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Review of Industrial Organization

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13.10.2017

The National Collegiate Athletic Association Cartel: Why it Exists, How it Works, and What it Does

verfasst von: Allen R. Sanderson, John J. Siegfried

Erschienen in: Review of Industrial Organization | Ausgabe 2/2018

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Abstract

In this essay we consider why American colleges and universities participate in big-time commercialized intercollegiate sports, and how sports came to play such a prominent role on American college and university campuses. We also review how the National Collegiate Athletic Association (NCAA) developed as a body to regulate player safety and transformed itself into an economic regulator, the means by which the NCAA attempts to maintain its control, increase revenues, and reduce costs for college sports programs. We also examine how the organization succeeds in the face of institutional characteristics that imply that its cartel activities would be doomed. Finally, we speculate on what changes might be on the horizon for the NCAA and college athletics.

Vorheriger Artikel Symposium: The NCAA Cartel—Introduction

Nächster Artikel Athlete Pay and Competitive Balance in College Athletics

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In nominal dollars, the median intercollegiate athletics program among the 128 largest [defined later as Division I, Football Bowl Subdivision (FBS)] generated $48 million in 2015, which was 110% more than the median of $23 million in 2004 (Fulks 2016, Table 2.1). Aggregate revenue for college football teams at 2072 institutions rose from $1.89 billion in 2003 to $4.66 billion in 2014; for basketball it rose from $1.13 billion in 2003 to $2.68 billion in 2014 (Equity in Athletics Data Analysis, US Department of Education 2017, accessed January 22, 2017, https://ope.ed.gov/athletics/Trend/public/#/answer/6/601/trend/-1/-1/-1/-1).

Consistent NCAA revenue and expense data are available only since 2004. The share of NCAA Division I FBS institutions’ (defined later) total intercollegiate athletics revenues (including within university transfers) accounted for by NCAA and conference distributions (mostly broadcast rights fees) and direct broadcast revenues increased from 14% in 2006 to 23% in 2015 (Fulks 2008, Table 3.27, 2016, Table 3.14).

For a more detailed examination of broadcasting and how it has affected professional sports leagues, the NCAA, and individual universities, see the authors’ complementary essay in this issue: “The Role of Broadcasting in National Collegiate Athletic Association Sports”. By 2015, broadcast rights constituted about 23% of the revenue received for intercollegiate sports by the largest 128 college sports programs. Ticket sales were 19% of revenues, cash contributions were 20%, and institutional subsidies were 18% (Fulks 2016, Table 3.14).

As of 1 year after graduation, based on nine US geographic regions, between 71 (New England) and 88 (Pacific)% of recent college graduates live in the same region as the college from which they graduated (Sasser 2008).

The five power conferences are: the Atlantic Coast Conference (ACC); the Southeastern Conference (SEC); the Big Ten Conference (Big Ten); the Big-12 Conference (Big-12); and the Pac-12 conference (Pac-12).

The Association for Intercollegiate Athletics for Women (AIAW) governed women’s college and university sports from 1971 through 1982, after which the NCAA organized women’s championship tournaments in most sports, and the AIAW discontinued operations.

USA Today reported on October 26, 2016, that 36 college head football coaches earned over $3 million each in 2016. The median head coach in the SEC earned $4.1 million. The highest football coach salary nationally for 2016 was earned by Jim Harbaugh (at the University of Michigan) $9 million, followed (in order) by Nick Saban (Alabama) $6.9 million, Urban Meyer (Ohio State) $6.0 million, Bob Stoops (Oklahoma) $5.5 million, and Jimbo Fisher (Florida State) $5.2 million. In basketball, Mike Krzyzewski (Duke) topped the list at $7.3 million, followed by John Calipari (Kentucky) at $6.6 million and Rick Pitino (Louisville) at $6.0 million.

This and the succeeding eight paragraphs are taken from Sanderson and Siegfried (2015a), updated and revised, and used by permission of the American Economic Association.

Based on a Knight Commission (2006) survey, 78% of Americans believe intercollegiate athletics is profitable.

These percentages, and all other NCAA data that are reported here, are limited to intercollegiate athletics programs and exclude intramural and club sports. The 128 FBS universities (defined later) have the largest intercollegiate athletics budgets; the 120 Football Championship Subdivision (FCS) universities (also defined later) have the second largest budgets.

In some states—e.g., West Virginia, Louisiana, and Arkansas—the median voter has not even attended college (Gaguin and Ryan 2014, p. 194, and US Census Bureau, “American FactFinder—Results”, factfinder.census.gov). Retrieved 2017-01-23.

While the median revenue that was generated from intercollegiate sports increased by 110% from 2004 through 2015 at the 128 largest programs, expenses rose by 129% at the same programs (Fulks 2016, Table 2.1).

A more comprehensive history of the development of the NCAA is in Grant et al. (2008).

The concept was that it was “insane” to pay players, when their services could be acquired free.

Walter Byers began the practice of calling the players “student-athletes” in 1951, when he became Executive Director of the NCAA, in order to justify their continued unpaid amateur status (Byers 1995).

