The Supreme Court cast a unanimous vote in favor of economic sanity this past week even if news of the oil spill and economic woes in Europe kept the media from paying much attention. Their 9-0 vote against the National Football League, which had been joined by all other major sports leagues, they demonstrated that for at least one branch of government the idea that government should curb monopolistic abuses is not completely dead.
The case dealt with a specific product sold by the NFL, the right to use its logos and other images in producing caps, T-shirts, and myriad other forms of sports memorabilia sold to fans. The courts said that the league’s decision to award the right to produce such articles to a single vendor was not exempt from U.S. antitrust law. The suit, brought by a memorabilia manufacturer that had produced these products for decades for sundry individual teams but that was frozen out by the NFL’s one-supplier policy, has been sent back to a lower court.
While the case dealt with one professional sports product — apparel and souvenirs — the decision has implications for other products, such as the right to televise games and ticket prices for games themselves. It also may bear on what role leagues can play in salary negotiations with players and perhaps even on the power of teams, such as the Vikings, to whipsaw cities into providing publicly funded stadiums.
The economics are clear. Whenever some business or group of businesses is able to exercise monopoly power, economic efficiency suffers.
The public focuses on the fact that consumers have to pay higher prices. Economists focus on the broader waste of resources monopolies entail. When monopolies are free to make output and pricing decisions at will, society as a whole gets fewer goods and services for a given use of resources. This ultimately is far broader than the simple gouging of consumers.
In this case, the NFL was able to extract a hefty fee for the exclusive right to produce memorabilia. But since the winner of the right thus had extreme monopoly power, it was able to raise prices and recoup its cost. The league gets more money for its member teams and the exclusive producer still can earn higher profits, but the public pays more. And companies that formerly dealt with individual teams saw their business evaporate.
Prices of these products did rise after the league created a monopoly, but few people saw any cause and effect. And so it was a frozen-out producer, rather than T-shirt buyers, that brought the suit.
Since 1890, U.S. law has prohibited “combinations in restraint of trade” including mergers or acquisitions that create monopolies or simple collusion between independent firms to fix prices.
Historically, we have done less to curb firms that achieve monopoly power through their own growth than to prevent mergers and overt collusion between independent firms. Sports leagues’ monopoly licensing agreements, such as the one in this case, fall into the last category and the court was clear in stating that antitrust law applies.
But professional sports are a special case with considerations that don’t apply to monopolistic acts by oil companies or paving contractors.
Competing steel companies that might fix prices don’t have to do business with each other as an inherent part of their normal business.
Subject to limitations imposed by freight costs, steel from one company can be sold anywhere, even in a competitor’s back yard. But most sports teams have local monopolies for live games.
Steel companies have no legal means to keep new competitors from starting up.
The last 50 years saw minimill firms such as Nucor and North Star, whose long-established mill in Cottage Grove is now owned by Gerdau, eat the lunch of established integrated steel producers.
But established sports leagues have nearly absolute power to control establishment of new teams, because a team that cannot play other teams has zero value. Yes, a number of new teams could start simultaneously and form their own league, but history shows this is extremely difficult.
All leagues use this power of excluding new teams to collectively maintain the profits and asset values of individually-owned member teams. This constitutes a “barrier to entry,” the key precondition for monopoly power.
One Supreme Court ruling opens only a small chink in the armor of politically and economically powerful monopoly professional leagues. But it is a step in the right direction and further lawsuits may be forthcoming.
At the risk of being criticized for piling on, Congress could do its part by repealing the specific exemption from antitrust laws that major league baseball garnered decades ago.
There is no reason one sport should get this extra-special treatment. But that may be too much to hope for.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.