The NCAA Cartel and Antitrust Policy

Abstract

The National Collegiate Athletic Association (NCAA) was originally founded to protect student athletes from the brutality of college football. The NCAA has established a number of prominent athletic programs and achieved huge commercial success. In spite of this success, the NCAA has limited the compensation of student-athletes through collusive monopsonistic restraints. Ordinarily, these restraints would be vulnerable to antitrust attack, but the NCAA has enjoyed benign neglect by the U.S. Department of Justice and the Federal Trade Commission. The root of this is the Board of Regents [National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984)] decision, which requires rule-of-reason treatment of the NCAA’s restraints. The essential role of amateurism of student athletes is used to justify the NCAA’s cartel behavior. In this paper, we demonstrate that amateurism is a myth. We suggest that the NCAA will be unable to provide an evidentiary foundation for its claim that amateurism is crucial to the success of college athletic programs. In addition, we reject the possibility of an efficiency defense for the NCAA’s cartel behavior.

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Notes

  1. 1.

    This definition is provided by the American Heritage Dictionary.

  2. 2.

    Blair and Romano (1990) provided an economic analysis of the NCAA cartel. See Fleisher et al. (1992) for further discussions.

  3. 3.

    Data were obtained from USA Today. http://sports.usatoday.com/ncaa/finances/.

  4. 4.

    For a compact survey, see Sanderson and Siegfried (2017). Fleisher et al. (1992) provide a more extensive examination.

  5. 5.

    Detailed coach salary data can be obtained from USA Today. http://sports.usatoday.com/ncaa/salaries/.

  6. 6.

    The benefits of the commercial success spilled over to athletic directors as well. Detailed athletic director salary data can be found in USA Today. http://sports.usatoday.com/ncaa/salaries/all/director. While they were not paid as handsomely as the head coaches, their compensation was substantial at academic institutions, where it is rare that a faculty member earns a comparable salary.

  7. 7.

    To some extent, the revenue shortfalls may be due to funding the so-called non-revenue sports: almost everything other than football and men’s basketball. These expenditures on all non-revenue sports may be viewed as a tax on the athletic department.

  8. 8.

    Ayres (1987) summarizes the ways that cheaters can be punished. Stigler (1964) explores the ways in which deviations from expected cartel results could destabilize a cartel. A recent special issue in the Review of Industrial Organization examines the determinants of cartel stability and investigates cases in the U.S (Ghosal and Sokol 2016; Levenstein and Suslow 2016), Europe (Ghosal and Sokol 2016; Zhou 2016), and South Korea (Feinberg et al. 2016).

  9. 9.

    These restrictions have resulted in large discrepancies between the estimated marginal revenue product of student athletes and their financial compensation (Brown and Jewell 2004; Brown and Jewell 2006; Brown 2010, 2012; Hunsberger and Gitter 2015; Kahane 2012; Lane et al. 2014). For example, Brown and Jewell (2004) and Brown (2010) estimated the marginal revenue product of college football players to be over $500,000, which is 10-times the value of the average grant-in-aid. Most of the existing works rely on ex post NFL draft status to estimate NCAA student athletes’ marginal revenue product; Hunsberger and Gitter (2015) is the only paper that uses ex ante statistics—in particular, the high school prospect rankings—to estimate the marginal revenue product for college football quarterbacks. Their estimated marginal revenue product is about $400,000, which is still eight times the compensation that is provided for the student athletes. Sanderson and Siegfried (Sanderson and Siegfried 2017) further suggest that freshman eligibility reduced the number of scholarships, which reduces costs and improves profits.

  10. 10.

    Stigler (1968) explores the consequences of non-price competition in this regard.

  11. 11.

    United States v. Trenton Potteries Co., 273 U.S. 392 (1927); United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Circ. 1898); United States v. Socony-Vacuum Oil Co., Inc., 310 U.S. 150 (1940); Palmer v. BRG of Georgia, Inc., 998 U.S. 46 (1990); United States v. National Society of Professional Engineers, 435 U.S. 679 (1978), respectively.

  12. 12.

    Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975); Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982); Catalano Inc. v. Target Sales Inc., 446 U.S. 643 (1980).

  13. 13.

