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Monopoly and Antitrust - Marietta College

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					    Labor Markets
in Professional Sports
An Overview
 Labor Markets
 Human Capital
 Monopsony and Free Agency
 Salary Arbitration
 Superstars and Winner-take-all
 When to turn pro?
What would Babe Ruth earn today?

   Ruth earned $80,000 for the 1930
    New York Yankees

       1930 CPI = 16.7
       2011 CPI = 224.939


   Ruth’s 1930 salary in 2012 dollars is:

(80,000)(224.939/16.7) = $1,077,552


“I know, but I had a better year than Hoover.”
   - Reported reply when a reporter objected that
the salary Ruth was demanding ($80,000) was more
than that of President Herbert Hoover's ($75,000)
               Average Salaries in Pro Sports (Nominal $)
         MLB                 NFL               NHL            NBA
1970     29,303             41,000              25,000
1972     34,092             45,000              45,000
1974     40,839             56,000              65,000
1976     51,501             78,000              86,000
1978     99,876            100,000              92,000       139,000
1980    143,756            117,000            108,000        170,000
1982    241,497            157,000            120,000        212,000
1984    329,408            279,000            118,000        275,000
1986    412,520            288,000            144,000        375,000
1988    438,729            307,000            172,000        510,000
1990    597,537            430,000            211,000        750,000
1992   1,082,667           551,000            368,000       1,100,000
1994   1,168,263           674,000            562,000       1,441,000
1996   1,119,981           807,000            892,000       1,979,000
1998   1,398,831          1,000,000          1,167,713      2,818,000
2000   1,895,630          1,116,100          1,642,590      2,901,595
2002   2,295,694          1,300,000          1,790,000      3,893,801
2004   2,486,609          1,333,333          1,830,000      3,748,659
2006   2,866,544          1,947,898          1,751,845      4,176,241
2008   3,154,845          2,205,792          2,234,225      5,365,000
                       Average Salaries in Pro Sports
                                      (2008 $)
$6,000,000


$5,500,000                                                              NBA
$5,000,000


$4,500,000


$4,000,000


$3,500,000                                                              MLB
$3,000,000


$2,500,000
                                                                       NHL
$2,000,000


$1,500,000


$1,000,000
                                                                       NFL
 $500,000


       $0
        1970   1974   1978   1982   1986   1990   1994   1998   2002     2006
Labor Market: Competitive Model

        $
                      S1



        w1




                           D1

                       Labor
                L1
Labor Supply

   Income-leisure tradeoff
                                  Substitution Effect (work effort rises)
        Wage increase causes:
                                  Income Effect       (work effort falls)

        $       S


              IE > SE

        w*                       Backward-bending labor supply curve

              SE > IE



                                  Labor
Labor Demand

   Profit-max decision by employers          Reflects DMR
   Hiring Rule: hire until MRP = w


      $
                               MRP = MP* MR

                                    MP = ∆Q/ ∆L
      w1
                                    MR = ∆TR/ ∆Q = P
      w2


                            MRP

                L1   L2     Labor
Estimating a Player’s MRP

   Scully (1974): two-step model using 1968-69 data

             PCTWIN = f(PRODUCTIVITY)

                  REV = g(PCTWIN)
                                                    TSA = Team Slugging Average
                                                    TSW = Team Strikeout – Walk Ratio

 Scully’s Results                                   NL = National League
                                                    CONT = Contender
                                                    OUT = Out of contention
                                                    SMSA = Market Population
                                                    MARGA = Differences in Fan Interest
                                                    STD = Stadium Age
                                                    BBPCT = % Black Players


PCTWIN = 37.24 + 0.92 TSA + 0.90 TSW – 38.57 NL + 43.78 CONT – 75.64 OUT

  REV = -1,735,890 + 10,330 PCTWIN + 494,585 SMSA + 512 MARGA +
                 580,913 NL - 762,248 STD – 58,523 BBPCT


1 point increase in TSA raises PCTWIN by 0.92

1 point increase in PCTWIN raises REV by $10,330


MRP per point = MP x MR = (0.92)(10,300) = $9,504       Avg Hitter: .340
                                                        1/12 of team’s offense
    MRP = ($9,504)(340)(1/12) = $270,000
Results
   Scully (1974): Players paid 10-20% of MRP
   Krautman (1999)
       Apprentice: 27% of MRP
       Journeyman: 85% of MRP
       Free agents

