Markets in which collusion is easier
to sustain
•
(1) Markets dominated by very large
firms/suppliers
•
•
(2) Crowded, mature markets
•
•
e.g. Saudi Arabia in OPEC
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 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
A Market with a large ’swing’ producer
Saudi Arabia
increase
Maintain output
output
(stick to quota)
increase 1m, 89bln
25m, 199bln
Small output
producer (cheat)
Maintain
output
-10m, 90bln 20m, 200bln
(stick
to quota)
What is the Nash equilibrium?
A Market with a large ’swing’ producer
Saudi Arabia
May even raise output if
increase
Maintain
others cut output
output
output
(cheat)
(collude)
increase 1m, 89b
25m, 198b
output
(cheat)
Small
Maintain
producer
output
-10m, 90b 20m, 200b
(collude)
Saudi Arabia’s dominant strategy is to show restraint
so there is no prisoners’ dilemma
Repetition and collusion
small
producer ‘cheats’ by exceeding quota
gains
million
a payoff of 25 million compared with 20
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
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
League success
Higher revenue
Improved playing
performance
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
CB4
CB3
E1
CB2
E2
E3
CB1
E4
10
Number of matches
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?
• 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
Decreasing returns to competitive
balance
Units of entertainment: E
More competitive balance
generates more
entertainment but only up to
a point
E1
E
E2
E3
E4
CB1 CB2
CB3
CB4
Level of
competitive
balance: CB
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 winwage relationship)
– But quality of the league also matters
• Leagues can be balanced upwards (+) or downwards (-)
Alternative scenarios
Quality of performance/entertainment (high)
Imbalance but overall high
quality
Convergence at high level of
quality
League Balance -
Imbalance and overall low
quality
League Balance +
Convergence at low level of
quality
Quality (low)
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?
League Balance -
Imbalance and overall low
quality – Scottish Premier
League (Demotion of
Rangers?)
League Balance +
Convergence at low level of
quality – e.g. New Zealand
domestic cricket, nonprofessional football
Quality (low)
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 Ratio
Percentage Share of Points of Top 5 Clubs
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
39
37
35
33
31
29
27
25
Source: Michie and Oughton (2004)
C5 Ratio
Herfindahl Index of Competitive Balance
FA Premier League
0.056
0.054
0.052
0.05
H-Index
0.048
0.046
0.044
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
0.042
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 coordination/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
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
Countries
England
6
France
6
Germany
5
Italy
6
Spain
4
Clubs
Liverpool 4
Manchester Utd 3
Arsenal 2
Everton 2
Blackburn Rovers 1
Leeds Utd 1
Marseille 5
Bordeaux 3
PSG 2
Auxerre 1
Monaco 1
Nantes 1
Bayern Munich 6
Borussia Dortmund 2
Stuttgart 2
Werder Bremen 2
Kaiserslautern 1
AC Milan 5
Juventus 3
Naples 2
Inter Milan 1
Sampdoria 1
Verona 1
Real Madrid 6
Barcelona 5
Atletico Bilbao 1
Atletico Madrid 1
Carmichael and Thomas, forthcoming
Post-Bosman
Winners by Number of Clubs
1996/7 –2008/9
Countries
Clubs
Pre-Bosman
Post-Bosman
Top 4
Top 4
Number of Clubs
Manchester Utd 8
Arsenal 3
Chelsea 2
15
8
Lyon 7
Bordeaux 2
Monaco 2
Lens 1
Nantes 1
13
13
Bayern Munich 8
Borussia Dortmund 1
Kaiserslautern 1
Stuttgart 1
Werder Bremen 1
Wolfsburg 1
15
11
Italy
5
Juventus 6
Inter Milan 3
AC Milan 2
Lazio 1
Roma 1
12
9
Spain
4
Barcelona 6
Real Madrid 4
Valencia 2
Deportivo 1
12
13
England
3
France
5
Germany
6
Pre and post Bosman changes in European championship winners and finalists
European Cup/Champions League Winners and Finalists: 1983/4-2008/9
1983/4 –1995/6
Post-Bosman
Winners
1996/7 –2008/9
Countries
Clubs
Countries
Clubs
Countries
Countries
Italy 5
AC Milan 3
Juventus 2
AC Milan 2
Italy 9
Italy 6
Netherlands 2
Ajax Amsterdam 1
PSV Eindhoven 1
England 1
Liverpool 1
France 1
Olympique Marseille 1
Portugal 1
FC Porto 1
Rumania 1
Steaua Bucharest 1
Spain 1
Barcelona 1
Yugoslavia 1
Red Star Belgrade 1
Pre-Bosman
Winners
Italy 2
Post-Bosman
Finalists by Countrya
Netherlands 3
England 3
Portugal 1
Liverpool 1
Manchester Utd 2
FC Porto 1
England 2
England 7
France 2
France 1
Portugal 3
Portugal 1
Rumania 2
Spain 5
Barcelona 2
Real Madrid 3
Spain 3
Spain 7
Yugoslavia 1
Germany 2
Carmichael and Thomas, forthcoming
Pre-Bosman
Finalists by Country
Bayern Munich 1
Borussia Dortmund 1
Germany 1
Germany 4
• 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