    In Mandeville Island Farms, the refiners of sugar beets in northern California agreed upon a pricing formula that depressed the price of sugar beets. The colluding refiners agreed on the price that they would pay. Thus, the victims were the sugar beet farmers who sold to the cartel at the collusively depressed prices. Mandeville Island Farms v. American Crystal Sugar Co., 334 U.S. 835 (1947).

  14. 14.

    For an extensive analysis of the Board of Regents case, see Porto (2012).

  15. 15.

    Board of Regents at 117, 120.

  16. 16.

    For a critical look at the Court’s reasoning, see Hovenkamp (2017).

  17. 17.

    The most comprehensive treatment of the rule of reason is provided by Areeda and Hovenkamp (2010, 1500–1512).

  18. 18.

    Relatively recent examples include Cason-Merendo v. VHS of Michigan. Inc. 2015 (hospital nurses), United States v. Adobe Systems, Inc. 2011 (hardware and software engineers), United States v. Lucasfilm, Ltd. 2010 (digital animators), and Deloach v. Philip Morris Companies, Inc. 2000 (leaf tobacco), among others.

  19. 19.

    Blair and Harrison (2010) examine monopsony from an antitrust law and economics perspective.

  20. 20.

    Williamson (1968) introduced the argument in a merger context. We examine this defense more fully below.

  21. 21.

    If a restraint is “naked”, it cannot be ancillary to lawful operation of a joint venture. If it were, it would not be “naked”.

  22. 22.

    For the details of this new policy, see www.NCAA.org.

  23. 23.

    Detailed cost-of-attendance information was obtained from individual university websites. Cost of attendance generally includes tuition and fees, room and board, as well as other personal expenses such as books and transportation. Some universities also include health insurance in their estimated cost of attendance. We restrict our attention to Division I schools because Division II schools usually rely on a partial-scholarship model. Thus some sports may receive the same scholarship limits as Division I programs while others have less. The detailed number of scholarships per sport for Division II schools can be found in http://www.ncaa.org/about/division-ii-partial-scholarship-model. Division III schools are not allowed to award any athletic scholarships.

  24. 24.

    According to the open-record requests that were conducted by CBSSports.com, out of the 28 Division I universities sampled, only five schools provided about 10 percent or more of their student athletes multiyear contracts, 15 schools provided less than 1 percent of their student multiyear contracts, and five schools provided none in the 2013–2014 academic year.

  25. 25.

    There have been cases that involved non-renewal of athletic scholarships due to injuries. For example, Joseph Agnew’s football scholarship at Rice University was not renewed due to ankle and shoulder injuries. Similarly, Kyle Hardrick, a basketball forward at the University of Oklahoma, was not awarded a scholarship renewal due to his injury. His medical treatment, on the other hand, had led to a disastrous financial burden for his family. For an examination of the Agnew case, see Blair and Whitman (2017).

  26. 26.

    Broadcast Music v. Columbia Broadcasting System, 441, U.S. 1(1979). In BMI, the Court recognized that output would be reduced in the absence of joint selling.

  27. 27.

    Unlike the merger analysis that is presented by Williamson (1968), the NCAA collaboration on scheduling, championships, rules of play, and the like may well be necessary; but further collusion on the compensation of student athletes is not.

  28. 28.

    Zimbalist and Meyer (2017) and Zimbalist (2017) make the case for a limited antitrust exemption. In our view, if the NCAA cannot survive a rule-of-reason analysis, it does not deserve a limited antitrust exemption.

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Acknowledgements

We are grateful for some useful advice provided by Debbie Garvin; and Jill Harris. Brad Humphreys, Jane Ruseski, Larry White, and other participants at the NCAA Cartel Symposium provided constructive comments that improved our exposition. We thank Bailey Fell, Jonathan Hulzebos, and Jeon Shim for research assistance.

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Correspondence to Wenche Wang.

Appendix

Appendix

See Table 2.

Table 2 Schools with more than 100 Million Total Revenue in 2014–2015 Year

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Blair, R.D., Wang, W. The NCAA Cartel and Antitrust Policy. Rev Ind Organ 52, 351–368 (2018). https://doi.org/10.1007/s11151-017-9603-y

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Keywords

  • Sports economics
  • Antitrust

JEL Classification

  • Z2
  • L4