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Cartels in College Sports Chapter 2

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Chapter 2
Cartels in College Sports
2.1 Introduction
The statement above would probably surprise many college students,
parents, alumni, and legislators. Most people do not even think of college
sports as a business, and even if they did, with hundreds of colleges and
universities competing against each other, how can it be a monopoly?
And as for the NCAA itself, the “basic purpose of [the] Association is to
maintain intercollegiate athletics as an integral part of the educational
program” (Article 1.3.1 of the NCAA constitution), not to promote anti-
competitive behavior.
The focus of this chapter is to examine the evidence for a monopoly
in the market for big-time college sports, particularly top-level men’s
football and basketball. It begins with an overview of the economic
theory of collusion, including the internal struggles and how they can be
overcome. The theory is then used to identify and analyze examples of
cartel behavior in intercollegiate sports.
2.2 Collusion and Cartels
Collusion occurs when the firms in a market cooperate rather than
compete with each other. In its simplest form, firms agree to all raise
their prices. This is commonly known as price-fixing, and it is strictly
illegal in the United States. It can also be surprisingly difficult to
accomplish. If the price increases then the quantity demanded by
consumers will decrease. Firms will have to reduce their level of
production, which some firms may be unwilling to do. If a firm does not
reduce its output, it will be unable to sell it all if it charges the same high
price as the others. It will be tempted to lower its price slightly and
1

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2 Economics of Intercollegiate Sports
attract customers away from the other firms. With their sales falling even
more than they expected, the other firms will probably retaliate and the
agreement will fall apart. The renegade firm may also resort to other
methods to attract additional customers, such as advertising and product
innovation. The cost of such non-price competition can quickly dissipate
the gains from raising prices.
In some cases, market conditions favor successful collusion.
Beginning in the 1950s, the Ivy League colleges agreed to limit the
amount of need-based financial aid they offered to prospective students.
The schools, known collectively as the Overlap Group, met each year to
set the size of a standard aid package. By reducing financial aid, this
practice effectively raised the price paid by students (and their parents).
The system worked well because the Ivy League reputation allowed them
to be highly selective, that is, accept only a fraction of those that applied
for admission. Even with a higher price, there was still enough demand
to allow each school to fill its entering class. They were not tempted to
offer slightly higher financial aid to lure students away from the other
schools.
1
In many other cases, the urge to compete and the lack of trust among
firms are too strong, and a simple agreement to raise prices is not
sustainable. An alternative is a cartel. A cartel is a more structured type
of collusion, with formal agreements on how much each firm will
produce and sell, and limits on other forms of competition, such as
advertising. For example, the Organization of Petroleum Exporting
Countries (OPEC) meets regularly to decide how much crude oil each
member country should produce. By lowering their total output, the
world supply of oil is decreased and the market price increases. For
decades, DeBeers has successfully controlled the world price of
diamonds by arranging with the major producers, including the former
Soviet Union, to sell all diamonds through a single location in London.
The DeBeers cartel strictly controls the number of diamonds released to
the market, leading to much higher prices and higher profits for its
members.
1 The government began an investigation of this practice and filed an antitrust lawsuit in
1991. The schools agreed to stop colluding, but Congress passed legislation that allowed
limited agreements between colleges on financial aid.

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Cartels in College Sports 3
A cartel can control the price charged for the output (e.g., tickets to a
baseball game) or the price paid for an input (baseball players). In the
past, Major League Baseball owners agreed to limit the ability of players
to switch teams, which enabled them to keep salaries low. This practice
was known as the Reserve Clause. The owners could decide to trade a
player to another team, but the player could not try to get a higher salary
by having teams compete for his talents. A players only leverage to
negotiate for a higher salary from his current team was the threat of
leaving professional baseball completely. When the owners’ collusive
conduct was declared to be illegal, and players were able to become free
agents, salaries increased dramatically.
So are college sports a cartel? To answer this question, we must
explore cartel behavior in more detail, review the history of college
sports and the NCAA, and then determine whether it fits the pattern of a
cartel.
2.3 The Three Challenges
For any form of collusion to be successful, the conspirators must
overcome three inherent problems: reaching agreement on the
appropriate actions by all members of the group, preventing cheating by
some members, and dealing with entry into the market by producers
attracted by the high profits. We will discuss each of these challenges in
order.
2.3.1 Agreement
In theory, a cartel should make decisions as if it were a monopoly, with
the members behaving like the divisions of one large firm. But there is a
big difference between a single large firm and a group of smaller ones
acting together. For a monopoly, if one of its factories is old and
inefficient, production would be shifted to one that operates at a lower
cost per unit, resulting in higher overall profits for the firm. In a cartel,
while such a decision would increase total profits, it would reduce profits
for one producer and increase them for another.
2
In the absence of some
2 The increase in profits for one firm would be larger than the decrease in profits for the
other firm, so total profits increase.

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