Is the NCAA a coercive cartel?

Gary Becker:

[T]he NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players. NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work. The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players’ parents, and of course the size of scholarships.

It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players. The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes.

Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses.

Consider the recent widely publicized violation of NCAA rules by five Ohio State football players and their coach. The players’ “crime” was that they sold some of their football memorabilia, including signed autographs, for modest sums, and for tattoos. The coach’s “crime” was that he failed to report these violations in a timely fashion. All the players involved, which includes the star of the team, and the very respected coach, will have to miss the first 5 games of the 2011 season. This is almost half of the 12 games played during the regular season. Nothing done by the players involved stolen property or anything else that would violate any laws except those imposed on players by the NCAA.

A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games.

. . . [T]he graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.

Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout. The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams. Schools usually forget about athletes when they stop competing. An important further difference between athletes and non-athletes who dropout of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes. They could have used these additional assets to help them finish school, or to get a better start if they dropped out.

And Richard Posner:

The most common type of cartel is an agreement among competitors not to sell their product below a fixed price that will generate monopoly profits for the parties to the agreement. But another type of cartel, termed monopsonistic (from the Greek words for “one” and “purchasing of food”) rather than monopolistic (one seller, versus one buyer in a monopsonized market), is an agreement among competitors not to pay more than a fixed price for a key input, such as labor. By agreeing to pay less, the cartel purchases less of the input (and perhaps of lower quality), because less is supplied at the lower price (and suppliers may lower quality to compensate, by reducing their costs, for the lower price they receive).

The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes. Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA’s monopsonistic behavior has thus far not been successfully challenged. The justification that the NCAA offers—that collegiate athletes are students and would be corrupted by being salaried—coupled with the fact that the members of the NCAA, and the NCAA itself, are formally not-for-profit institutions, have had sufficient appeal to enable the association to continue to impose and enforce its rule against paying student athletes, and a number of subsidiary rules designed to prevent the cheating by cartel members that plagues most cartels.

As Becker points out, were it not for the monopsonistic rule against paying student athletes, these athletes would be paid; the monopsony transfers wealth from them to their “employers,” the colleges. A further consequence is that college teams are smaller and, more important, of lower quality than they would be if the student athletes were paid.

. . . College athletics would be less profitable for colleges if the student athlete market were competitive. If permitted, colleges would continue to agree to limit recruitment of athletes who could not satisfy degree requirements and to require athletes to attend classes and thus be bona fide students, because otherwise competition for the best athletes would tend to eliminate the “student athlete”; college teams would be largely composed of athletes who had no interest in or capacity to obtain a college education; awarding them a degree would be meaningless. The college would be engaged in a business unrelated to its academic mission and would thus have to pay taxes on its teams’ earnings. Worse, alumni donations to their alma mater, which are stimulated by the success of the college’s teams, would wilt if the teams were composed of non-students. If the University of Chicago bought the Chicago Bears, and renamed the team the University of Chicago Bears, would alumni of the University of Chicago write bigger checks to the University?

. . . The strongest argument against eliminating the NCAA cartel is that it would make colleges and universities poorer, and this would be a social loss if one assumes (plausibly) that higher education creates external benefits. Of course the government could replace the lost revenues with subsidies financed by taxes. But while monopsony is inefficient, tax increases create distortions similar to those created by monopoly and monopsony.

  • Bret Moore

    Assuming “higher education” is a net positive assumes too much. Posner’s closing sentences reveal the problem and the solution: let the market sort it out. Of course, Bear Bryant pwn3d everything under that regime… but that was pre-Social Media/Internet recruitnik stuff, so maybe the current environment is more favorable to a completely deregulated free market for athletics.

    Most of the “majors” these kids are into don’t do them any good anyway. Why punish them even more?

  • Grouse

    I would rather see actual for-profit minor leagues, and shift towards a less professional college sports world (probably impossible given where things are at now). While it is true that the NCAA operates as a cartel, the same is true of the major private sector employers in the field: the NBA and NFL. They refuse to hire younger employees, and those workers have few options other than college. The way things have evolved, the colleges are doing much of the work of identifying, developing, and promoting top talent, and the professional leagues have no reason to disturb that arrangement.

    Ideally, players would have more options: work for money, or go to school and get an education while training in their sport. It wouldn’t be perfect, but it would be better than the current scheme of forcing talented athletes to work for free, attend colleges they don’t want to go to, or to break the rules and take handouts in order to make ends meet or to help their families.

  • Deryl Garland

    If these kids are truly under compensated, then someone should be able to profit by starting a competing league that paid them more. I suspect the reason this isn’t happening has something to do the schools being the true source of value to consumers. I also suspect that the total amount of compensation wouldn’t change much if the market were more free, but that the distribution of that compensation would change drastically.

