Market Power

Musings by an academic economist on the power of markets and the power over markets.

Friday, November 12, 2004

Unintended Consequences of Alcohol Restrictions

I expect that alcohol restrictions on college campuses aren’t going to do a lot to stop student drinking. The restrictions, most-likely, shift the activity off campus. Even if c school's restrictions don’t stop the activity, they can probably limit its liability in an unfortunate alcohol-related situation.

It’s an especially prominent issue right now because of the deaths of two students who literally drank themselves to death, one at Colorado State and one at the University of Colorado. The deaths have spurred a call for action. See here.

One student at the University of Missouri was extremely lucky – lucky because of an unintended consequence of Mizzou’s alcohol policy. See this article in the Columbia Daily Tribune.


Millionaire Owners

Opponents of sports subsidies often point to the wealth of those asking for the subsidy. Here’s one example with the following statement found approximately two-thirds towards the end:

" "The fact that major league sports are subsidized is sinful," (Steve) Khalil says. "You have billionaire owners, you have millionaire players, and they stick their hands out to taxpayers for subsidies. It's just not right." "

Even economists use this rhetoric. Skip Sauer at The Sports Economist links to this editorial by Dennis Coates originally appearing in the Washington Post and now posted by the Cato Institute. Prof. Coates quotes a statement allegedly made by P.T. Barnum, “There’s a sucker born every minute,” and writes:

“How else to explain people's willingness to believe politicians and millionaire (emphasis added by me) sports team owners' claim that spending millions of taxpayer dollars on a baseball stadium will lead to economic growth for the community?”

Why, in the economic argument against sports subsidies, is it important that sports team owners (and player) are m(b)illionaires? The argument for subsidies for some activity is that it generates external benefits – good things that are felt by people who do not engage in the activity. Proponents of stadiums frequently point to the jobs and income generated externally by sports teams. Economists have soundly debunked that myth. Now much of the current economic research focuses on “commonality” and “quality of life” externalities – sports teams draw people together and makes the local community more enjoyable.

Externalities are externalities – by definition they are felt those who do not engage in an activity. If the local millionaire comes up to me and blows smoke in my face, it impacts me exactly as smoke blown in my face by the third baseman on my softball team. It matters not how much money either has in his bank account or wallet.

There are plenty of reasons to dislike subsidies for professional sports teams, but the fact that owners are m(b)illionaires is not one of them.


Wednesday, November 10, 2004

Where's My Dad Been?

If you've seen Adam Sandler's "The Waterboy", you may remember the last scene where Bobby Boucher has just married Vicky Vallencourt. To make a long story short, Bobby, the son of a very overprotective mother, finds success on the college football field. In the last scene, Bobby's long-lost father shows up to restart a relationship with his son. Of course, the father's motives are less-than fatherly. He expects his son to be a star in the NFL and he wants a piece of the action.

So why am I bringing up "The Waterboy"? Read this column by Jason Whitlock of the Kansas City Star and you'll see why.

Sometimes life imitates "art".


The Comments are Working!

The comments are working! The comments are working!


Comments to this Blog - I'm a Rookie

I guess I don't know what I'm doing when it comes to setting this blog up to allow comments. I thought I had the comments set up so that anyone could comment, but I find that to comment, you've got to go to the web's version of Timbuktu (Tim Biakabatuka?) and back just to get to a window that allows you to comment. If you've been trying to comment, please accept my apologies. Hopefully I can get this problem fixed soon.


On McCloskey’s “The Secret Sins of Economics”

I read through Deidre McCloskey’s “The Secret Sins of Economics” last night. The two sins she places on economists are 1. Our theories and their results, because they are based on various assumptions, don't really show concrete results. When one changes the assumptions, the results change... so the theories aren't that useful, per-se. 2. Economists focus too much on statistical significance when doing their empirical analyses. These two sins, she argues, causes us not to focus enough on answering "how much" questions.

For example, suppose I take a sample of 100 students and examine their attendance and their performance on the final exam in my macro class. Suppose I find that a 1 person increase in student attendance over a semester in my macro class is correlated with a 0.001 increase in the average score on the final exam (test scores are out of 100). Further suppose that number is significantly different from 0. That's all well and good, but that doesn't "prove" anything.

First, the true value of my population parameter - the correlation between attendance and average test scores is still unknown. I don't know what the true population value is. It may actually be 0, but I got misleading results - I was unlucky. Merely reporting statistical significance and making conclusions solely on it misses the point - we have evidence that suggests something is likely in the population, but we don’t *know* for sure.

Second, 0.001 is not that big of a number. How much effort should a teacher take to improve attendance?

