Why do black basketball players work more for less money?

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Abstract

We explore Kahn and Sherer’s finding that National Basketball Association players’ salaries are lower for black than white players. In general, we do not find evidence that this salary differential is due to the racial preferences of fans. Specifically, we observe that black players actually play more than comparable white players. We offer a theory of price discrimination based on relative supplies and supply elasticities, in lieu of the racial discrimination argument, as an explanation for the black/white wage differential.

Introduction

The literature on the economics of sports has demonstrated that sports data and organizations provide a useful and accurate laboratory for the study of some economic issues (Goff and Tollison, 1990). Nonetheless, the enduring value of the economics of sports lies in its ability not just to understand the play of sports, but to improve our understanding of general economic problems. Take the problem of racial discrimination. There is a well developed literature on this general issue, but a host of questions remain for researchers. For instance, Kahn and Sherer (1988) presented evidence that black professional basketball players are compensated as much as 20 percent less than white players with comparable skills.1 They explained this differential by appeal to an argument about customer discrimination by National Basketball Association (NBA) fans, which they test and find not to be refuted for six seasons worth of data on NBA attendance. In other words, NBA fans prefer to see more white players, all else the same. Kahn and Sherer estimated that an additional white player of equal skills increased home attendance by some 8000–13,000 fans per season. At an average ticket price (plus concession revenues) of US$12, the revenue effect of the additional white player more than outweighs the estimated salary differential, suggesting that team owners and white players share in the gains from satisfying customer preferences for white players.2

While Kahn and Sherer present an interesting thesis, it has not been carefully compared with alternative explanations of pay differentials. This is the problem tackled here. Indeed, when all is said and done, the expression “racial discrimination” is very confusing. More precisely, is there a theoretical distinction between racial and price discrimination? If so, what does it mean? In the classical model of third-degree price discrimination, a single-price seller (or in this case buyer) separates the market into two or more submarkets based on some easily identifiable characteristic, for example, foreign or domestic buyers. If these submarkets have different elasticities of demand (or supply), and if recontracting is costly (and if the antitrust authorities can be kept at bay), a profit opportunity arises. The buyer reduces the consumption of the relatively inelastically supplied input and increases consumption of the (homogeneous) elastically supplied input.

Few have any trouble with this model with minor exceptions.3 But the real issue involves the question, if the market happens to be separated on the basis of race, but solely for purposes of price discrimination, is that what one wants to call racial discrimination? Put differently, if race or skin color reveal information about a buyer’s (or seller’s) idiosyncratic elasticity of demand (or supply), should this characteristic be called racial or should the issue more appropriately focus on the underlying reasons why there is a connection between race and elasticity. The normal idea of racial discrimination involves the special treatment of black (or white or yellow or red) people simply because their skin is different without regard to questions of whether their elasticity of demand or supply might be collinear with their skin color. Accepting Kahn and Sherer’s wage-differential result, do black professional basketball players make less money than white players, all else equal, because fans and owners have racial preferences at the margins? That is, do fans or owners simply not like to see black players play? Or, in the alternative, do black professional basketball players earn less money, other things the same, because they belong to a class of identifiable people, who for some currently unknown reason, are not very responsive to wages paid in professional basketball?4

Why is this distinction important? If racial bias provides the explanation of the wage gap, then cultural shifts and education and integration of black people more completely into the culture should reduce the wage gap as the tastes of racially biased fans recede. On the other hand, if fans are not biased, that is, they do not care about the skin color of players, only that they play well and win, the wage gap persists as the society loses its racially segregated attitudes. If price discrimination is the basic reason why black NBA players earn less than white players, the attitude of the fans is irrelevant. Indeed, the extent of the wage gap depends on the relative supply elasticities of black and white players.