  • woods84

    The bottom line argument for the university system is that these players are compensated by receiving a college education free or at a reduced price, and that they stand for true “amateur” status. Put this to the test: do away with athletic scholarships. Doing so would, quickly, bring about minor leagues for those who don’t have the inclination/ability to attend college, while maintaining the university’s position on amateurism. Yes, this would destroy the college game. But it gives the university system exactly what they claim to want.

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  • C Hoffman

    If the last few years have taught (or better “untaught” us anything) it should be the utter fallacy of “Let the market sort it out” as an implication that free market competition always produces improvements for the consumer or that the wisdom of emergent market behavior trends toward the best result and use of resources. Market flaws are mercilessly exploited by those with the insight, capital, and ethical shortcomings suited to the task. The result once the inequality reaches a critical state is typically something polluted, tragic, or a failure of the market altogether.

    Markets are always flawed, as are systems, and all, due to the individual incentives collectively exaccerbating the blemishes on their foundations, will reach states at which the fundamental rules must be altered to encourage something better. I agree NCAA football has reached that state. However, to argue that throwing a “deruglated free market” at the problem and watching it sort itself out is incredibly simplistic and naive.

  • ragequit

    “lthough cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA’s monopsonistic behavior has thus far not been successfully challenged.”

    That’s not entirely true, see NCAA vs. Board of Regents of University of Oklahoma.

  • ragequit

    I guess I’m quibbling, as it wasn’t the NCAA’s monopsonistic behavior that was at issue, rather more traditional cartel behavior.

  • Squigglers

    If there is coercion going on, it’s the NFL that’s to blame for its minimum age restriction on entrants. Even then, a player out of high school has the option of going to the CFL, like Bryce Brown considered doing, or a minor league stateside. The NCAA isn’t at fault for the NFL using it as an amateur farm system, although I doubt they’re shedding any tears over it.

  • Stan Brown

    The biggest market flaw of all is government. Politicians and bureaucrats sell govt action (or inaction) to rent-seekers and create all manner of bizarre distortions.

  • C Hoffman

    Meaning government is actually the flawed system, or conceptualized differently, a flawed “market” where what’s exchanged (among other things) is public policy and revenues. The bureaucrats, lobbyists, politicians (good and bad) are actors acting most often in rational accord with the incentives of the system as it was designed and has evolved to what it’s become today. Their behavior and the resulting waste, corruption, and regression of prosperity and social progress will NOT change (just as the corruption of NCAA sports will not lessen) without the fundamentals of the system, the “rules of the game”, changing such that those behaviors are no longer personally profitable to the individual actors.

    To be clear, I don’t advocate “more regulation” or “bigger system” any more than I would espose “let the market sort it out”. My observation is that systems like the government and intercollegiate athletics will never reach a state of perpetual virtue where everything works correctly and everyone is incented in such a way to preserve long-term gain. Any human-designed system or market will forever need periodic adjustment to its rules and mechanisms to disincent exploitation, sometimes drastically. In essence, the question is never whether to regulate or allow a market to be free but how much regulation and in what forms a market needs regulation.

  • dave frederick

    There are a couple of issues with paying players and letting the market sort itself out. Programs are already cutting athletic programs due to budget concerns and the impact of Title IX. There are already issues of the “haves” vs. the “have-nots” in D1 college football. It would be similar to the time when scholarships were unlimited – the Floridas, Texas’, Nebraskas of the world will have the most money to pay, and we’d see the rapid decline of parity as the Boise States of the world would be priced out of the market. Of course, a lawsuit would quickly be filed on behalf of women athletes to demand equal treatment, meaning even more money would have to be paid to athletes in other sports. What is the going rate for a woman’s lacrosse midfielder?

  • Paul

    I love college football. But I can’t defend anything about the NCAA. I followed the Andy Oliver (baseball) contretemps closely, my kids knew him well in high school, and the whole thing made me sick of the NCAA.

    I predict severe legal consequences in the next ten years.

  • Anonymous

    This is a fairly naive view of the economics of the situation. Consider the perspective of a potential entrant into the professional football business: on the one hand you’re competing against a well-established amateur league that is directly and indirectly subsidized by the state in a variety of ways (direct state support, student fees, subsidized use of facilities, tax-deductible private donations), and on the other hand you’re competing against a well-established professional league that has received a variety of anti-trust exemptions that allow it to operate as a cartel and hold down costs, and whose individual members have themselves often been subsidized by the state in the form of taxpayer-supported stadiums. Does that really sound like an easy market to jump into?

  • dirk pitt

    Colleges don’t make a profit off athletics. Maybe 2 or 3 athletic departments out of 10 make a profit. Why should these kids get paid?