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