Sport

Question 1

Special features of the market of sport

Answer 1

Monopsony power

Co-dependence

Question 2

Monopsony power - how does it arise

B) What is an example of this power being used?

Answer 2

Limited number of buyers (clubs) for talent. Thus have market power over their key inputs i.e players

E.g finite amount of clubs that play champions league football.

B) contracts, thus restrict freedom of transfer of players

Question 3

2nd special feature of the market: Co-dependence

How does co-dependence exist

Answer 3

Both teams jointly contribute to output i.e matches (Needs to be reasonably competitive to be interesting and keep market existing)

(not common to other industries e.g Apple v Samsung where one just wants to dominate)

Question 4

Sources of co-dependence (4)

Answer 4

Attendance depends positively on quality of opposition. (People want harder opponents e.g champions league final)

Fans purchasing excitement of the contest e.g winning on last day of season rather than early (aguero moment vs arsenal bottle jobs)

Fans of dominant teams may still prefer to win closely contested games/leagues. (Like me)

Longer term fans care about sustainability of league (don’t want to dominate too much, dull and league collapse)

Question 5

Rotternberg’s implication - what is needed?

Answer 5

Uncertainty of outcome - teams should be of broadly equal strength to sustain interest.

(Hence why FFP, squad size limits exists, the league does it to keep as equal as possible…)

Question 6

Important: How can externalities be caused

Answer 6

On individual basis clubs want to increase dominance with the best players,

But this can impose a cost on the league if too strong, struggle to sustain interest.

Question 7

Policy question

B) 4 ways to fulfil uncertainty of outcome(real life examples)

Answer 7

SHOULD regulator intervene to redistribute talent for longer-term benefit of the league?

B)
HOW to intervene & redistribute?
Crudest mechanism - forced transfers

More realistic - NBA draft college basketball players (teams who finish lower get first choice of players)

Salary caps - reduce power of large clubs

Contract structures - make transfer easier e.g compulsory release clauses in Spain
Eval: if set unreasonably high can restrict uncertainty of outcome since big clubs retain top players easier

Question 8

Should regulators intervene?

According to the first fundamental theorem of welfare economics

Answer 8

Any competitive equilibrium leads to a Pareto efficient allocation of resources (no one can be better off without making someone worse off)

I.e markets work. Intervening can lead to a fall in welfare

Question 9

Second fundamental theorem of welfare economics

What is a problem of this

Answer 9

Society can reach efficient and equitable outcome by carefully selecting the initial allocation of endowments

However any re-allocation needs to be done through lump sum transfers to not influence decision making. (Difficulty to implement lump-sum transfers, most do change incentives!)

Question 10

Invariance principle

Answer 10

Regardless of structure of ownership rights for factors of production (players) , provided they are freely exchangeable, they will be efficiently employed in their most productive use.

Question 11

Interpretation of invariance principle

Answer 11

As freely exchangeable, an overly dominant club would allow some of their players to move to other clubs where their talents would be more productively employed. (Bench players)

Why? The transfer fee compensates the selling club.

Allows for redistribution more efficiently and preserves uncertainty of outcome. Players end up at team which values their talent the most.

Question 12

Bosman ruling

Answer 12

Intervention which addressed club monopsony power.

Prior retain-and-transfer system - clubs owned property rights of players - even prevent out-of-contract players from leaving.

Bosman ruling granted free agency to players (become a free agent after contract expires)

Question 13

What actually happened in case

Answer 13

FC Liege refused to allow him to sign for Dunkirk since fee did not meet their valuation.

So Bosman was effectively trapped, forced to remain on lower wages (75% cut!)

EU court ruled his way as seemed to restrict free movement of labour. Granted free agency!

Question 14

Why is this good (2)

Answer 14

Reduces monopsony power - transfers property rights from clubs to players. Prevents excessive dominance (before, even if club didn’t require their services, they could prevent other clubs benefitting and using!), upholding uncertainty of outcome and invariance principle (now can be employed in their most productive use)

Also benefits players (PTO)

Question 15

Implications for out-of-contract players

B) Who is in the strongest position to make demands of current employers

Answer 15

They can demand higher salaries from new clubs, and with signing bonuses.

B) Valuable players approaching contract expiry (club don’t want to let them leave free to a rival etc, so willing to pay more to keep them to retain)

Question 16

We consider Bosman ruling as a natural experiment

Why is it imperfect/not clean (3)

Answer 16

Cannot observe counterfactual of the allocation of talent had ruling not implemented (without the ruling, more players held hostage at their clubs and thus not to the benefit of other clubs!)

Min. EU player requirement per squad was scrapped.

Also champions league reformatted at similar timing - questions over whether results derived from this or the ruling

Question 17

Lee & Fort’s prediction on the Bosman Ruling and the invariance principle

What has changed, and what hasn’t (1,1)

Answer 17

Competitive balance (distribution of talent) unchanged. (There was never a ban on transfers, Liege just didn’t sell as didn’t meet value!)

Only difference is the value redistributed from owners to players (since they assume property rights now, more bargaining power for players FC17)

Question 18

Lee and Fort actual findings:

What did they measure?