     Alternative Explanation: Low salaries of younger players may
                              reflect general training
Example: The Mark McGwire Show
   During McGwire’s record-
    breaking run at the home
    run record in 1998,
    attendance in St. Louis
    increased by 1.5 million.
   Even if McGwire was only
    half of the reason, just the
    gate portion of his MRP
    that year was around $15
    million!
   McGwire earned $8.9
    million that year.

                Wins Score Approach: #2 and #3
Human Capital Theory


  Human Capital           Productivity        Earnings




         General Training
             Increases MP to all employers
         Specific Training
             Increases MP to specific firm
  Who Pays for Training?
                                        $
MRP1 = untrained worker

MRP1 – T = trainee’s net productivity                                            MRP2

MRP2 = trained worker                                              Benefit

                                                                                 MRP1
                                             Cost
                              MRP1 - T
                                            Training period


 Hiring Rule: MRP = w                                                             time
                                                              t1


      MRP           w2
MRP      2
             w1       T              GT: worker pays in form of lower training wage
      1 r         1 r
  1

                                        ST: worker and firm share costs
Minor Leagues
   Baseball
       First Contract Season:
            Single A: $1100/month
            AAA: $2500/month
       Open to negotiation after that
       Meal money: $20 per day
Economics of Superstars
   Forbes Top 100 Celebrities and CEOs
 Economics of Superstars
   Rank order tournaments: golf, tennis, auto racing
       difficult to measure absolute effort (MRP) when many
        factors are involved
       relative productivity matters rather than absolute

                                     $                 MC

                                                                     MR1
Increasing MC of effort requires
large difference between first and                             MC′
second place for optimal effort.
                                                                     MR1′


                                                                     MR2




                                                E2     E1            Effort
Which of the following achievements would please
you more?
a)   You win fortune without fame: you make
     enough money through successful
     business dealings so that you can live
     very comfortably for the rest of your life.
b)   You win fame without fortune: for
     example you win a medal at the
     Olympics or you become a respected
     journalist or scholar.
You are offered a banned performance-enhancing
substance that comes with two guarantees:
        1. You will not be caught.
        2. You will win every competition you enter for the next five years,
        and then you will die from the side effects of the substances.

Would you take it?

 a)    Yes
 b)    No


      Prisoner’s Dilemma?
When to Turn Pro?
   1 million high-school football players - roughly 150
    will make it to the NFL
      Odds of a high-school player going professional
       in football - approximately 1 in 6,000
   About 500,000 high-school basketball players -
    roughly 50 to the NBA
      Less than 3% of all college seniors will play one
       year in professional basketball
      Odds of a high-school player going professional
       in basketball - approximately 1 in 10,000
 When to Turn Pro?
    Why would a player choose to leave early?
        Must compare the marginal cost and marginal benefit of
         staying in school versus leaving.




Marginal Benefit of waiting the extra year is:

           MB = (1 + g)S0                         [where S0 is the pro salary and g is
                                                  the growth rate in the salary]

Marginal Cost of waiting is the foregone salary
plus the sacrifice on the use of that salary:

           MC = (1 + r)S0                         [where r is the interest rate]
When to Turn Pro?
   As usual, the player is best off when MB = MC

                 (1 + g)S0 = (1 + r)S0


       Player should stay in school as long as g > r
       Player should turn pro when r > g
Sample Problem
Suppose a junior could earn a salary of $750,000 by declaring
himself eligible for the draft. If he waits until his senior year he
can make $900,000. If the interest rate is 4% should he stay the
extra year?
               g = (900,000 – 750,000)/750,000 = 0.20 or 20%

