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Source link: http://archive.mises.org/12822/nba-star-explains-the-economics-of-collusion/

NBA Star Explains the Economics of Collusion

May 27, 2010 by

Miami Heat player Dwayne Wade becomes a free agent on July 1. So does LeBron James of the Cleveland Cavaliers, Joe Johnson of the Atlanta Hawks, and Chris Bosh of the Toronto Raptors. The four men are the cream of the 2010 NBA free agent crop. And according to Wade (via the Chicago Tribune), they plan to consult one another about their decisions on where to sign:

Wade said he’s not sure when the top free agents will discuss their respective plans, though they have spoken informally in the past.

“(Free agency) has been three years coming,” Wade said. “We’ve discussed it prematurely, at different times. (But) you don’t know what guys are thinking and where they’re going. I think we’ll all sit down, and before one of us makes a decision, all of us will have spoken to each other and (listened to the) thinking.

“A lot of decisions (will be based on) what other players are willing to do and what other guys want to do. So it’s not just a ‘me’ situation here. We all have to look and see what each other is thinking.”

There’s nothing remarkable about Wade’s statements — except that he’s admitting to a felony punishable by a $1 million fine and ten years imprisonment. That’s the “max contract” for price fixing these days. And what Wade describes is in fact an illegal price-fixing cartel.

Scoff if you will, but if four firms in any industry meet to discuss what customers they plan to negotiate with, the Justice Department and the FBI will come barging in with guns blazing. Heck, as former Congressman Tom Campbell once told a House committee, if “three eye doctors in Elgin, Illinois” have lunch to discuss a proposed HMO contract, they’ll get a letter from the Federal Trade Commission advising them that said lunch violated the Sherman Act.

Campbell was not exaggerating. The FTC has prosecuted over 18,000 physicians during the past decade for essentially doing what Dwayne Wade wants to do with his fellow All-Star players — sit down and discuss potential contract offers. Former Commissioner Thomas Leary explained that it was illegal for physicians to even discuss their contract situations with one another because, “Their prime focus is on using negotiations and contracts for the purpose of enhancing their bargaining power.” And that would be a bad thing in Antitrust World; sellers are never allowed to improve their bargaining power without the federal government’s consent.

Most “price fixing” cartels are in fact little more then discussions. There are no contracts, as those would be unenforceable in government courts. An exchange of information — what contracts do you plan to bid on, what do prices do you expect to charge next year, etc. — can be mutually beneficial to “competing” firms without the need for more formal arrangements. As Wade said, “A lot of decisions (will be based on) what other players are willing to do and what other guys want to do … We all have to look and see what each other is thinking.”

Again, there’s nothing controversial in Wade’s statement. But contrast it with a press release issued by the Justice Department’s Antitrust Division announcing a coerced guilty plea from an Iowa concrete executive, Kent Stewart:

According to the charge, Stewart participated in a conspiracy in which he engaged in discussions concerning project bids for sales of ready-mix concrete in Iowa, submitted rigged bids at collusive and noncompetitive prices and accepted payment for sales of ready-mix concrete at collusive and noncompetitive prices.

Now how would this differ from Wade, LeBron James, and Chris Bosh having a discussion, agreeing they’ll all sign with the Chicago Bulls — or maybe Bosh agrees to sign with a Western Conference team so as not to compete directly against Wade and James in Chicago — and refusing to entertain offers from any other teams? This would be a case where the market participants (a) engaged in discussions concerning bids from NBA teams, (b) submitting rigged bids at “collusive and noncompetitive prices,” and ultimately (c) accepting contracts at said prices.

And although price fixing is a per se antitrust violation — meaning it’s unnecessary to show there’s any monopoly or exercise of “market power,” as in a merger case — the antitrust violation is arguably worse in the basketball players’ case then in the Stewart case cited above. Stewart colluded on the sale of concrete in Iowa City; that’s not even interstate commerce. Collusion by three or four NBA All-Stars, however, can fundamentally alter the fortunes of several teams and cities, not to mention the league’s worldwide business.

Obviously nobody expects the Justice Department to prosecute Wade or his fellow players for violating the Sherman Act. That goes against the “business model” of the Antitrust Division, which is to prey on individuals, like Kent Stewart, outside the public eye who won’t mount a defense. Prosecuting NBA players for collusion would bring unwelcome public and press scrutiny. Ideological consistency must yield to preserving the antitrust establishment’s position in the social structure.

The benefit of Wade’s remarks is that they reiterate how commonplace “collusion” is within the marketplace — and how the two are compatible, despite over a century of antitrust propaganda to the contrary. Humans are not interchangeable widgets in a machine; they’re unique individuals with their own subjective preferences. Economic decisions are not made in a vacuum, or by mathematical formula, but within a series of social relationships. When Wade says, “We all have to look and see what each other is thinking,” he’s describing an essential act of economic calculation.

This equally applies to “teams” of individuals, be they a basketball team or a business firm. If one firm chooses to share information with another about its possible business plans, that’s not a violation of anyone’s rights or destructive of marketplace competition — as opposed to the antitrust regulator who imprisons people for sharing information and demands individuals obey a rigid, illogical concept of “competition.”

{ 24 comments }

Boom May 27, 2010 at 10:01 pm

Collusion is immediately what I thought of when I heard the news of Wade’s statements today. Next was, “Why hasn’t David Stern fined the hell out of Wade for such comments.” I’m positive Stern has contacted Wade and reprimanded him. This is the same guy who fined the Phoenix Suns general manager for joking on a radio show that he’d like to sign Lebron for the “mid-level exception,” which is about $5 million per year.

Oliva is right, the NBA players will never be prosecuted for their collusion because the entire nation would throw a fit if it did.

