Exam 3 Flashcards
a. Pure competition
i. Many sellers
ii. Individual firm has a horizontal demand curve
iii. Demand = price = marginal revenue
iv. Price takers
v. Focus on lowering costs
vi. Standardized product
vii. No barriers to entry
b. Monopolistic competition
i. Many sellers
ii. Little control over price
iii. Products are standard, but perceived differently by the consumer (furniture)
iv. Minimal barriers to entry
c. Oligopoly
i. Few number of sellers (airlines, appliances, etc.)
d. Monopoly
i. Control the price
ii. One seller
iii. High barriers to entry
- Explain why the marginal revenue for a competitive market is perfectly elastic (horizontal), however the marginal revenue curve for a monopoly is downward sloping. (Hint: law of demand)
a. Because the firm has to lower their price in order to sell more
- Define market power.
a. The ability to sell and influence prices
Why is the market power of sports teams so high
a. No competing leagues
a. There is no competition
b. Revenue sharing
The owners get all of the revenue
c. Barriers to entry: exclusive geographic territory
Only some cities can house a team
d. Barriers to entry: management of leagues as cartels
Not anyone can make a sports team or competing sporting league
Control the inputs and outputs of the product
Get together and decide how many games will be played
Barriers to entry: league negotiated TV contracts
a. If you don’t have television coverage, you won’t make money
- Describe a regional sports network (RSN).
a. In the MLB, every team has its own RSN
b. Large market team: LAD
$7 Billion TV deal with Time Warner (25 years)
LAD will own SportsNetLA
RSN Revenue: $340 million
c. Small market team: TBR
RSN Revenue: $20 million
d. 31% of net local revenue is shared
This includes RSN
Except carriage fees
LAD: $3.5 Billion of $7 Billion deal is carriage fees.
- How does an RSN give a large market team a competitive advantage over a small market team?
a. Yes, they are able to use their tv revenue to sign a lot of free agents
- What are antitrust laws?
a. Protect consumer from predatory business practices12
b. Promote fair competition in a market economy12
- Describe Section 1 and Section 2 of the Sherman Act
a. Section 1 – prohibits restraint of trade (FTC enforces)
b. Section 2 – prohibits individual actions to monopolize a market (Department of Justice Enforces)
- How do leagues violate antitrust laws?
a. Fans demand competition among teams in a sports leagues.
b. The competition would not exist without collusion.
Teams are separate yet economically interdependent14
- Distinguish between ‘innocent’ collusion and ‘illegal’ collusion.
a. Innocent collusion – set the rules of the league/game
Limited the number of games, amount of access
b. Illegal collusion – labor, broadcasting rights,
- Why is it important to determine if leagues are single-entities or joint ventures?
a. Single entity – economically dependent on other teams, thus exempt from antitrust laws
b. Joint venture – a collection of independent firms, thus subject to antitrust laws
- What four fronts do leagues fight antitrust?
a. Mergers and acquisitions
Stopping teams from relocation
Stopping new teams from joining the league
b. Broadcasting
c. Licensing
Revolves about exclusive contracts (Nike in the NFL)
d. Labor
- Explain how the Federal League resulted in the Congressional antitrust exemption for MLB. This includes the role of the reserve clause, how the reserve clause violates the Sherman Act, why the leagues believed they were exempt from antitrust laws, why others felt they were subject to antitrust laws, and why Landis never ruled. Yes loaded questions, but I can’t emphasis enough how important this ruling was for sports and how it shaped the leagues we enjoy today.
a. They added a reserve clause in order to keep the players from leaving the team that drafted them
b. Included if someone leaves the AL/NL to play in the Federal league, they will be blacklisted
c. Federal league sued under anti-trust law restraint of trade (because of the reserve clause) on Jan 5, 1915
d. The lawsuit threatened to make any coordination (collusion) between AL and NL unlawful
Threatened the future of the World Series
e. Federal League brought the suit in Northern Illinois District Court
Judge Landis was known as a ‘trust-buster’
Landis sat on the case for a year because they were proposing to stop baseball altogether until these problems were resolved
f. Eventually the Federal League ran out of money and gave up
g. Supreme Court ruled that baseball is a public good, not a service, not interstate commerce, thus exempt from antitrust law
h. The antitrust ruling has been challenged during the steroid trials if baseball did not do something about the PED usage
Landis was the very first commissioner of the MLB
- Why did NFL-AFL need Congressional exemption from antitrust laws? What law was passed?
a. Public Law 89-800
i. Passed so the merger of the AFL and NFL could happen
- What were the two agreements Rozelle (NFL) made with Congress in order to get the exemption approved?
a. Any football stadium under 50,000 seats must be redone
b. No Friday or Saturday games
- What football team was a direct result of the Congressional exemption?
a. Both congressmen from Louisiana
b. The Saints were approved through this
- How did the NFL broadcasting rules violate the Sherman Act (and what section of the act did it violate?)
a. The NFL bylaws prohibit teams from broadcasting in another teams home territory.
b. Fans could not watch games if home team wasn’t playing.
c. Section 1 of the Sherman Act (restraint of trade)
- If the NFL did not have these broadcasting rules, what could happen to the league?