Assume the pro league plans to institute a rookie salary
cap of $750,000 at the end of the player’s senior year.
Should the player play his senior year?
               g = (750,000 – 750,000)/750,000 = 0.00 or 0%

Now consider that the player has a 12% chance of having a
career ending injury in his senior year and thus having a
median income of $40,000 per year. Would he consider
going pro or not?
                g = (796,800 – 750,000)/750,000 = 0.062 or 6.2%
Labor Market Imperfections
 Monopsony
 Reserve Clause
 Salary Caps
 Player Draft
 Arbitration
 Unions
Reserve Clause & Free Agency
   MLB: 1976
       After 6 years of service
   NBA: 1983
       After 5 years of service
   NHL: 1993
       After 4 years of service
   NFL: 1994
       After 4 years of service
                 Restrictions:
                 • Right of First Refusal
                 • Compensation requirements
                 • Salary caps
Final Offer Arbitration
   MLB 1972
   Arbitrator must select either team’s or player’s
    final offer—No compromise!
       must base decisions on info regarding player
        performance and salaries of comparable players
       can not consider financial condition of team


                                                  Wage
           WT        WA                WP


   Overpaying a player leads to further overpaying
    down the road
   1974-2012: Owners-291, Players-214
Monoposony                           Worksheet Example

   Sole buyer of labor
       Enables employer to
        exert market power       $                  ME
        by paying lower
        wages
                                                         S
                              MRPm
   Monopsonist hires
                                wc
    until MRP = ME and
    sets wage off S curve       wm

       Lm < Lc                                           D = MRP
       wm < wc < MRPm
                                          Lm   Lc        Labor
Player Drafts

   Allocation of new players by
    reverse order finish
            NBA: 7  2 rounds
            NFL: 12  7 rounds
       Coase Theorem applies
Labor Unions and Labor
       Relations
Economics of Labor Unions
                                  SU
                              $
   Free Market: wN, LN                unemployment         SN

                             wU
   Union Outcome: wU, LU
                             wN                       DWL
       Unemployment
       Inefficiency (DWL)

                                                                 D


                                  LU      LN                Labor
    Bilateral Monopoly
   Union behaves as monopolist:
                                          $
       Sets employment where MR = S                        ME   S
       Sets wage off D curve
       WU, LU
                                         wU
   Employer behaves as
    monopsonist:                         wM
       Sets employment where D = ME
       Sets wage off S curve
                                                       MR            D
       WM, LM
                                               LU LM             Labor



            WU – WM = Range of Indeterminacy
Bargaining and Strikes
   Each of major sports had a work stoppage
    during 1990s (when overall labor strife was
    pretty tame)
   Why resort to a strike/lockout?
       Irrational behavior?
       Excessive optimism?
       Excessive uncertainty?
       Political gamesmanship?
Contract Zone

 Strike fund
 Alternative jobs

Union threat point = WU                        Acceptable to Union
                                    Contract
Low Wages                                                      High Wages
                                     Zone
           Acceptable to Employer
                                               WE = employer threat point

                                                        Strike insurance
                                                        Replacement workers
Baseball’s First Strike




              1912 Detroit Tigers
           Ty Cobb vs Ban Johnson
1972 Baseball Strike
   Main issue was player pension and health benefits
   Uncertainty
       Owners were over-optimistic         (believed players' threat point
        was lower than it was)
       MLBPA was optimistic due to Commissioner’s behavior
   Strike lasted 13 days        (including 9 days at the start of the season)
       Owners lost $5m in revenues
       Players lost salaries but won on pension demands
       Arbitration was added to CBA

               1972-1995: a strike/lockout preceded every CBA
    1987 NFL Strike
   Main issue: free agency
   Uncertainty: Gene Upshaw and
    demise of USFL
   Strike lasted 4 weeks (weeks 3 – 6)
       Replacement players cost $1000
        per game; teams profits rose by
        more than $100k per game
       Players lost $80m in salary




