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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.

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Presentation on theme: "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."— Presentation transcript:

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)

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?

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

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 s maller countries gain if unilaterally increase output Saudi Arabia can adjust output to balance the market price- act cooperatively

6 A Market with a large swing producer Saudi Arabia Small producer increase output Maintain output (stick to quota) increase output (cheat) 1m, 89bln25m, 199bln Maintain output (stick to quota) -10m, 90bln20m, 200bln What is the Nash equilibrium?

7 A Market with a large swing producer Saudi Arabia Small producer increase output (cheat) Maintain output (collude) increase output (cheat) 1m, 89b25m, 198b Maintain output (collude) -10m, 90b20m, 200b Saudi Arabias dominant strategy is to show restraint so there is no prisoners dilemma May even raise output if others cut output

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 countrys 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

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

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

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

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)

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?

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

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

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

17 Competitive balance and entertainment Units of entertainment Number of matches 10 E2E2 CB4 CB3 CB2 CB1 More competitive balance – more uncertainty E1E1 E3E3 E4E4

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

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

20 Decreasing returns to competitive balance Units of entertainment: E Level of competitive balance: CB CB 1 CB 2 CB 3 CB 4 E2E2 More competitive balance generates more entertainment but only up to a point E1E1 E4E4 E3E3 E

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 dont 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 (-)

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

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

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 (Porters 4 th 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

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

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

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

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

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

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

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

32 Case study: Monopolies and Mergers Commission Inquiry into BSkyBs 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

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)

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

36 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

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)

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 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 Winners by Number of Clubs 1996/7 –2008/9 Pre-Bosman Top 4 Post-Bosman Top 4 CountriesClubs CountriesClubsNumber of Clubs England 6 Liverpool 4 Manchester Utd 3 Arsenal 2 Everton 2 Blackburn Rovers 1 Leeds Utd 1 England 3 Manchester Utd 8 Arsenal 3 Chelsea France 6 Marseille 5 Bordeaux 3 PSG 2 Auxerre 1 Monaco 1 Nantes 1 France 5 Lyon 7 Bordeaux 2 Monaco 2 Lens 1 Nantes 1 13 Germany 5 Bayern Munich 6 Borussia Dortmund 2 Stuttgart 2 Werder Bremen 2 Kaiserslautern 1 Germany 6 Bayern Munich 8 Borussia Dortmund 1 Kaiserslautern 1 Stuttgart 1 Werder Bremen 1 Wolfsburg Italy 6 AC Milan 5 Juventus 3 Naples 2 Inter Milan 1 Sampdoria 1 Verona 1 Italy 5 Juventus 6 Inter Milan 3 AC Milan 2 Lazio 1 Roma Spain 4 Real Madrid 6 Barcelona 5 Atletico Bilbao 1 Atletico Madrid 1 Spain 4 Barcelona 6 Real Madrid 4 Valencia 2 Deportivo Pre and post Bosman changes in national championship winners and top 4 clubs Carmichael and Thomas, forthcoming

43 European Cup/Champions League Winners and Finalists: 1983/4-2008/9 Pre-Bosman Winners 1983/4 –1995/6Post-Bosman Winners 1996/7 –2008/9Pre-Bosman Finalists by Country Post-Bosman Finalists by Country a CountriesClubs CountriesClubsCountries Italy 5AC Milan 3 Juventus 2 Italy 2AC Milan 2Italy 9Italy 6 Netherlands 2Ajax Amsterdam 1 PSV Eindhoven 1 Netherlands 3 England 1Liverpool 1England 3Liverpool 1 Manchester Utd 2 England 2England 7 France 1Olympique Marseille 1France 2France 1 Portugal 1FC Porto 1Portugal 1FC Porto 1Portugal 3Portugal 1 Rumania 1Steaua Bucharest 1Rumania 2 Spain 1Barcelona 1Spain 5Barcelona 2 Real Madrid 3 Spain 3Spain 7 Yugoslavia 1Red Star Belgrade 1Yugoslavia 1 Germany 2Bayern Munich 1 Borussia Dortmund 1 Germany 1Germany 4 Pre and post Bosman changes in European championship winners and finalists 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 - its still a prisoners dilemma

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