a. The large market teams could take over due to the higher viewing
b. The weaker teams would be driven out of the league
c. Ultimately the NFL could collapse
- In 1954, How did the courts rule in favor of the NFL, yet at the same time rule against the NFL?
a. It was okay to blackout home games
b. Have to show out of market teams
- In 1961, NFL signed broadcasting rights to CBS. How did this violate the previous court ruling?
a. Because this would allow things to go back to the way they used to be
Blackout home games
Not showing out of market games
- What did the Sports Broadcasting Act of 1961 accomplish?
a. NFL, NHL, MLB, and NBA can all collectively bargain about broadcasting things
b. No games on Friday or Saturday
c. You will be exempt from antitrust
- In 2012, MLB was sued for antitrust practices. They were accused of violating section 1. What were the four (PPT’s say 5, but it’s an error, only 4) key violations?
a. Because of the restraint of trade
i. Blacked out the home team’s game on local TV
ii. Blacked out nationally televised games in the home town
iii. Charged subscribers for all teams broadcasting networks, not just one team
iv. MLB charged subscribers the same amount no matter the number of games that were blacked out
v. MLB refused to stream games on the internet
- The 2012 MLB antitrust lawsuit was combined with NHL in 2015. The NHL agreed to a settlement. What were the terms of their settlement?
a. Initially the lawsuit was denied, then accepted as long as team broadcasting can be bundled
- MLB eventually settled the 2012 lawsuit. What were the terms of their settlement?
a. Bundled the teams games
- In 2010, NFL sued in antitrust court by American Needle. What was the basis of American Needle’s argument?
a. Prior to 2000, NFL had license deal with 28 different companies. Including American Needle
b. 2000 NFL signed exclusive deal with Reebok
c. All other vendors, including American Needle, had their licensing rights revoked.
d. American Needle filed suit under Clause 1 of Sherman Act. (restraint of trade)
- What is a bilateral monopoly?
A bilateral monopoly is a market structure consisting of both a monopoly (a single seller) and a monopsony (a single buyer).
a. Labor and management come to an agreement (CBA)
b. Statutory labor exemption – If you have a CBA, you cannot go to antitrust court
c. Generally, need a union to set this up
- What is the statutory labor exemption law?
a. If you have a CBA, you cannot go to antitrust court
- Distinguish between lockout and strike
a. Lockout – from the league
b. Strike – from the players
- Why would players vote to decertify their union?
a. So they can sue the league because the statutory labor exemption is now void
a. What changes did the owners want and what changes did the players want? 2011 NFL Lockout
i. Owners
1. An 18 game season
2. The rookie salary cap
ii. Players
1. More money
2. Safety
- What were the key issues in the 2011 NBA Lockout
a. NBA
i. Revenue sharing
ii. Salary cap
iii. Luxury tax
iv. Over 90 players signed with foreign teams during the lockout
v. NBA cancelled all games through December
vi. Players decertified the union in November
- Define variable ticket pricing.
a. It is a change in demand for the tickets, but it is based on things that you know before the season starts and the prices will be adjusted accordingly
i. Lions in September vs. Lions on Thanksgiving (higher)
ii. Lions vs. the Panthers or Lions vs. the Patriots (higher)
- Define dynamic ticket pricing.
a. Changes of ticket prices as the season unfolds
b. Elasticity is irrevelant
- Two limitations of spending money
a. More fans = higher prices
b. Profit mentality
- Fixed costs in the short run
a. Player contracts
b. Coaches contracts
c. Current facilities
d. In the long run, they could all change
i. The fans may not understand
- Why was MLB the first to implement dynamic ticket pricing?
a. They play a ton of games
b. Very large stadiums
i. They don’t consistently sell out
c. The games are mostly outdoors and subject to the changes in weather
- In the NHL, what variables impact ticket price and quantity sold (3 variables)
a. The franchise value
i. If you are an original 6 team, you have more power to dynamically price
b. Month/day/time
c. The number of Tweets
i. They found a correlation between Twitter activity and how much they can dynamically price
- Define ticket bundling.
a. Packaging less desired tickets with more desired tickets
- What is price discrimination?
a. Charging one customer more than another for the same product
- Define the three degrees of price discrimination.
a. First degree
i. Trying to find out what our customers are willing to pay and then charging them that price
ii. “What monthly payment are you looking for”
b. Second degree
i. Involves special deals to certain customers who meet certain conditions
1. Buy this one, get the next half off
c. Third degree
i. Offering special discounts to members of certain groups
1. AAA, students, veterans, AARP, etc.
b. In 2010, the league played without a salary cap. This rule was put in place to encourage negotiations and renewal of CBA. What are the pros/cons of no salary cap? 2011 NFL Lockout
i. Pros
1. If you are an elite level player and an UFA
ii. Cons
1. The regular players salary will be much lower because there will be no salary minimum
c. What as the basis of the player’s antitrust lawsuit?
i. Prohibiting players to market their service
1. This was because of the lockout
ii. They used their monopsony power to restrict rookie pay
iii. The franchise tag
1. Preventing players from making their maximum value
What were the key issues in the NHL Lockout
b. NHL
i. Revenue sharing
ii. Players wanted to eliminate arbitration
iii. Change free agency rules
iv. Teams wanted contract limits
v. If a player votes to decertify the union, and it passes, all of their contracts are voided