           1988 NFLPA Decertification
Hockey: The Lost Season
   2004-05 Lockout
       Whole season canceled
       Main issues: cost certainty (linking salaries to league revenues)
       Uncertainty: league losses
       Outcome: $39m salary cap; salaries at no less than 54% league revenues;
        maximum player salary at 20% of cap; salaries rolled back by 24%




                                                                   Bob Goodenow
                                                   Revenue sharing; luxury tax; 5% pay cut
               Gary Bettman                        Revenue sharing; luxury tax; 24% pay cut
    $40m salary cap linked to league revenues      $52m salary cap linked to league revenues
    $42.5m salary cap linked to league revenues    $49m salary cap linked to league revenues

                                       Season Canceled!
1998-99 NBA Lockout
   Main issue: hard salary cap; revenue sharing
   Uncertainties: lackluster attendance; turmoil within NBPA;
    rising power of agents (stars vs benchers)
   191 day lockout  50 game season
   Outcome: Individual player salary cap; players guaranteed
    55% of BRI; limit on raises for “Larry Bird” free agents



                            NBA would be paid TV contract money
                            even though games weren’t played.


                            Arbitrator ruled NBA did not have to pay
                            Players with guaranteed contracts
Discrimination
   in Sports
Jackie Robinson         Larry Doby                  Kenny Washington and Woody Strode
1947 Brooklyn Dodgers   1947 Cleveland Indians      1946 Los Angeles Rams




                        Earl Lloyd                                       Willie O’Ree
                        1950 Washington Nationals                        1958 Boston Bruins
Labor Market Discrimination
   Becker “rational choice” model
       Source of prejudice:
            Employers
            Employees
            Customers




                                       Gary Becker
                                     Nobel Prize (1992)
Employer Discrimination
   Hiring Rule:         w = MRP
       Workers with same MRP will be paid same wage


   Assume:
       MRPB = MRPW
                                              “Psychic cost”
       d = discrimination coefficient

       Perceived wage of black player: w*B = (1+d)w


            Example:
              w = $20                    w*B = (1.20)(20) = $24
              d = 0.20
 In a picture…                                $


 Black wage as perceived by
 discriminating firm
                                       w*B = $24

                                       w = $20

                                   wB = $16.67
                                                                           MRPB = MRPW

Black wage if firm hires same number
of black works as white workers
                                                   LB      LW           Players




 Note:
 > Owners must pay for the right to discriminate
                                                   Employment if blacks are paid
   in the form of lower profits.                   same wage as whites: w = $20
 > Competitive markets force discriminators out
   of the market.
Monopoly Power
   Baseball has legal cartel
       Bill Veeck foiled in 1943
       Dodgers/Indians reintegrated in 1947

                                                  Jackie Robinson and Branch Rickey
                                                         1947 contract signing




              Moses “Fleetwood” Walker
                     1880s A.A.

   Integrated teams tended to dominate
       Dodgers, Giants, Indians, & Braves
        Red Sox & Phillies last to integrate
                                                           Bill Veeck and Larry Doby
                                                            1947 contract signing
       Great Celtic teams built on integration
Employee Discrimination
   Early whites didn’t want to work
    with blacks
       Feel psychic cost
       Demand higher pay to work with
        blacks
   What would employer do?
       Segregation vs Discrimination    Bud Fowler 1885

       Dodgers protested Robinson’s
        presence
Customer Discrimination
   Employer punished for tolerance
                                                      "We'll start
   Celtics of the 1980s?                             signing Negroes
                                                      when the Harlem
   George Preston Marshall & NFL’s Redskins          Globetrotters
       Last NFL team to integrate: 1962              start signing
                                                      whites."
            “Burgundy, Gold, and Caucasian”
       Southern focus
       Forced by U.S. government
            Facility on government land


   Nardinelli and Simon (1990)
       Examined baseball card prices for black and
        white players
       PB < PW by about 10%
 Measuring Discrimination
                                                             White
  Ww = $500                                                  Wage
                                  $
                                                             Function
  WB = $200
  How much of the
                         $500 = Ww
 wage gap, if any, is
due to discrimination?                                             Black
                                                                   Wage
                                                                   Function

