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Is the NCAA’s Abusive Wage Cartel Finally Going Down?

In late September, an advocate for college athletes told a federal antitrust workshop that by ensuring that collegiate players who make millions for their schools don’t get paid a penny above tuition, room, and board, the NCAA is operating nothing less than a wage-setting cartel.

The State of California agreed, and on September 30, Governor Gavin Newsom signed the Fair Pay to Play Act, which for the first time will permit college athletes to earn money from endorsement deals. It also prohibits the NCAA—which pulled in an unprecedented $1.6 billion in 2017—- from barring a university from competition in retaliation. 

By taking this dramatic step, the state is hoping to end the abuse that Ramogi Huma, executive director of the National College Players Association, so passionately raised in his talk to DOJ representatives on September 23:

The NCAA does nothing about the trail of seriously injured, abused, and dead college athletes. Instead of action, the NCAA states loudly that it has no duty to protect college athletes. In fact, it ruled that Michigan State University team doctor Larry Nassar’s multiple sexual assaults against Michigan State athletes did not break NCAA rules simply because there are no NCAA rules that prohibit the sexual or physical abuse of college athletes. But if any of those abused athletes would have dared to benefit from the economic rights afforded to everyone else, the NCAA would have spared no expense to investigate and punish them. That’s because the primary economic function of NCAA rules is price-fixing athlete pay.    

The abuses endured by unpaid college athletes extend beyond the short-term sexual and physical pain described by Huma. Take the case of Ryan Hoffman, a former football player for the University of North Carolina. Hoffman was homeless and died after being hit by a car. He was suffering from brain damage and was posthumously diagnosed with chronic traumatic encephalopathy (CTE), the degenerative brain disease believed to be caused by repeated hits to the head. 

Even in the absence of long-term physical harm such as CTE, the exploitation is a harm unto itself. For evidence, watch HBO’s Student Athlete, which traces the post-college lives of four athletes—Nick Richards (Kentucky), Mike Shaw (Illinois), Shamar Graves (Rutgers), and Silas Nacita (Baylor)—who made significant contributions to their schools but failed to monetize their talents.

The beleaguered antitrust division of the Department of Justice gave Huma, a former linebacker for UCLA in the mid-1990s, a powerful platform to prosecute his case against the NCAA’s cartel. This was presumably to correct an impression that the DOJ had habitually sided against workers in several high-profile antitrust disputes involving Uber drivers and workers in fast food franchises subject to “no poach” agreements. 

To his credit, the assistant attorney general for antitrust, Makan Delrahim, bemoaned in his remarks at the workshop that “labor cases have comprised a smaller portion of our docket than enforcement actions involving tangible goods and services.” He went so far as to note that harms to workers (or what he called “worker welfare”) will be given equal footing in antitrust enforcement as harms to consumers. But even a good speech can’t reverse bad policy.

While most of the scant attention since the Borkian antitrust revolution of the 1970s has been paid to taming the monopolist, his analogue in labor markets—the “monopsonist”—has largely evaded scrutiny. Yet the similarities are striking. A monopolist restricts the ability of buyers to substitute away from its product by, for example, demanding exclusivity or conditioning rebates on loyalty, to dampen what economists call the consumers’ “elasticity of demand,” and thereby drive a larger wedge between the product’s price and the marginal cost. 

In comparison, a monopsonistrestricts the ability of workers to substitute away from its employ by, for example, inserting non-compete provisions in its employment contracts, to dampen what economists call workers’ “elasticity of supply,” and thereby drive a larger wedge between their wages and their marginal revenue product. These forms of unilateral conduct by the monopolist and monopsonist may be considered violations of antitrust laws. (The NCAA case is an example of how coordinated conduct among a group of buyers may run afoul of antitrust laws.)

It doesn’t take a Ph.D. in economics to recognize that the math undergirding this duality is nearly identical. Despite the same math and similar welfare concerns—an output reduction in the product market for the monopolist (or in the job market for the monopsonist) and the associated deadweight loss, the monopsonist has been something like antitrust’s step child. 

Until now. The mere fact that there’s a monopsony hashtag on Twitter will guarantee a passionate audience of labor economists. And monopsony conferences are suddenly all the rage.

Why the sudden interest (albeit feigned in certain quarters) in monopsony? And why should conservatives be concerned about power imbalances in the workforce that give rise to lopsided allocations of wealth?

With regard to the first question, one participant at the DOJ’s workshop, Professor Marshall Steinbaum of the University of Utah,suggested that prior academic models of labor markets focused exclusively on worker characteristics in explaining wages and employment. Labor economists only recently understood that characteristics of the job market and of the employers were just as important in explaining wages. An omitted variable, if you will. Steinbaum also offered a political reason for the sudden interest in monopsony: policymakers were at a loss to explain wage stagnation among U.S. workers using the old tools of economics. What was missing was an antitrust story based on industry concentration—several industries have become freshly concentrated in the absence of antitrust enforcement—which seems to resolve several economic puzzles. 

Why are wages stagnant despite low unemployment? Professor Simcha Barkai provides fresh empirical evidence that increases in product market concentration play a significant role in the decline in the U.S. “labor share,” or that portion of an industry’s revenues retained by workers. Professors Ioana Marinescu and Jose Azar, along with several co-authors, recently uncovered that the impact of an increase in the minimum wage depends critically on the degree of concentration in a local employment market: an increase in the minimum wage was found to decrease employment in low concentrated markets but increase employment in the most highly concentrated markets. 