Third, we haven't even said anything about cause and effect. Statistical significance, by itself, does not tell us this. Theory, by itself, does not tell us this.

Good scientific inquiry needs to have theory and empirics - it's not necessary for one person to do everything, she argues, but it is necessary for the body of literature to have both components.

She's right - in general, but I don't think she's right to claim that these are the sins of economics, but these are things that *economists* do. Her point, from what I gather, is that economists need to focus on the whole package of scientific inquiry in order to root out what is. But we do not.


Tuesday, November 09, 2004

The Cost of Amateurism

The stuff that got the University of Missouri basketball program put on probation has nothing on these allegations made by Maurice Clarett, formerly of the Ohio State University.

What’s worse for Buckeye fans is that his claims are being corroborated by others – but not everybody. See here. We’ll have to see how this shakes out.

None of this is surprising to those who follow the economics of college sports. The amount of money generated by NCAA Division 1 college football and men’s basketball teams dwarfs what players can receive. Unfortunately, some of the things that they can receive are things they don’t care about.

When players can’t be compensated by legal pecuniary means and if they don’t care about their education, they will seek alternative forms of compensation. Cars, under-the-table cash, and easy classes are some ways schools and boosters compensate players. Nice playing and training facilities are other ways to compensate players. Players may also seek out other forms of compensation from people other than boosters (for example, shaving points for gamblers).

To battle this stuff, the NCAA has rules upon rules upon rules about what can and cannot be done and millions of dollars are spent by the NCAA in enforcing its rules and millions of dollars are spent by member schools in an effort to either play by the rules or, in the jaded person’s view, not get caught.

As I ponder these questions, I am frequently left with this thought: “What’s the cost of amateurism?”


This is Economics

The fellas at Marginal Revolution mentioned a paper by Deidre McCloskey entitled The Secret Sins of Economics. I haven’t read through the whole thing but have skimmed over some of it. I like the passage on Gary Becker’s answer to why people have children:

“…because children are durable goods. They are expensive to produce and maintain, over along period of time, like a house. They yield returns over a long future, like a car. They have a poor second-hand market, like a refrigerator. They act as a store of value against future disasters, like pawnable gold or your diamond ring. …the number of children that people have is a matter of cost and benefit, just like the purchase of a house or car or refrigerator or diamond. A prudent parent decides whether to invest in many children or few, extensively or intensively, early or late, just like investing in a durable good.”

Yup. I find myself thinking that way sometimes.

This is how heavy metal musicians must have seen themselves after first seeing “This is Spinal Tap”.

Now I need to go and play with my durable goods.


Spring Practice Injury Rates in College Football

This article in the Kansas City Star describes research that examines rates of injury to players in college football. The research finds that limiting spring practice times in NCAA football does not reduce injury rates. Here are some other interesting findings noted by the article:

1. Injury rates in the spring are three times higher than in the fall.
2. Of all scrimmages, the last one in the spring, the spring game, had the lowest rate of injuries. The other spring scrimmages had the highest rate of injuries of all scrimmages.
3. Limited-contact scrimmages (players wear pads but there is no tackling) had higher injury rates than full contact scrimmages.

Here are my thoughts on potential explanations for these findings.

On point 1: fall practice starts in August and players have more of an opportunity to get/stay in playing shape during the summer than before spring practice begins. Spring practice comes during the spring semester when players have largely been away from practicing for a few months and have been involved in their classes. If this is the reason for the difference in the injury rates, the research underscores how important it is not to jump into an activity whole-hog.

Also on point 1: spring practice may be more intense than fall practice because of the relatively short amount of time that coaches have to work new things in.

On point 2: by the time of the spring game, those most likely to get injured have been injured – this is the survival of the fittest.

On point 3: when someone injures a leg, it’s common for that person to begin to compensate for this injury by favoring that leg. Because of the extra stress put on the good leg, they end up hurting that leg. A similar thing probably happens in the limited-contact scrimmages. Instead of finishing a tackle, players let up. This could cause a player to sustain an injury that he otherwise would not have sustained.


NCAA Market Power

Monopolies produce less output than competitive markets. What happens when a monopolistic firm loses its market power? Output in the market tends to increase.

How many college football games were on TV during the first week of November in 1984? How many were on last weekend?

Because of the way the Supreme Court ruled in the 1984 case “Board of Regents of the University of Oklahoma vs. National Collegiate Athletic Association”, you can watch dozens of college football games each week. Compare that to a weekend in 1981 as described in this article in the Minneapolis Star-Tribune:

“For instance, on one weekend in 1981, an Oklahoma-Southern California game aired nationally on ABC while a Citadel-Appalachian State game was shown regionally on four channels. Both games garnered the same payout for all four schools.”