2 measures for it

Answer 18

Measure competitive balance (they predict unchanged)

Scully-Noll ratio: Measured DISPERSION winning percentages amongst all 20 teams.
(Smaller dispersion=more competitive!!!)

Koning (concentration) ratio - no. of points obtained by a pre-specified no of top/bottom teams (N) divided by the max no of points that group could’ve achieved.
(For the top N: If smaller, more competitive (not running away with it!)
(For bottom N: larger, more competitive as putting up a fight and obtaining points!)

E.g top 3 teams, max points they can achieve is 3x38=114!

Question 19

Lee & Fort findings

Answer 19

Scully noll has increased - so competition has fallen!

Koning top - larger N (so less competitive)

Koning bottom - smaller N (less competitive!)

Question 20

They then identify structural breaks in their measures of competiveness (to see impact of Bosman ruling on competitiveness!)

Findings (and what is important to note)

Answer 20

Breaks in Scully-Noll and Koning (top but not bottom) ratio around 1995, suggesting Bosman Ruling had a significant effect. (Goes against their prediction of no competitive balance change!)

Bottom had no break, suggesting it may be down to the champions league reformat instead of the ruling, hence why only top teams benefitted (TV revenues etc)

Question 21

So results imply less competition since 1995.

Real life application
(hint: PL vs Super Bowl, top 2 vs bottom 3, goal difference

Answer 21

Only 7 diff clubs have won the prem since 1993 compared to 14 winners in Super Bowl since 1993

In 1992-93, top 2 (United & Villa) accrued 158 points, bottom 3 accrued 133 total. 2 seasons ago, top 2 City & Liverpool-185, compared to 80 points!

Goal difference for champions average: from 45 to 62 this seasons

Question 22

Reason for less competitive

Answer 22

Pre-existing barriers to player mobility benefitting the top clubs. E.g very high release clauses (protectionist) Bellingham

(Violates invariance principle as restricts freedom of transfers)

Question 23

Back to uncertainty of outcome: (more competitive = more successful league)

What did they find for the PL’s popularity/success

Answer 23

Despite the fall in competitiveness, English club revenue around £6bn and attendance has increased.

(So contrasts the theory of uncertainty of outcome within the sport market)

Question 24

Why has popularity remained despite a decline in uncertainty of outcome? (3)

Answer 24

Extreme brand loyalty (also derived by local rivalries)

Leagues within a league - still want to finish in a good position relative to their expectations (despite city always winning it)

Overall revenue can remain high despite uncompetitive if certain clubs can extract MPL better e.g increase players potential via facilities, medical team, managers etc!

Question 25

Previous salary cap until 1961. (£20 a week)

Rationale for the cap and
Predicted consequences of the cap (2)

Answer 25

Rationale - prevent large teams from hoarding talented players (since large teams only ones who can offer large wages, so have leverage)

Consequences:
Excess demand (shortage of players) since players have to choose between normal careers or football as £20 similar to normal salary!)

Fall in quality of players - since reduced player pool

Question 26

Price cap (max price) diagram (pg 18)

Answer 26

Creates excess demand since players unwilling to supply since wages limited at £20.

(Bad hence why scrapped after 1961!)

Question 27

Irony of results in 1967 following the cap removal

Answer 27

Wages increased as expected following the scrap.

However, no of players employed fallen to 2400 from 3000 in 1961!

Question 28

How can we model these findings

Answer 28

Segment the labour market into high and low skill players

High skill players - perfectly inelastic supply; demand unchanged since vital for success

Low skill players - perfectly elastic - demand changes to reduce wage bill once cap removed (since high skilled players cost more so need to balance the books)

Question 29

High skilled players diagram

Answer 29

Vertical supply to show perfect inelastic supply.

Wages higher but quantity unchanged as players are vital for success.

Question 30

Low skilled diagram

Answer 30

Horizontal perfectly elastic supply curve - will reduce demand for them to make cost-savings for high skilled players. (Still wages unchanged, just assume that we employ less now)

Question 31

So overall effects on labour market

Answer 31

Average wages rise! Since low skilled still earn Wcap (less of them), and high skilled now earn high wages (quantity remains unchanged as vital for success)

Question 32

PL doesn’t use caps: what do they use, and rationale behind it

Answer 32

Squad size limitations - 25 man, 8 homegrown.

Rationale: prevent stockpile of talent (for injury cover or congested fixtures, or to prevent them keeping talent to stop others from signing)

Question 33

Squad size limit diagram

Answer 33

Kinked demand curve: (similar to public PAYG pension)

Demand for players cuts of vertically at the squad limit Llim , cuts off because will not want to hire beyond limit(25 in this case)

Equilibrium outcome is where kinked demand curve and supply curve intersect (So lower wage and employment than if no squad size requirement!)

Question 34

So what is important to consider in policy interventions like this

Answer 34

Behavioural responses to international competition

E.g if squad size limit here or wages lower here, but not in other leagues, can cause an outflow of talent in our league, reducing supply and increasing wages!

Question 35

Is squad size limit good for small clubs?

Answer 35

Yes if large forced to sell/loan players.

No if squad size limit is non binding i.e at LS1