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The NCAA has been sued repeatedly under antitrust laws for its wage-setting activities, albeit with limited success. In Banks v. NCAA, the Seventh Circuit Court of Appeals in 1992 upheld an NCAA rule providing that college football players lost eligibility if they hired an agent or applied for the NFL draft. 

And in Agnew v. NCAA, the Seventh Circuit in 2012 upheld the NCAA’s restrictions on a university’s scholarships per team and a prohibition on multiyear scholarships. The NCAA’s year-in-residence restriction forces college athletes to sit out for one year before they can play for new schools, even if they don’t get athletic scholarships. In 2018, the Seventh Circuit affirmed the legality of this restraint in Deppe v. NCAA, finding that it was presumptively competitive. 

In O’Bannon v. NCAA, the Ninth Circuit agreed with part of a district court finding that the NCAA ban on compensating athletes for the commercial use of their names, images, and likenesses (“NIL”) was an antitrust violation. But it overturned the lower court’s proposal that athletes be able to receive up to $5,000 annually in exchange because such payments were not “tethered to education.” 

In March 2019, Judge Claudia Wilken ruled in Alston v. NCAA that the NCAA’s restrictions on paying college athletes violated antitrust law, but she rejected plaintiffs’ proposed remedy to lift the cap on compensation. The NCAA and the conferences argue that those limits on compensation are essential for promoting amateurism. But the court appears to have rejected that argument, noting, “The rules that permit, limit or forbid student-athlete compensation and benefits do not follow any coherent definition of amateurism.” The upshot is that the NCAA may continue to cap payments with the limited exception of expenses that are educational in nature, such as computers or costs related to internships or postgraduate scholarships. 

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The NCAA has threatened to retaliate against California’s new law by banning state-based schools from participating in NCAA tournament events. The NCAA’s position is that the proper and equitable share of revenues associated with the sale of products bearing a college athlete’s name or image for said athlete is zero. The NCAA rationally fears that in the absence of its anti-competitive restrictions, donors would begin to give money directly to athletes, money that otherwise would go to the schools. The cartel is so committed to the cause of “amateurism” that it would sooner withdraw a basketball video game by EA Sports bearing Ed O’Bannon’s image from the marketplace—a clear output reduction and cognizable antitrust injury—than share any portion of the proceeds with O’Bannon or other athletes. 

The Economistdryly notes that the NCAA’s arguments in defense of amateurism “would hardly earn a passing mark even in an introductory college course.”

A liberal might naturally align with the college athletes in this debate, under the rationale that no amount of exploitation—defined again as the wedge between an athlete’s marginal revenue product and her wage—is tolerable. But what of a conservative? Would a conservative be upset to learn that Arnold Palmer kept just 1.7 percent of the revenues collected by Wilson Sporting Goods on the sale of golf merchandise bearing his name in 1962? Or that Major League Baseball players collectively earned less than 18 percent of overall revenues in 1974, before the advent of “free agency,” which gave them more control over where they worked? Or that college athletes collectively keep (via scholarships) less than 22 percent of total athletic department revenues? 

Power imbalances that lead to one party extracting all of the surplus in a transaction would not keep a libertarian-leaning economist or Chicago School law professor up at night. For market-oriented policymakers, interventions are only justified in the presence of a market failure. 

But here the market failure takes the form of the NCAA’s unwillingness or inability to recognize that a smaller share of a larger pie for the schools would be more profitable than a lopsided share of the existing pie. (And there are other market distortions caused by the restriction on college athlete pay, such as the overpayment of college coaches and the absence of college video games; EA Sports NCAA football and basketball games would be massive sellers. But there’s no reason to pile on.)

When athletes have finally achieved free agency—whether in professional baseball, basketball, football, or hockey—they’ve captured larger shares of the revenue pies. That was expected by the owners, as free agency reduced the switching costs of moving across teams, enhanced worker mobility, bolstered the elasticity of supply, and thereby reduced the wedge between the athlete’s wage and his marginal revenue product.

What wasn’t expected by the owners was that the pie would explode in a way that increased profits for both the platform provider (the teams) and the players, even accounting for the greater labor share. Had owners behaved rationally, they would have allowed free agency earlier. As explained powerfully by Matthew Futterman in Players: How Sports Became a Business, the myopic and greedy owners could not recognize that by paying athletes closer to their marginal revenue product, they had the incentive and resources to invest in their talents, which made the sports more enjoyable for consumers. And this led to greater demand and more advertising revenues. 

Being a professional athlete entails massive investments in training, nutrition, physical therapy, promotion, and travel. If these resources are not provided by the team or the league, an undercompensated athlete will often have difficulty making those investments themselves. And achieving elite status in a sport is not possible if the athlete must sell insurance or drive for Uber in her spare time to make ends meet.

Ending the NCAA price-fixing cartel is not tantamount to the government’s dictating a particular wage or wage share for college athletes. Instead it would allow the free market to dictate wages, which is consistent with a conservative’s core values. The freedom to work—and to be compensated at market-determined rates—should also be central to any conservative governing philosophy. 

Hal Singer is a managing director at Econ One and an adjunct professor at Georgetown’s McDonough School of Business. He has served as an economic expert in antitrust and regulatory matters, including several cases in sports.

This article was supported by the Ewing Marion Kauffman Foundation.