                         $260 = W*B

                         $200 = WB


                                           SAB       SAw   Slugging Average

Ww – WB = observed wage gap           = 500 – 200 = 300

W*B – WB = explained wage gap         = 260 – 200 = 60

Ww – W*B = unexplained wage gap = 500 – 260 = 240
 Statistical Discrimination
    The use of group averages to judge individual
     productivity levels
        Profit-maximizing strategy to reduce cost of hiring




                                                     French-speaking
English-speaking
                                                     Canadian players
Canadian players


                     F                      E



                         MRPE        MRPF                 productivity
Economic Findings on Pay Discrimination
   There is evidence that pay discrimination
    existed in pro team sports in the past.
   But by the mid-1990s, pay discrimination is
    pretty much gone. Only a negligible premium
    for the very best white players in the NBA
    appears to remain.
   Interestingly, in the NHL, there appears to be
    pay discrimination against French-speaking
    players.
Role Discrimination?
                                NFL 2009
 Position                                    White   Black
 Quarterback                                 81%     16%
 Wide Receiver                               11%     87%
Source: 2010 Racial and Gender Report Card
 Racial Composition of Athletes, 2010
 Race                                   MLB   NFL   NBA
 White                                  60%   30%   18%
 African American                        9%   67%   75%
 Latino                                 28%   1%    3%
 Asian                                   2%   2%    1%
 Other                                   0%   <1%   1%
Source: 2010 Racial and Gender Report Card
 Racial Composition of Head Coaches, 2010
 Race                                   MLB   NFL   NBA
 White                                  68%   81%   70%
 African American                       14%   19%   27%
 Latino                                 17%   0%    3%
 Asian                                 <1%    0%    0%
Source: 2010 Racial and Gender Report Card
Racial Composition of Division I Head Coaches
(men’s teams), 2007-08
 Race                              Basketball   Football
 White                                  76%      94%
 African American                       23%       5%
 Latino                                0.7%      0.5%
 Asian                                 0.0%      0.0%
 Native American                       0.3%      0.0%
Source: 2009 Racial and Gender Report Card
Gender Discrimination
   Harder to measure
       Men & Women seldom in same sport/venue
       Even same sport may vary
            Tennis, figure skating, & basketball
 Top Money Winners: ATP vs WTA
                 ATP Money Leaders                                         WTA Money Leaders
 Rank          Player            Country          Earnings    Rank         Player           Country     Earnings

  1     Novak Djokovic          Serbia        $   3,323,881    1     Victoria Azarenka     Belarus     $ 4,008,080
  2     Roger Federer           Switzerland   $   2,316,585    2     Maria Sharapova       Russia      $ 2,083,350
  3     Rafael Nadal            Spain         $   1,725,465    3     Agnieszka Radwanska   Poland      $ 1,650,459
  4     Andy Murray             Scotland      $   1,053,481    4     Caroline Wozniacki    Denmark     $   596,188
  5     David Ferrer            Spain         $     771,998    5     Petra Kvitova         Czech Rep   $   533,690
  6     Juan Martin del Potro   Argentina     $     769,238    6     Kim Clijsters         Belgium     $   513,691
  7     John Isner              US            $     707,701    7     Sara Errani           Italy       $   512,265
  8     Tomas Berdych           Czech Rep     $     521,801    8     Marion Bartoli        France      $   509,326
  9     Jo-Wilfried Tsonga      France        $     516,678    9     Julia Goerges         Germany     $   484,670
  10    Radek Stepanek          Czech Rep     $     516,048    10    Angelique Kerber      Germany     $   414,207
  11    Nicolas Almagro         Spain         $     460,736    11    Ana Ivanovic          Serbia      $   411,784
  12    Milos Raonic            Canada        $     407,883    12    Maria Kirilenko       Russia      $   401,903
  13    Jurgen Melzer           Austria       $     389,313    13    Svetlana Kuznetsova   Russia      $   395,038
  14    Leander Paes            India         $     372,103    14    Vera Zvonareva        Russia      $   384,983
  15    Kei Nishikori           Japan         $     326,245    15    Samantha Stosur       Australia   $   376,344