This is an excellent example of how a firm with market power restricts output and what happens to market output when the market power is restricted.


Lies, Damned Lies, and Labor Relations in the NHL

The Labor strife in the NHL is really getting interesting. While professional hockey is the 4th most-popular professional sport in the 4 major American professional sports, the labor market is global. Many NHL players have signed contracts overseas which allows them to keep in playing shape and earn an income while the lockout goes on with little end in site. You can follow your favorite players here. Skip Sauer mentions here that the NHL All-Star game, while cancelled in the US, is effectively going to be played in Russia. In any case, this strengthens the position of the union.

In the wake of some dissension among the players, the NHLPA convened a meeting 10 days ago with player representatives from each team to keep them informed of the situation. The Sports Business Journal (a for-pay site) now reports that the NHL Players’ Association has accused the league of anonymously sending players’ agents a memo that describes various lies made by the NHLPA. Union leaders are supposedly telling fibs to players in order to keep the rank-and-file on the same side of the rink. One of those lies regards guaranteed contracts. See here from the official NHL website about this particular bit of “misinformation.”

The NHL also claims that the misinformation is meant to sway public opinion towards the union’s side. Read here.

Bargaining power is the name of the game. The side that gets more of it and uses it effectively gets settlements tilted its way. There are many sources of bargaining power in labor relations, including 1. alternative sources of income for employees and employers; 2. public relations. It’s apparent that the employees are doing better than the employers right now in terms of alternative sources of income - and pretty soon the league is going to begin losing its national TV money. Advantage: players.

The league seems to be working harder to get public sentiment on its side. The NHL even has a webpage devoted to keeping the public informed here which talks of “distortions”, “inaccuracies”, and “misleading” statements made by the union to its players. The NHLPA has devoted no resources on its website to defend itself to the public – yet.

Right now, it looks like the union has a bit of the upper hand in the current situation. Whether they will keep it is another matter altogether.


Monday, November 08, 2004

Displaced Spending

Voters in the Kansas City area defeated a tax that would have provided funds to maintain both Arrowhead Stadium and Royals Stadium. As one would expect, voters from Jackson County, Mo. passed the measure (the stadiums are in Jackson county) and voters in Clay and Platte Counties in Missouri (north of the Missouri River) and Wyandotte and Johnson Counties in Kansas voted it down.

George Brett, former Royal and Hall of Famer, is not happy. Here is a quote from a Kansas City Star article on the failed Bistate Tax:

“It's really time Johnson County stepped into this and started paying for it. Half of the people that go to the games are from Johnson County. And how long has Jackson County been going alone on this? Over 30 years?”

Maybe the reason why Johnson County doesn’t want to pay is because those people are *leaving* Johnson County and going to Jackson County. The spending by Johnson County residents on the Chiefs and Royals represents displaced spending from that county. The Chiefs and the Royals drain some spending from the Johnson County area and the Chiefs and Royals want them to buck up to maintain the stadiums too?


Text Me!

If you are a college recruiter, you can now send text messages to your recruits. It falls under the description of “general correspondence.” See this article in the Minneapolis Star Tribune.

Suppose I am recruiting Joe Blow to play basketball for Minnesota. Could I hang a jersey in the rafters of Williams Arena with the name “Blow” on the back and send the recruit a picture of said jersey to his cell phone? I doubt that would be referred to as “general correspondence”, but what does the rulebook say?


Airline Deregulation

The St. Louis Post-Dispatch has this article on the deregulation of the airline industry in the United States.

While regulation is bad for the customer, especially in the long run, it’s been argued that some companies actually like regulation. By allowing themselves to be regulated, companies can use their position to keep competitors away and to maintain a profit. I suppose it is easier to justify why prices need to be set at some regulated level than it is to convince consumers that your product is their best choice. Here is a quote from the article:

“Regulation lasted four decades, starting in 1938. That’s when the government and the airlines struck a bargain. ”The airlines let the government tell them which cities they could serve, and how much they could charge for tickets. In return, the government set the ticket prices high enough to make sure the airlines made money. ”The bargain was a good deal for airline management. Without much sweat, management kept the books in the black.”

Here is another quote from the article describing who else benefited and which consumers got served:

“The bargain was also a good deal for airline unions. They won high paychecks and strong work rules. Management went along. After all, the government would cover the higher labor costs by raising ticket prices. ”Trouble is, the bargain shut out consumers. Nobody could shop around for a discount fare. The airlines might compete on the basis of which had the leggiest young flight attendants or the highest-octane cocktails. But they all charged the same fares. ”And those fares were high — so high that flying ferried only the coat-and-tie set. Business executives flew. The rest of us drove, rode the bus or took the train.”

