sports in USA); Potentially a higher quality product for consumers/fans; If more successful clubs receive larger shares leads to more competitive imbalance If clubs sell broadcasting rights individually then leading clubs attract more viewers (less balance) See Jeanrenaud and Kesenne (2006) “The economics of sport and the media” If monopoly selling of broadcasting rights leads to a higher quality product – more units of entertainment – then monopoly power generates higher output, not less Problem here is this issue of positive negative balance; if redistribution raises or lowers overall quality/units of entertainment; if clubs overall are poorer can’t buy the players so need overall revenue to be rising for redistribution to lead to an increase in quality of play as well as m ore balance Quality of the league also matters Leagues can be balanced upwards (+) or downwards (-) Possibility of positive balance increases with increasing revenue streams If more successful clubs receive larger shares then this leads to more competitive imbalance as they do with the current Sky distribution in the premiership revenue sharing implies that successful clubs subsidise less successful clubs This can explain unequal divisions

29 Case study: Restrictive Practices Court Case Collective sale of TV rights by PL (1999)
Case referred to RPC by Director General of Office of Fair Trading (OFT), exclusive and collective selling OFT argues that PL behaves like a cartel, restricting output, raising price TV companies and PL on same side (defence) OFT lost case, first time OFT has ever lost a case in RP court Issue of exclusive selling may disappear anyway

30 Redistribution rules Different redistribution rules impact on league balance Premier league redistribution from Broadcasting Revenue 50:25:25 redistribution rule + match sharing rule; each club appears a minimum number of times still gives more money to leading clubs via merit and facility (appearance payments) More progressive redistribution could make income more equal; More CB See Jeanrenaud and Kesenne “The economics of sport and the media” 50 per cent of UK broadcast revenue is split equally among all the clubs and 25 per cent is distributed according to the team's finishing position in the league. The remaining quarter is divided up based on how many TV appearances a team makes over the course of a season. Fees from international networks are shared equally by the 20 clubs.

31 Joint selling of TV rights and vertical integration between clubs and broadcasters
For competitive balance also need to prevent vertical mergers between clubs and broadcasters distorts bidding process (under collective sale of rights) under individual sale of rights it is a form of market foreclosure could lead to monopoly control over gate and TV access if a case of vertical integration precipitates other takeovers it could lead to greater inequality and lowered quality Toehold effect

32 Attempted takeover/merger referred to MMC by DG of OFT
Case study: Monopolies and Mergers Commission Inquiry into BSkyB’s attempted takeover of Manchester United Monopolies and Mergers Commission Report (1999) British Sky Broadcasting plc and Manchester United PLC: A Report on the Proposed Merger, Cm 4305, The Stationery Office. London Attempted takeover/merger referred to MMC by DG of OFT MMC Panel Chaired by Chair of MMC Panel recommended that the proposed merger be blocked on competition grounds and adverse effects on quality of football But media companies may respond by backdoor strategy

33 Examples of coordinated behaviour used to operate a successful cartel (3)
Redistribution of revenue from supranational leagues to national leagues or from top national leagues to lower national leagues E.g. through cup competitions, shared attendance revenue

34 Other methods used by sports leagues to operate successful cartels
Elimination of competition (rival leagues) Exclusive rights to sports stadiums/arenas/geographic/territorial areas Agreement on division of monopoly power Outputs are close substitute; Entertainment with same rules and regulations, schedules Power to prevent cheating Contractual powers to enforce league rules (FA, UEFA) Maintain monopoly power Rival leagues difficult to form and in the US, if successful, eventually invited to joint existing cartels Territories are divided geographically and equal number of games; local monopoly power that maintains the shared monopoly of the cartel Most cartels cannot enforce not cheating as it would be illegal but in sports there are some exemptions in law (particularly USA) and FA etc can fine, deduct points etc

35 Have these measures been successful?
Evidence on competitive balance uses measures of industry concentration Standard deviation of win % Measures of championship wins N Firm/club Concentration Ratio in terms of points won; Cn = total points won by top n clubs divided by total points of all e.g. C5 or C4 Herfindahl Index (sums of squared shares of total points); H weights larger shares more heavily Increases in SD, Cn or H measures imply less competitive balance For EPL estimates from Michie and Oughton(2004) indicated a decrease in competitive balance C5 = total points won by top 5 clubs divided by total points won by all clubs; C5 index of CB = C5/(5/N) * 100, N is the number of teams in the league to allow for changes in size of the league – if perfect balance C5 index = 100 H = sum of squared shares (of points) – weights larger shares more heavily