This paper explores Kahn and Scherer’s results in search of a better understanding of this issue. We accept their result of a 20 percent salary differential. In an expanded sample of NBA seasons, however, we find no evidence of general customer discrimination by NBA fans. To the contrary, if anything, there is a preference for more black players and more black playing time in our results.5 However, there do appear to be patterns of racial composition across teams in the NBA. We start with the same empirical model as Kahn and Scherer, but add two more seasons’ worth of attendance data.6 We identify a pattern of racial preference in NBA cities with large black populations. We also model playing time for NBA players as a function of performance and race. Definitively, black players play more minutes than seemingly comparable white players.

In light of these results, we are left with the following: (a) a large salary differential between black and white players, (b) a weak basis for a claim of general customer discrimination, and (c) more playing time for black players, all else equal. This pattern of results, in our view, is suggestive of price discrimination. NBA owners and executives are engaging in price discrimination across classes of players who have different elasticities of supply. For whatever reason (including past racial discrimination), black players have a more unresponsive elasticity of supply with respect to providing professional basketball services than do comparable white players, and hence their salaries can be set lower without erasing their supply of labor. The salary differential identified by Kahn and Scherer is most likely a result of this condition.

Section snippets

Monopsony power?

In order for the NBA to price discriminate between player inputs on any basis, the league must face an upward sloping supply curve of labor. We contend that the market for professional basketball talent exhibits this characteristic. Moreover, the rules and institutions of the league must prevent internal competition among teams that would otherwise force individual owners to pay each player the value of his marginal product. We believe that the institutions of the NBA reveal just such a pattern

Attendance results

We accumulated data on NBA teams for eight seasons, 1980–1981 through 1987–1988, primarily from various issues of Sporting News Official NBA Guide8 and Sporting News Official NBA Register.9 Summary statistics on these data are reported in Table 1. Over the period of the data, the

Local differences in racial preferences

To investigate whether there are regional or local differences in racial preferences, we parse the data into racial groups based on the black percentage of population in the underlying SMSA. The quartiles of this variable in our sample are 5.7 percent black at the lower end and 18.2 percent at the top end. We define an SMSA as White if it falls in the lower quartile; Black if occurs in the top quarter; and Mixed if it lands in the middle half of the distribution. Table 3 reports the breakdown

Playing time results

Our basic premise is that what may look like racial/gender/age discrimination is sometimes more properly characterized as simple price discrimination. To continue this investigation, we now examine whether there is any systematic relation between minutes played and race.

Following other models of playing time, we regress average minutes played per game for each player on each team over the sample period 1980–1981 through 1987–1988 on a vector of player skills (Clement and McCormick, 1989). The

A model of wage determination with racial discrimination by customers

Existing models of customer discrimination routinely employ an asymmetric approach. Some members of a majority group do not like members of a minority group. Here, we develop a more complete model where both groups in the model are biased. Suppose that there is customer-driven racial discrimination in professional basketball. That is, some white fans prefer to watch white players, and some black fans prefer to watch black players, other things the same. The remaining white and black fans are

Odds and ends

In 1985–1986 the NBA instituted a salary cap. This restriction limits the total wage bill that a team can pay to its players. The limit has varied slightly from team to team based on a number of factors, but it was approximately US$ 53 million per year until the most recent (1999) CBA. We reestimated the minutes played equation (Table 5) allowing for different race coefficients in the two periods, the years without a salary cap (1980–1985) and the subsequent period.

First, the marginal minutes

Concluding remarks

The following combination of results seems to hold sway-in general, fans do not seem to care about race, owners pay black players less, and blacks play more. While there is some evidence of racial preferences by some fans, the weight of the evidence points toward a simple case of market segmentation price discrimination. Black players and potential black players have a more unresponsive labor supply with respect to providing services in this labor market than do white players.

The reasons which

Acknowledgements

Thanks go to Robert Clement, Kris Krauza, and Erick Moore for help in assembling the database. We also appreciate the comments of session participants at the 1994 meetings of the Western Economics Association and seminar participants at Clemson University and the University of Chicago. The comments of Raymond Brastow, Donald Gordon, and Michael Maloney were particularly helpful. The usual caveat applies.

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