The NCAA’s constitution declares its basic purpose to be to “maintain intercollegiate athletics as an integral part of the educational program” of colleges (NCAA Constitution, Article 1.3.1), which is sufficiently vague as to reveal nothing about its actual goals. The NCAA’s website claims it is “dedicated to the well-being and lifelong success of college athletes.” But the “well-being of college athletes” could be interpreted to involve the maximization rather than control of their compensation.

For 2016, Forbes estimates TV related revenue, including "both rights fees and, for the conferences with network ownership stakes, estimated profit shares” for the 10 Division I conferences, including the SEC, the Big Ten, the Big 12, the Pac 12, the ACC, the American, the Big East, the Mountain West, Conference USA, and the Mid-American as $1.38 billion, an increase by a factor of 15 over 32 years (Smith 2016).

Prior to 1990 the NFL required entry-level players to wait until their high school class was 4 years beyond graduation to be eligible to be employed in the league.

In addition to differences in the cost of a grant-in-aid to universities with different levels of tuition and fees, those institutions with excess capacity face only the marginal cost of enrolling an additional athlete on a grant-in-aid, while institutions that are at capacity face losing the average net revenues from a non-athlete when they add a scholarship athlete.

The latest example of blatant recruiting violations occurred in September 2017, when federal authorities revealed details of corrupt schemes involving footwear manufacturers, coaches at premier NCAA basketball programs, and financial advisors. Allegedly, large cash payments moved from footwear company executives and financial advisors to coaches and players with the intent of steering prospective NBA players to certain college programs and eventually to representing the footwear brands and hiring the financial advisors.

In 1987 and 1988 the NCAA imposed the “death penalty” on the football program at Southern Methodist University because of “a lack of institutional control,” when it discovered that athletic department employees were assisting in providing cash payments to players. In 1952–1953 the NCAA closed the University of Kentucky’s men’s basketball program because of complications that arose from some players’ accepting payments from gamblers to shave points in games.

The fixed-cost nature of the sports production function also encourages expanding the length of the regular sports season, and the addition of ever more post-season games.

In addition, a 1972 amendment to the 1964 Civil Rights Act (Title IX) mandates that to promote gender equity educational institutions spend proportional amounts on women’s athletics as on men’s, thereby increasing the costs of upgrading men’s programs by more than just the expenditures on those programs themselves.

The primary argument against conference expansion is the need to divide shared (mostly broadcasting) revenues among more institutions.

The NCAA, CFA, Big Ten/Pac-10 and now individual conferences all left the selection of the particular games to broadcast to the networks in order to increase the value of the broadcasting rights.

Such a “side payment” in a cartel is called a “true-up” in the standard cartel literature (Marshall and Marx 2012).

This change was provoked by University of Connecticut basketball player Shabazz Napier’s announcement on national television immediately after the Huskies won the 2014 national collegiate men’s basketball title that he frequently went to bed hungry because of NCAA restrictions on “excess food.”

This action essentially added a new, sixth division to the NCAA for football governance purposes.

O’Bannon v. NCAA, 7 F.Supp. 3d 955 (2014); available at http://s3.documentcloud.org/documents/1272774/obannon-court-decision.pdf.

O’Bannon v. NCAA, 802 F.3d 1049 (2015).

The plaintiff in the case is Jenkins, but the name usually mentioned is his attorney Kessler, because he is a formidable legal opponent in sports labor law. Kessler was involved in the case that led to free agency for NFL players.

The NCAA used to fix the salaries of some assistant basketball coaches, but a 1998 Court of Appeals ruling held that this limit was collusion in restraint of trade; this was an antitrust violation that cost the NCAA a judgment of $66 million (Law v. National Collegiate Athletic Association, 134 F.3d 1010 [10th Circuit 1998]).

Alexander, D. L., & Kern, W. (2010). Does athletic success generate legislative largess from sports-crazed representatives? The impact of athletic success on state appropriations to colleges and universities. International Journal of Sport Finance, 5, 253–267.

Alsher, J. (2017). Five college conferences that bring in more than $250 million. Sports Cheat Sheet (January 4).

Anderson, M. L. (2012). The benefits of college athletic success: An application of the propensity score design with instrumental variables. National Bureau of Economic Research working paper no. 18196 (June).

Berkowitz, S., Upton, J., & Brady, E. (2013). Most NCAA Division I athletic departments take subsidies. USA Today (July 1, 2013).

Byers, W. (1995). Unsportsmanlike conduct. Ann Arbor, MI: The University of Michigan Press.CrossRef

Carroll, K., & Humphreys, B. R. (2016). Opportunistic behavior in a cartel setting: Effects of the 1984 Supreme Court decision on college football television broadcasts. Journal of Sports Economics, 17(6), 601–628.CrossRef

Clotfelter, C. T. (2011). Big-time sports in American universities. New York: Cambridge University Press.CrossRef

Coates, D., Humphreys, B. R., & Zhou, L. (2014). Reference-dependent preferences, loss aversion and live game attendance. Economic Inquiry, 52(3), 959–973.CrossRef

Farrey, T. (2014). Jeffrey Kessler files against NCAA. ESPN.com (March 18).