Deregulation has forced firms to find ways to cut costs and pass savings onto consumers. The newer low-cost airlines are not free of unions, but they are relatively free of inflexible practices that one sees in older airlines. The low-cost airlines find ways to specialize and thereby lower their costs, passing on savings to consumers.

Just as one would expect, especially over time.


Power Outage

The Missouri Tigers football squad is an extremely fragile team. They have shown a penchant for getting big first-half leads, only to lose (or not find) that killer instinct that good teams use to put opponents away. When one bad thing goes wrong, it simply snowballs: The Tigers take a 14-0 lead in dominant fashion against Troy University – then they retreat into a shell and lost the game 24-4; 17-0 first half lead for the Tigers against Oklahoma State, the Cowboys drive the length of the field in less than a minute before the end of the first half for a TD- they end up winning 20-17; against Kansas State this past weekend, the Tigers take a 21-0 lead only to see the Wildcats score their first TD late in the first half. KSU wins the game 35-24.

Jason Whitlock of the KC Star has this column on the Tigers. Bryan Burwell of the St. Louis Post-Dispatch has this column on the subject. Joe Walljasper of the Columbia Daily-Tribune has these thoughts.

I traveled to Columbia to see the KSU game this past weekend. Last year when I attended the Nebraska-Missouri game, there was an electricity surrounding the event. Those of us in the crowd knew NU was beatable and we knew we had a team that could do it. It had been 25 years since James Wilder ran crazy against the Huskers and it had been 30 years since the Tigers beat the Huskers at home. We smelled an upset. The Tigers were down 24-14 going into the 4th quarter, and after a 27 point outburst, the goalposts came down.

This weekend when I walked into Faurot Field and got to my seat, there was no electricity in the crowd. We were not pumped up although the Tigers had a shot at beating KSU for the first time in 12 years. When the Tigers got up by 21, the crowd was *not* abuzz. It was a very strange feeling - the crowd knew the lead was not safe.

And it wasn’t.

Momentum in sports? The Tigers have none.


Sunday, November 07, 2004

Aurora Borealis

One of the benefits of living in Minnesota is the occasional opportunity to see the Northern Lights. At this moment, they are shimmering above the Nort’lands – brighter than I’ve seen them in my two years in Mankato.


Sports Econ

This is the first semester I have taught Sports Economics and I wasn’t sure what to expect.

While I was working on gathering some free agent data from baseball, one of my students stopped by to talk about the material on the upcoming test. Specifically, he wanted to talk about the various ways a sports league can try to improve competitive balance.

It’s starting to gel with him, but he’s still having some trouble with the intricacies of some of the theories and their results. Gate revenue sharing may not do anything to competitive balance. Local TV revenue sharing can. Luxury taxes likely will. Salary caps may not do anything to competitive balance but can introduce problems similar to the problems ignited by price ceilings.

My student mentions a conversation he had with a buddy. He told his buddy that he was taking Sports Econ and his buddy replied (paraphrased, of course) “That’ll be a piece of cake. New York makes the most money so they get the best players. What’s there to learn?” My student now realizes there is more to it than this. He told me that he looked at his friend, shook his head, and told him that it’s not that simple.

When my class was covering the material on salary caps etc., one of the graduate students asked about “social inefficiencies” introduced by luxury taxes, revenue sharing, etc. He can see why fans of the Twins want to reign in the high-spending Yankees, but why is that good for the Yankees? Isn’t the league taking away something from their fans that they are willing to pay for?


It’s the first time I’ve taught this course although I’ve been studying Sports Econ since the subject was a preschooler, 10 years ago. I wasn’t sure what to expect, but it has been a pleasant surprise.


New York Toast

New York is taking over the US. It’s bad enough that they dominate baseball, but now they dominate the naming rights to food! See Joe Posnanski’s column.



More NCAA Legislation

The NCAA has passed yet more legislation that they hope will limit recruiting improprieties. NCAA men’s basketball teams can no longer play those traveling barnstorming teams that they used to play in exhibition play. No more Nike Elite. No more Athletes in Action. No more Spotlight Jammers. This St. Louis Post-Dispatch article explained the ban thusly:

“The NCAA made the change because some exhibition touring teams were associated with club teams filled with potential recruits.”

As fat as that NCAA manual is, the NCAA may require all coaches and administrators to have a law degree in order to understand the rules and restrictions. Man, talk about something that needs simplifying. The US tax code ain’t got nuthin’ on the NCAA Manual.

For the record, Missouri beat Central Missouri State, a Division II school, 100-73 last night to usher in the new Paige Sports Arena.