Source: tennis.com. As of April 16, 2012.
Purses in Golf’s Majors (in millions):
2011 for PGA, 2010 for LPGA
                Men                          Women
Masters                    $7.5    Kraft Nabisco     $2.0
US Open                     7.5    US Open           3.25
British Open                7.3    British Open       2.5
PGA                         7.5    LPGA              2.25

Source: PGATour.com and LPGA.com
Gender Discrimination
   Harder to measure
       Men & Women seldom in same venue
       Often don’t play same sport
       Even same sports may vary
            Tennis, figure skating, & basketball
   Direct competition?
       Jockeys & auto racing & golf
   Are women always victims?
Title IX
   Part of 1972 Education Amendments to Civil Rights Act
   Mandated equal access & opportunities for women in
    federally funded education programs
   3 ways to comply
       Funding proportional to enrollment
       Show history of expansion
       Interests of students accommodated
   Few programs in compliance
       But NCAA certifies all

          2009-10 Marietta College           Roster Slots

          Male Enrollment     726    51.2%   Male Athletic     298   61.3%
                                             Participation
          Female Enrollment   692    48.8%   Female Athletic   188   38.6%
                                             Participation
          Total               1418   100%                      486   100%
Impacts of Title IX
   Good
       Spurred rapid growth in women’s sports
            Though most of growth early on
       Gave grounds to seek remediation
   Bad
       What happened to women coaches?
            Was ~80% of women’s programs - now ~ 44%
       Women’s programs lose money
       Can meet in many ways –
            Cut men’s programs rather than expanding women’s
Amateurism and
 College Sports
Overview
   College sports is similar in many economic ways
    to pro sports, but the relationship between the
    athletics department and the university deserves
    careful attention
   Conferences and the NCAA play an important role
    in limiting competition, negotiating TV
    broadcasts, and managing competitive balance.
   NCAA player rules have dramatic impacts on the
    economic welfare of college athletes.
   Colleges enjoy special tax and antitrust status for
    much the same reason as pro owners.
Amateurism & the Olympic Ideal
   Ancient Olympics     (776 BC-393 AD)
       Even central myth hypocritical
       Winners well rewarded by home cities


   Modern Olympics      (1896-present)
       “mens sana in corpore sano”


   Amateurism reflected class snobbery
       Laborers not considered amateurs
American College Sports
   Commercialism & Corruption always present
       1st competition: 1852 Harvard v. Yale in crew
            Sponsored at a resort by a railroad company

       2nd competition brought first eligibility scandal
            Harvard’s coxswain had already graduated!


   Second sport: Football
       Rutgers v. Princeton (1869): First academic scandal
            4 Rutgers players were flunking math

       University of Michigan (1894)
            7 of 11 starters were not registered students
NCAA as “Incidental Cartel”
   Restricts movement
       Prevents “tramp athletes”
       Monopsony power
            Players have little mobility
            Drives down pay
NCAA Recruiting Game
                                          OSU
                                   High         Low
                           High        50         20
                 UM               50        90
                           Low         90         75
                                  20        75


Dominant Strategy?
Competitive Equilibrium?
Cooperative Optimum?
Athletic Scholarships
                                   Citadel
   NCAA forbade them until 1956   UVA
                                   VMI
       NCAA rules often ignored   VPI
       “Seven Sinners”            UMD
                                   Villanova
                                   Boston College
The “Student Athlete”
   “Student athlete” is a legal term
       Disavows desire for pay
       Colleges do not have to provide workmen’s
        compensation
   Stars worth more than tuition      (Brown 1993; 1994)

       In football >$500k/yr
       In basketball >$800k/yr
The Value of an Education
   An athlete who…graduates is overpaid”
                                    Joe Paterno


   Do athletes get an education?
       On average athletes graduate at the same rate
        as non-athletes
            Handout