Fleisher, A. A., III, Goff, B. L., & Tollison, R. D. (1992). The National Collegiate Athletic Association: A study in cartel behavior. Chicago: University of Chicago Press.

Fraas, A. G., & Greer, D. F. (1977). Market structure and price collusion: An empirical analysis. Journal of Industrial Economics, 26(1), 21–44.CrossRef

Frank, R. H. (2004). Challenging the myth: A review of the links among college athletic success, student quality, and donations. Miami: Knight Foundation on Intercollegiate Athletics.

Fulks, D. L. (2008). NCAA revenues and expenses of Division I Intercollegiate Athletics Programs Report. Indianapolis: The National Collegiate Athletic Association.

Fulks, D. L. (2016). NCAA Division I Intercollegiate Athletics Programs Report, 2004–2015: Revenues and expenses. Indianapolis: The National Collegiate Athletic Association.

Futterman, M. (2017). New football league charts an alternative path to NFL. The Wall Street Journal, A14 (January 12, 2017).

Gaguin, D. A., & Ryan, M. M. (2014). The who, what and where of America: Understanding the American Community Survey (5th ed.). Lanhan, MD: Bernan Press.

Getz, M., & Siegfried, J. J. (2012). What does intercollegiate athletics do to or for colleges and universities? Chapter 19. In L. Kahane & S. Schmanske (Eds.), Handbook on sport economics. Oxford: Oxford University Press.

Grant, R. R., Leadley, J., & Zygmont, Z. (2008). The economics of intercollegiate sports. Singapore: World Scientific Publishing Company.CrossRef

Hay, G. A., & Kelley, D. (1974). An empirical survey of price-fixing conspiracies. Journal of Law and Economics, 17(April), 13–18.CrossRef

Hoffer, A, Humphreys, B. R., Lacombe, D. J., & Ruseski, J. E. (2014). The NCAA athletics arms race: Theory and evidence. Working paper, Department of Economics, West Virginia University.

Hoxby, C. (2014). The economics of online postsecondary education: MOOCs, nonselective education, and highly selective education. American Economic Review, 104(5), 528–533.CrossRef

Hruby, P. (2017). The plot to disrupt the NCAA with a pay-for-play HBCU basketball league. USA Today (September 11).

Humphreys, B. R. (2006). The relationship between big-time college football and state appropriations for higher education. International Journal of Sport Finance, 1, 119–128.

Kirk, J. (2014). College athletic departments aren’t necessarily as broke as you think. SBNation.com (June 6).

Knight Foundation Commission on Intercollegiate Athletics. (2006). Miami: Public opinion poll (January).

Koch, J. V. (1973). A troubled cartel: The NCAA. Law and Contemporary Problems, 38(Winter), 135–150.

Lifschitz, A., Sauder, M., & Stevens, M. L. (2014). Football as a status system in US higher education. Sociology of Education, 87(3), 204–219.CrossRef

Marshall, R. C., & Marx, L. M. (2012). The economics of collusion: Cartels and bidding rings. Cambridge: MIT Press.

Pope, D. G., & Pope, J. C. (2009). The impact of college sports success on the quantity and quality of student applications. Southern Economic Journal, 75(3), 750–780.

Raiborn, M. H. (1986). Revenues and expenses of intercollegiate athletic programs (p. 4). Indianapolis: National Collegiate Athletic Association.

Sanderson, A. R., & Siegfried, J. J. (2015a). The case for paying college athletes. Journal of Economic Perspectives, 49(1), 115–138.CrossRef

Sanderson, A. R., & Siegfried, J. J. (2015b). Pastimes, seriously. The Milken Institute Review, 17(3), 84–92.

Sargeant, K., & Berkowitz, S. (2014). Subsidy of Rutgers athletics jumps 67.9% to $47 million. USA Today (February 23).

Sasser, A. (2008). The future of the skilled labor force in New England: The supply of recent college graduates. Boston: Federal Reserve Bank of Boston, New England Public Policy Center.

Siegfried, J. J., & Burba, M. G. (2004). The college football association television broadcast cartel. The Antitrust Bulletin, 49(Fall), 799–819.

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Strauss, B. (2014). After ruling in O’Bannon Case, determining the future of amateur athletics. New York Times (October 21).

US Department of Education, Office of Postsecondary Education. (2017). Equity in athletics data analysis website. Accessed 15 Jan 2017.

Zimbalist, A. (1999). Unpaid professionals. Princeton, NJ: Princeton University Press.

Titel: The National Collegiate Athletic Association Cartel: Why it Exists, How it Works, and What it Does
verfasst von: Allen R. Sanderson
John J. Siegfried
Publikationsdatum: 13.10.2017
Verlag: Springer US
Erschienen in: Review of Industrial Organization / Ausgabe 2/2018
Print ISSN: 0889-938X
Elektronische ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-017-9590-z

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