Welcome back to week 12 of the Power of Markets course. In this session, the application of input market analysis will focus on what happens if there is a buyers' cartel in a market. Several weeks ago we looked at sellers' cartels in output markets. And we'll see there's some analogous insights that can be developed. When in an input market, it's buyers that work to coordinate their actions and drive down the cost of an input. And we'll focus in particular at the National Collegiate Athletic Association in the Untied States. A group of 800 colleges and universities that first got established in 1906 when President Roosevelt, Teddy Roosevelt called a meeting to try to limit violence in the increasing popular sport of college football. Now the National Collegiate Athletic Association, or the NCAA for short, has developed an extensive 400-page rule book that specifies how many scholarships a school can offer. What’s the most in terms of payment, and typically involves just tuition and room and board a college can offer. And we’ll look at the impact of labor in this market and the buyers of labor in this market. Now, let's look first at Figure 18.8, and for those of you following along in the textbook, we're covering this week most of Chapter 18. We'll whiz through Chapter 19 very quickly and then cover pretty much all of Chapter 20. Let's say we look at input markets and, in particular, first in figure 18.8 (b). If there was no cartelization, equilibrium would be determined where total supply intersected with overall demand for the input. Each firm, if it was a relatively small player in this market, would be a price-taker for the input, would face a perfectly horizontal small s curve in figure 18.8 (b). Now what if this group of firms gets together and says, look, let's figure out the overall impact of our hiring actions on the price we pay for the input in question. And so what we saw a few weeks ago, the supply curve is the average cost of labor. And if the average cost is rising, then it must mean the marginal cost is above it in order to be able to pulling it up succeeding levels of higher and higher input employment. Each firm has a corresponding, if it is part of this group that is trying to monopsonize the market, of small s star or a small ACL. And the associated small MCL the marginal cost of hiring the input. To maximize profits, if you coordinate fully in this input market, you would look to where each additional input at added value just above or equal to the marginal cost to hiring that input. So we'd say look, the best employment level is L2. We determined the price of the input by selecting that point on the average cost of labor curve. Wage w prime, and that's the wage that each firm that has monopsonized market end up paying. So reducing employment small L2, all firms and units then achieve the overall large L2 employment output level. Now there's a deadweight loss that results in this market. But this is basically how the NCAA operates. Saying look, we want to restrict what we pay to players. So that we can become, and it's a very profitable business, it's been noted in the press nowadays. For the revenue generating sports, primarily football and men's basketball. Overall ticket and television revenue sales in the United States exceed $2 billion per year. How do we know this market's monopsonized? Well we know from cases like Johnny Johnny Manziel, the quarterback at Texas A&M who gets paid tuition and room and board, but yet generates multiple millions of dollars in ticket sales and TV revenue sales for his firm. We also know that this market's monopsonized through the incentive to cheat to try to provide additional payments to recruit more players. And whether it comes in the form of cars, free tickets for friends and relatives that can be resold. Potential or other margins of signing autographs for various, whether it's Ohio State paraphernalia or Texas A&M paraphernalia. We know that the levels through which players are being paid are below what would prevail in a competitive market. And there are big ongoing debates nowadays to what extent colleges should be forced to pay higher wages to the employees that they benefit from. Right now, the beneficiaries on college campuses tend to be, when you look at coaches that get awarded multiple million dollar annual contracts. And also the ancillary revenues from running coaching clinics from TV shows. They benefit, professors benefit, students on campus basically benefit to the extent that revenue from these revenue generating sports allow a university to charge lower overall tuition. Now there are arguments that people make why we shouldn't get rid of the current system. One argument goes that it'll force some colleges to drop programs. And that potentially is true if colleges have to pay more for football players or basketball players. And yet, what may end up happening is there would be less opportunity to cross subsidize other non revenue generating sports. So it's unclear to what extent there would be a significant decrease in the number of colleges that field football and the basketball teams. Another argument says look, it'll destroy the amateur status on campus. And yet, fundamentally, if we change to a pay for play system, colleges would have to decide, much of the ivy league, for example opts not to compete at the highest levels in the revenue generating sports and decides to focus more on a amateur approach, amateur status approach to their sports. Another argument goes along the lines of if we started paying players, it would diminish the incentive for them to get a high quality education. But what that masks is that right now in men's college basketball and football, only a third of the players end up graduating. And there's that old joke about the college football player earning four Fs and a D. And the coach saying what's clear from this is you're spending too much time on one course. You should be more equally spending time and not getting such a high grade in one of the courses. And there are important equity arguments, college football and basketball tend to come from families much lower on the income scale. Only 1% of college athletes end up attaining professional status. So to the extent that many can recoup later on in life is simply not the case. And while they end up earning just tuition and room and board, it's other people that come from much higher ends of the income scale, coaches, the average college student, college professors, that end up benefiting at their expense. Another example of monopsonied work is in major league baseball. Earlier there were limits through the reserve clause that we've talked about, to what extent you could sell your services for a competing team. When the reserve clause got eliminated, there was an increase between 1976 and 1985 of 700% of the average salary of a baseball player in the major leagues. This got arrested in the collusion era between 1985 and 1988 where Peter Ueberroth took over as commissioner. And essentially doubled the number of meetings and had team owners open up their books. And berated them if they were trying to compete with each other for players that had entered free agency status. The net effect in 1986 was the player salaries declined by 2%. Whereas average team profits increased by 103 million. Ueberroth also increased penalties from 5,000 to 250,000 the team could levy if any one team tried to too aggressively bid for players. And he also developed a kitty based on licensing and royalty revenues, where a team can be awarded a $500,000 benefit if the morgue cooperated with the League office. It worked for about 5 years, and then the players' union took the Major League Baseball to court. Peter Ueberroth also decided not to run for a second term as the Major League Baseball commissioner. And the upward spiral in players salaries then took over again between 1990 and 1991 when average player pay rose by 50% just in a one year period. So, input market cartels, monopsonistic cartels face some of the same difficulties that we saw in output market cartels. There's an incentive to cheat. You have to figure out how to organize. If you're successful, you'll attract entry. There are also additional disincentives to form monopsonistic cartels that aren't present in output markets. And one of these is input buyers sometimes span industries. They're not just localized to one industry. And one input may just be one part of all the inputs that firms buy. Whereas in output markets, the revenue that gets generated by the output in the case of OPEC and oil is a much more driving determinant of the overall profitability of firms in that industry. So there are challenges, but sometimes there are abilities to overcome those challenges as we see currently with the NCAA and its impact on player salaries in revenue generating sports.