36 Source: Michie and Oughton (2004)

37 Source: Michie and Oughton (2004)

38 If competitive balance is declining does it matter?
Factors other than the level of competition affect attendance demand Income, population, history, broadcasting coverage, quality of performance Some of these can reinforce competitive imbalance Population effects protect big clubs even if rest of league suffers Historical success protects clubs that have been successful in the past Dynasty effects TV coverage can have pos and neg effects on demand -Profitability of Clubs and the League Making one side competitive will not improve matters (theory of the second best) Collectivity Vs exclusivity End of league via a breakaway league would signal end of revenue and match sharing -> league imbalance Institutional Constraints will-o’the wisp idea – chasing an impossible dream

39 Summary Benefits to league (clubs and fans) of co-ordination/collusion to maintain competitive balance are still in conflict with individual club motives still a Prisoners’ dilemma so a tendency to imbalance reinforces need for strong (self) regulation of leagues and players’ labour markets plus some revenue sharing Can be justified to fans (customers) Conflict with policy makers (eg EU single market, labour market mobility) suggest a need for stronger regulation of leagues, related labour markets and some revenue sharing

40 Discussion Use examples to discuss whether collusion between firms/suppliers is more likely to be sustained if (a) there is a large ‘swing’ producer and (b) customers as well as suppliers can gain from coordinated behaviour What other industry characteristics are likely to support collusion?

41 Appendix: other evidence on trends in competitive balance – for personal interest only

42 Winners by Number of Clubs
Pre and post Bosman changes in national championship winners and top 4 clubs National Championship Winners and Top 4 clubs in Europe: 1983/4-2008/9 Pre-Bosman Winners by Number of Clubs 1983/4 –1995/6 Post-Bosman 1996/7 –2008/9 Top 4 Countries Clubs Number of Clubs England Liverpool 4 Manchester Utd 3 Arsenal 2 Everton 2 Blackburn Rovers 1 Leeds Utd 1 England Manchester Utd 8 Arsenal 3 Chelsea 2 15 8 France Marseille 5 Bordeaux 3 PSG 2 Auxerre 1 Monaco 1 Nantes 1 France Lyon 7 Bordeaux 2 Monaco 2 Lens 1 13 Germany Bayern Munich 6 Borussia Dortmund 2 Stuttgart 2 Werder Bremen 2 Kaiserslautern 1 Germany Bayern Munich 8 Borussia Dortmund 1 Stuttgart 1 Werder Bremen 1 Wolfsburg 1 11 Italy AC Milan 5 Juventus 3 Naples 2 Inter Milan 1 Sampdoria 1 Verona 1 Italy Juventus 6 Inter Milan 3 AC Milan 2 Lazio 1 Roma 1 12 9 Spain Real Madrid 6 Barcelona 5 Atletico Bilbao 1 Atletico Madrid 1 Spain Barcelona 6 Real Madrid 4 Valencia 2 Deportivo 1 The Bosman ruling eventually gave out of contract players (in the European Union) effective freedom of contract Carmichael and Thomas, forthcoming

43 Pre and post Bosman changes in European championship winners and finalists
European Cup/Champions League Winners and Finalists: 1983/4-2008/9 Pre-Bosman Winners 1983/4 –1995/6 Post-Bosman 1996/7 –2008/9 Finalists by Country Finalists by Countrya Countries Clubs Italy 5 AC Milan 3 Juventus 2 Italy 2 AC Milan 2 Italy 9 Italy 6 Netherlands 2 Ajax Amsterdam 1 PSV Eindhoven 1 Netherlands 3 England 1 Liverpool 1 England 3 Manchester Utd 2 England 2 England 7 France 1 Olympique Marseille 1 France 2 Portugal 1 FC Porto 1 Portugal 3 Rumania 1 Steaua Bucharest 1 Rumania 2 Spain 1 Barcelona 1 Spain 5 Barcelona 2 Real Madrid 3 Spain 3 Spain 7 Yugoslavia 1 Red Star Belgrade 1 Germany 2 Bayern Munich 1 Borussia Dortmund 1 Germany 1 Germany 4 Note a: Three finals between teams from the same domestic league (England, Italy, Spain) Carmichael and Thomas, forthcoming

44 Sports leagues are not just another business – peculiar economics (Neale,1963)
Corporate governance issues in industries with fan equity and local monopoly Monopoly power of players may require payroll and salary caps to control player wages particularly superstar wages Club/league and fans’ interests for leagues to act as cartels e.g. through collective selling of TV rights, revenue sharing, prevention of breakaway leagues, coordination via institutional constraints (e.g. labour market) But some bigger leagues are becoming less balanced - it’s still a prisoners’ dilemma Need to promote positive league balance Match and revenue sharing - need for progressive revenue sharing Breakaway leagues should be prevented If breakaway leagues arise revenue should be redistributed to national leagues Problem is the voting structure of the leagues: Turkeys and Christmas – blocking minorities Regulatory authorities need to coordinate regulation at international level – institutional constraints Better management/corporate governance required all round but by whom? turkeys and Christmas….?


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