        Long and Caudill (1991)
           Male college athletes earn more than non-athletes
Why do Some Sports do Worse?
   Some athletes less prepared
       Lower SATs, HS rank, HS GPA
            True for basketball & football
            Not so for softball or golf
   Is dropping out a rational investment?
Academic Standards
   Preserve academic integrity
       Don’t recruit students who cannot read
   Creates barrier to entry
       Established powers keep out new entrants
       Competitors cannot pay athletes more
       Now cannot take weaker students either
History of Standards
   Nothing uniform until 1965
       1.600 Rule
       To play needed projected 1.600 GPA
   1973: Replaced 1.600 with 2.00 rule
       Ostensibly higher standards
       Actually needed C+ average in high school
            Could take any courses
            Worst abuses came under this rule
            The sad case of Chris Washburn


                       470 out of 1600 on SAT
Proposition 48 (1983)
   Provisions
       Needed SAT=700 & GPA=2.00 in 11 core courses
       If not: no scholarship in 1st year & cannot play
   Was Prop 48 Racist?
       Disproportionately affected black athletes
            SATs for blacks average 200 points lower
            Are SATs a valid predictor of college performance?
       Still – graduation rates rose for whites and blacks
   A concession: Partial Qualifiers
       Could receive aid if pass one criterion
Proposition 42 (1989)
   Meant to eliminate partial qualifiers
   Loophole restored – and then some
       Under Prop 48 scholarship “counted”
       Under 42 doesn’t count against limit
Proposition 16 (1992)
   Created sliding scale
       Lower GPA permitted if SATs higher & vice versa
   Clearinghouse evaluated individual courses
   Allows partial qualifiers to practice
   Challenged in court
       Students claimed disparate racial impact
            Won initial case
       Verdict overturned on technicality
            NCAA does not disburse federal funds
Latest Revision (2003)
   Eases initial restrictions
       14 core courses (up from 13)
       Sliding scale
            2.0 core GPA requires 1010 SAT
            3.55 core GPA requires 400 SAT
       No Partial Qualifier status
   Stiffens progress requirements
       Need 40% of degree requirement after 2nd year
       Need 60% of degree requirement after 3rd year
       Need 80 % of degree requirement after 4th year
Academic Progress Rates (APR)
   School scored for student progress
       1 point if athlete stays enrolled
       1 point for staying academically eligible
   Computes % of total possible points
       Consider Big State U’s basketball team
            52 possible points (13 players *2 points*2 semesters)
            If one player is ineligible in spring – lose 1 point
            APR=100*(51/52)=981
       If its score falls below 925, BSU could lose scholarships
Entry Barrier or Academic Standards?
   Small schools
       May be unable to compete with larger schools
   Faculty fear
       Greater pressure to pass
       Proliferation of garbage classes
                     Profitability of Specific Programs
                           at Division I-A Schools
                                         (measured in $1000s)


Sport                                 1997           1999       2001     2003
All Men’s Sports                      3,300         4,000       4,900    6,100
Football                              3,200         3,700       4,700    5,920
Men’s Basketball                      1,600         1,600       1,600    2,020
Women’s Basketball                    - 500          - 600      - 700    - 775
All Women’s Sports                   -2,300         -2,400      -3,200   -3,600
Source: Table 11.8, Leeds and Von Allmen, 2008




                             NCAA Financial Database
                       Football Coaches Salary Database
    March Madness
   NCAA has 14-year, $10.8 billion contract: CBS & Turner Sports
   Tourney revenue now $810 million/year
       $770m in TV rights
       $40m from ticket sales, etc.
   ~60% goes to Division I conferences & schools
       $167m distributed according to program size
            Number of sports offered
            Number of athletes on scholarship.
       $167m distributed according to performance
            Conference gets 1 "unit" per member game
            Each unit worth ~$222,000.
Non-Profit vs Profit Seeking
 Principle-agent problem
 Growing payroll costs for sports programs
Clicker Review
A college player should stay in school when:

a)   staying in college another year
     increases his earnings.                         62%
b)   staying in college another year
     increases his earnings above the
     interest rate.
c)   staying in college another year           29%

     increases his earnings below the
     interest rate.                                        10%

d)   staying in college another year reduces                     0%

     his earnings.                             a)    b)     c)    d)
Salaries have risen dramatically in the NBA
because of the dramatic rise in
a)   the quality of the players                  76%
b)   the opportunity cost faced by
     players
c)   the market value of the product
     the players produce
d)   the strength of the Players’                      19%

