Basketball teams compete with each other. Basketball team companies cooperate, as they should.
By Scott Sumner
Matt Yglesias has a post suggesting that if the NBA were “any normal industry” it would not be able to get away with collusive schemes like the NBA draft. For those who don’t follow American sports, the new players entering the pro basketball league are picked via a draft and assigned to various teams. This does seem to violate anti-trust rules. Here I’m going to take a contrarian position, although the truth is probably somewhere in between my view and Yglesias’s view. I will simplify to make a point.
It’s not clear to me how we should think about the pro basketball industry:
1. It’s an industry with 30 firms that collude.
2. It’s an industry with a single monopolistic firm having a bunch of franchises.
3. It’s not an industry at all; it’s a group of firms in entirely different industries.
Matt Yglesias seems to hold the first view. I lean toward the second or third. Firms are in the same industry if consumers see their products as close substitutes. In my view going to a Cleveland Cavalier game is not a close substitute for going to a Boston Celtics game. Rather the Celtics are competing against other sports teams in Boston, and indeed other forms of entertainment in Boston, such as movies. It’s in the (monopolistically competitive) “Boston entertainment industry.”
Now this is where the simplification comes in. What I said is not completely correct. Even though a Boston fan would not go to a Cleveland game, they might watch Cleveland on TV. So in that limited sense they are in the same industry, or at least have been since the onset of TV revenues. I simply don’t know how important that factor is. There are all sorts of complications such as the sharing of TV ad revenue that cloud the picture. So to be precise, my claim is that the teams were in completely separate industries until the onset of TV, and are still in mostly separate industries.
Now let’s think about option 2. Suppose we think of the NBA as a single firm, which uses inputs from all these teams to produce a product called “games.” Notice how far we are from traditional industries like automobiles, where GM and Ford do not cooperate to produce cars. Basketball teams compete in an athletic sense, but they cooperate in an economic sense. I have two problems with Yglesias’ claim that any normal industry would not be allowed to do something like the draft. If that were true, then wouldn’t it be equally true that any normal industry would not be allowed to collude on output? In other words, the mere fact that the NBA sets up a schedule of games is evidence of a collusive output agreement. Do we really want to apply anti-trust logic to schedules? Should we have a free market where teams (and fans) just randomly show up and hope there is someone else to play that day? I have a hard time imagining the NBA as anything other than a monopoly that organizes output (i.e. that sets schedules.)
My second objection is that it’s not clear that other industries don’t behave this way. Prior to the 1970s, ATT had a monopoly on phone service. Even today Boeing is the only builder of jumbo jets in America. A young American who wanted to work in the phone industry in the 1960s, or who wants to build jumbo jets today, has only one firm they can work for. If that firm hired them, the firm can assign them to any part of the country it wishes to. Yes, the young jumbo jet engineer could go to Europe and work for Airbus, but the young basketball player can also go to Europe and play in a different league. So if you consider the NBA to be a single firm, a monopoly, then the draft is really no different from the personnel policies of any other monopoly in the US.
To summarize, I have my doubts as to whether basketball firms are even in the same industry. In that case antitrust issues don’t apply. If I’m wrong, and they are in the same industry, then I think it makes more sense to view that industry as a single firm that uses inputs from multiple teams to produce a product called “games.” And that product can only be produced via collusion. Thus either basketball firms aren’t in the same industry, or they are in the same industry, but should be allowed to collude.
None of this has any bearing on the issue of whether players are under- or overpaid, a debate that I find to be mind-numbingly boring. It’s just one of those monopoly/monopsony deals where both sides of the negotiation are quite rich. Yawn.