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)

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?

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. 2009. 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) 204-228

• Szymanski, S (2003) The Economic Design of Sporting Contests, Journal of Economic Literature, XLI: December:1137-1187.

• Szymanski, S. (2001). `Collective selling of broadcast rights’. Soccer Analyst. Vol. 3, Issue One. Page 33-37.

– 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. 2004. The Economics of Sport, Palgrave.

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

The case of OPECSaudi 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

A Market with a large ’swing’ producer

Saudi Arabia

Small produce

r

increase output

Maintain output (stick to quota)

increase output (cheat)

1m, 89bln 25m, 199bln

Maintainoutput (stick to quota)

-10m, 90bln

20m, 200bln

What is the Nash equilibrium?

A Market with a large ’swing’ producer

Saudi Arabia

Small producer

increase output (cheat)

Maintain output (collude)

increase output (cheat)

1m, 89b 25m, 198b

Maintainoutput (collude)

-10m, 90b 20m, 200b

Saudi Arabia’s dominant strategy is to show restraint so there is no prisoners’ dilemma

May even raise output if others cut output

Repetition and collusionsmall 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-tatthen the small country’s gain is completely wiped out

over the 2 time periods total payoff 25m – 10m = 15m if cheatsinstead of 20m + 20m = 40m if colludes

So no incentive to cheat

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

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

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

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)

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?

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

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

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

Competitive balance and entertainment

Units of entertainment

Number of matches10

E2

CB4

CB3

CB2

CB1

More

competitive

balance –

more

uncertainty

E1

E3

E4

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

But can there be too much competitive balance?

Decreasing returns to competitive balance

Units of entertainment: E

Level of competitive balance: CB

CB1 CB2 CB3 CB4

E2

More competitive balance generates more entertainment but only up to a point

E1

E4

E3

E

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 (-)

League Balance +League Balance -

Quality (low)

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

League Balance +League Balance -

Quality (low)

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?

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

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

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

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

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

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

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”

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

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

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

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)

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

5 Firm Cocentration RatioPercentage Share of Points of Top 5 Clubs

2527293133353739

C5 Ratio

Source: Michie and Oughton (2004)

Herfindahl Index of Competitive Balance FA Premier League

0.042

0.044

0.046

0.048

0.05

0.052

0.054

0.056

H-Index

Source: Michie and Oughton (2004)

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

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)

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?

Appendix: other evidence on trends in competitive balance –

for personal interest only

National Championship Winners and Top 4 clubs in Europe: 1983/4-2008/9

Pre-BosmanWinners by Number of Clubs

1983/4 –1995/6

Post-BosmanWinners by Number of Clubs

1996/7 –2008/9

Pre-Bosman

Top 4 Post-Bosman

Top 4

Countries Clubs Countries Clubs Number of Clubs

England 6

Liverpool 4Manchester Utd 3Arsenal 2Everton 2Blackburn Rovers 1Leeds Utd 1

England 3

Manchester Utd 8Arsenal 3Chelsea 2

15 8

France 6

Marseille 5Bordeaux 3PSG 2Auxerre 1Monaco 1Nantes 1

France 5

Lyon 7Bordeaux 2Monaco 2Lens 1Nantes 1

13 13

Germany 5

Bayern Munich 6Borussia Dortmund 2Stuttgart 2Werder Bremen 2Kaiserslautern 1

Germany 6

Bayern Munich 8Borussia Dortmund 1Kaiserslautern 1Stuttgart 1Werder Bremen 1Wolfsburg 1

15 11

Italy 6

AC Milan 5Juventus 3Naples 2Inter Milan 1Sampdoria 1Verona 1

Italy 5

Juventus 6Inter Milan 3AC Milan 2Lazio 1Roma 1

12 9

Spain 4

Real Madrid 6Barcelona 5Atletico Bilbao 1Atletico Madrid 1

Spain 4

Barcelona 6Real Madrid 4Valencia 2Deportivo 1

12 13

Pre and post Bosman changes in national championship winners and top 4 clubs

Carmichael and Thomas, forthcoming

European Cup/Champions League Winners and Finalists: 1983/4-2008/9

Pre-BosmanWinners

1983/4 –1995/6 Post-BosmanWinners

1996/7 –2008/9 Pre-BosmanFinalists by Country

Post-BosmanFinalists by Countrya

Countries Clubs Countries Clubs Countries Countries

Italy 5 AC Milan 3Juventus 2

Italy 2 AC Milan 2 Italy 9 Italy 6

Netherlands 2 Ajax Amsterdam 1PSV Eindhoven 1

Netherlands 3

England 1 Liverpool 1 England 3 Liverpool 1Manchester Utd 2

England 2 England 7

France 1 Olympique Marseille 1 France 2 France 1

Portugal 1 FC Porto 1 Portugal 1 FC Porto 1 Portugal 3 Portugal 1

Rumania 1 Steaua Bucharest 1 Rumania 2

Spain 1 Barcelona 1 Spain 5 Barcelona 2Real Madrid 3

Spain 3 Spain 7

Yugoslavia 1 Red Star Belgrade 1 Yugoslavia 1

Germany 2 Bayern Munich 1Borussia Dortmund 1

Germany 1 Germany 4

Pre and post Bosman changes in European championship winners and finalists

Carmichael and Thomas, forthcoming

• 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