     Association                            5%
                                       0%

                                       a)   b)    c)    d)
According to the Coase Theorem, free agency
should leave the distribution of talent

a)   more equal than before                           76%

b)   less equal than before
c)   exactly equal among all teams
d)   the same as it always was

                                     10%        10%
                                           5%

                                     a)    b)    c)    d)
Free agency came to MLB and the NFL in
different ways because
a)   the football owners practiced
     collusion while the baseball              43%

     owners did not                                        33%
b)   the MLBPA had to rely on the
     courts
c)   the NFLPA had to rely on the        14%

     courts                                          10%


d)   the NFL had a limited exemption
     from antitrust laws, and baseball   a)    b)     c)    d)
     did not
In November 1989, the NFL Players Association, the
union for NFL players, disbanded. Why?
a)   The union was bankrupt due to failed
     strikes in 1982 and 1987.
                                                            48%
b)   The players were upset with the
     union’s lack of ability to gain full free                    38%

     agency for its members and wanted to
     bring in new leadership.
c)   The union wanted to remove the NFL’s
     non-statutory labor exemption and           10%
                                                       5%
     pursue an antitrust claim against the
     league. This could only be done by
     decertifying the union.
                                                 a)    b)    c)    d)


d)   The court had declared in Powell v. NFL
     (1987) that the union was guilty of
     conspiring against the NFL in order to
     raise wages.
Most mainstream economists view discrimination
as
a)   a taste.                                    43%

b)   overstated.
                                     29%
c)   a mistake due to the
     misperception of people’s
                                           14%         14%
     true skills.
d)   a way for capitalists to keep
     the working class from
     uniting.
                                     a)    b)     c)    d)
Integration was much faster in football than in
baseball because
a)   of the competition provided by a
     rival league                          48%

b)   the owners in the NFL were less
     discriminatory than the owners in           29%
     MLB
c)   football fans are far less                              14%

     discriminatory than baseball fans
                                                       10%


d)   football had to get the approval of
     liberal-minded colleges and           a)    b)     c)    d)


     universities
It is difficult to determine whether women are victims
of discrimination in professional sports because
a)   women have brought far fewer
     discrimination suits                       86%

b)   women seldom compete with
     men in the same event
c)   women aren’t as good at sports
     as men
d)   it is difficult to separate out      10%
                                                      0%
                                                           5%
     racial effects from gender effects
                                          a)    b)    c)    d)
The notion of a “student-athlete” was
developed in order to
a)   assert the primacy of education         38%
                                       33%
b)   eliminate under-the-table
     payments to athletes                          24%

c)   keep athletes from filing for
     workman’s compensation
d)   prevent gambling scandals                           5%


                                       a)    b)     c)    d)
The University of Michigan’s Athletic Department
cannot break even because

a)   it is very poorly run.
                                               48%   48%
b)   its costs rise as quickly as its
     revenues rises.
c)   it gives much of what it makes to
     the academic side of the
     university.                          5%

d)   NCAA rules prohibit Athletic                          0%


     Departments from making a            a)   b)     c)    d)

     profit.
The shift to “two-platoon football” was a way for

a)   professional teams to turn profits
     into losses                                           62%


b)   colleges to exploit “student-
     athletes”
c)   the NFL to exert monopsony                14%
                                                     19%

     power over its players               5%

d)   colleges to spend increasing
     revenues                             a)   b)    c)     d)
The monopoly power that the NCAA held
over TV networks fell apart due to
a)   The prisoner’s dilemma
b)   The winner’s curse                  48%


c)   The outlawing of the reserve                    33%

     clause
     The entry of new schools into the
                                               19%
d)
     NCAA
                                                           0%


                                         a)    b)    c)    d)

				
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