Some days one needs a profound sense of irony just to make it through the morning paper. That certainly was the case Wednesday.
The lead story on the front page noted that 33,700 people will be lopped off the rolls of MinnesotaCare, the state health plan for low-income households, because of budget constraints. This while another front-page story revealed that Minnesota might get a $200 million upfront payment from a new Indian casino with another $100 million or so annually thereafter. Some of this money eventually might be used to build new sports stadiums.
The top story on Page 1 of the sports section noted that Red McCombs is shopping the Vikings around for $650 million. That’s $404 million more than he paid for the team in 1998.
The first story in the business section noted that state Attorney General Mike Hatch is challenging Allina Hospitals about potential anti-competitive moves in heart-treatment facilities.
Believe it or not, there is an economic theme that ties all of this together — monopoly. We know that monopoly corrupts the efficiency of free markets. We applaud when a crusading attorney general rightfully tries to limit it. Yet we are willing to tolerate it in some situations. Moreover, there are times when we allow government itself to create abusive monopolies.
Monopoly is, of course, the factor that has made owning National Football League franchises a lucrative deal in recent decades. There are only 32 professional football teams. What economists call “barriers to entry” are huge in professional sports. Starting a single pro football team outside the NFL would be fruitless. The capital requirements for starting a competing league would be enormous. History is littered with the skeletons of upstart pro sports leagues.
The league does dribble out expansion franchises fast enough to meet demographic growth and forestall upstart competitors, but the pace is still slow enough to prevent any erosion in the value of existing teams. Current owners, in fact, capture most of the monopoly rent from expansion franchises.
Rising television revenues are one reason the value of McCombs’ franchise is appreciating so rapidly. The Vikes’ share of this boodle will rise to some $100 million in 2006 from $84 million this past season.
Why, many will ask in outrage, is there even talk of public funding for sports stadiums when, in seven years, the value of a team can increase by about the amount a new stadium costs?
The answer again is monopoly. There are more cities that want pro teams than there are teams available. Once cities start to bid for teams, existing franchise cities are in a classic “prisoners’ dilemma”: You might as well cave in to extortion because if you don’t, someone else will.
Reducing the monopoly power of major league sports would not be easy — in effect they constitute a “natural monopoly” — but some steps could be taken. Congress studiously avoids any such action, however, and the owners’ market power continues unabated.
States cannot claim any moral high ground because they, in turn, scrupulously protect their own monopoly positions in gambling. Their defense is that gambling has external costs and thus cannot be left to the market.
Tobacco and alcohol involve externalities too, but we don’t restrict entry into manufacturing these products. Municipalities do limit the number of bars and liquor stores and do capture some of alcohol’s monopoly rents by charging high licensing fees. State and federal governments similarly impose excise taxes on tobacco and alcohol. But anyone is free to start manufacturing or distributing booze and smokes.
Why don’t we open up gambling to the same extent as alcohol and tobacco? If gambling is a socially acceptable service — albeit one with some harmful side effects — why not open it up to healthy competition?
Consumers who gamble certainly would benefit if competition drove free-market casinos and lotteries to increase the proportions of money paid out to players. People would not have to make tiring road trips to reach the nearest casino.
We don’t do this for several reasons. First, we still have many moral qualms about gambling that we don’t attach to smoking or drinking, even though those two activities cause enormous social harm. Second, state government itself is a major player in the gambling industry and we don’t want to threaten our own quasi-monopoly position with market competition. The Minnesota State Lottery generates substantial income, and increased competition would reduce those revenues.
Thus, we end up in the situation we are in. Our attorney general scourges monopoly power in health care while the governor and Legislature cultivate our own monopoly power in gambling. Gains from the state’s monopolistic control over gambling may flow to increase the wealth of Vikings owner McCombs, a man already rich because of his own monopoly power as an NFL franchisee.
I’m not sure if one should laugh or cry. A lot is going on here, but fairness and economic efficiency don’t play much of a part.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.