Taylor May 27, 2010 at 10:37 pm

That’s weird, if you sell your labor in a factory you have a right to collective negotiation (cartel pricing) of the sale of your labor. But if you’re a doctor, eff nah, brah!

Jeff May 27, 2010 at 11:42 pm

I was wondering the same Taylor. If a Union has a meeting to discuss contract, labor cost, benifits, or job contracts does that not fall under Sherman? They are selling labor right?

Walt D. May 27, 2010 at 11:59 pm

If you treat the Federal Government as a business, then Medicare would be a monopoly, and subject to being broken up under the Sherman Antitrust law?

Steve Hogan May 28, 2010 at 2:26 pm

The federal government, by definition, is a monopoly. I’m all for using the Sherman anti-trust act as the rationale for breaking it up! Any excuse will do.

Short of that, I suggest that each individual be given the choice of opting out of all the wonderful “services” Obama’s minions are creating for us, including the gigantic Ponzi scheme known as Medicare. The system would be left with nothing but free-loaders, and the whole thing would deservedly collapse overnight.

As for treating the government like a business, I already do. I liken it to the Mafia. The primary difference is that the Mafia is honest in its thuggish behavior. It merely steals to fund its operations, and doesn’t stoop to lecturing you about your waistline, the drugs you take, how big your toilet bowl flush is, or what kind of light bulbs you install. Don Corleone for president!

S.M. Oliva May 28, 2010 at 5:51 am

Boom —

Stern may lack the authority to fine players for colluding. Kerr was fined for “tampering” with a player still under contract. Major League Baseball’s labor agreement actually does forbid player (and owner) collusion of this sort, but I have not looked at the basketball agreement to see if there’s a similar provision.

Taylor and Jeff —

Labor unions organized under federal law are exempt from the Sherman Act — comically on the grounds that “the labor of a human being” is not an article of commerce — and in the context of sports leagues, virtually anything done in a collective bargaining agreement enjoys Sherman Act immunity. This is why, for example, the labor agreement can impose rules on college players who are not members of the union.

As for physicians, the FTC and DOJ have ruled that they are “independent” competitors; if they act jointly, they must integrate their medical practices to the satisfaction of the antitrust regulators to avoid a price-fixing charge. Antitrust Division boss Christine Varney spoke about this subject earlier in the week:

http://www.justice.gov/atr/public/speeches/258898.htm

Chris May 28, 2010 at 6:45 am

A few years Columbia expanded their Economics department by convincing some economists that other economists of a high level would also be joining Columbia. A better explanation is linked. I’d like to hear your thoughts on that situation.

http://nymag.com/nymetro/urban/education/features/14642/index2.html

S.M. Oliva May 28, 2010 at 7:10 am

Chris —

That situation is interesting because, if I’m reading the article correctly, Columbia targeted seven professors who then made a joint decision. It’s different from the NBA scenario but similar to the physician cases. If an HMO makes a contract offer to a group of otherwise independent doctors, the FTC and DOJ say it’s illegal for the doctors to exchange information in a way that would enhance their bargaining power or compromise their “independent” decision-making.

I suspect the Columbia scenario falls just outside the reach of conventional antitrust doctrine absent any evidence the professors “leveraged” their collective positions to enhance their bargaining position with Columbia. But it’s a close call. The FTC has prosecuted physicians even when there’s no evidence of actual joint decision-making; if the FTC really wanted to, it probably could come up with an excuse to go after the Columbia professors.

danny May 28, 2010 at 2:44 pm

Collude away! I would love to see two or three of these guys on the same team.

Now excuse me while I collude with a co-worker about where we are going for lunch….Too bad for the restaurant we DON’T choose.

Larry Ruane May 28, 2010 at 3:04 pm

Of course, the other thing that should always be mentioned when discussing these situations is — what about the First Amendment freedom of speech? (I think it’s worth bringing up this point even if, like me, you side with Lysander Spooner on the Constitution.)

S.M. Oliva May 28, 2010 at 3:21 pm

Larry —

Excellent point. I’ve raised First Amendment concerns many times before in the antitrust context. The government’s position is consistent: The First Amendment does not protect “anticompetitive” behavior. Yes, I’ve got that from them in writing.

Ivan May 28, 2010 at 3:22 pm

No, no, you don’t get it. Labor is allowed to collude because they’re not the evil exploiters; they’re just trying to get their fair share, the just wage ($50,000,000 a year?). But colluding capitalists should have the book thrown at them!

Art Thomas May 30, 2010 at 9:16 am

How right you are. Envy and/or economic ignorance oozes from the anticapitalist mentality.

Jack May 29, 2010 at 3:50 pm

ESPN just ran a story demanding the NBA crack down on the conspiracy!

http://sports.espn.go.com/espn/commentary/news/story?id=5229374

Ke May 29, 2010 at 7:35 pm

I often read Mises, but this is absolutely absurd. These NBA players are “colluding” to suppress their own salaries in order to be together on one team to win a championship. They are GIVING UP money; they’re not trying to extort money from the organizations like what the Players Union is doing.

S.M. Oliva May 29, 2010 at 7:41 pm

Well I agree it’s absurd. I’m certainly not suggesting the players should be charged with violating the antitrust laws. I’m simply pointing out how in other contexts, the same behavior is condemned as collusion.

Now to your specific point — Even if the players were colluding to suppress their own salaries, I don’t think that matters from the antitrust point of view. This is perhaps more a hypothetical case of “group boycott” rather than “price fixing.” If Wade and Bosh, for example, said they would only agree to be signed together, the antitrust regulator would have to condemn that even if one player, say Bosh, agreed to a less-than-maximum salary.

Ke May 29, 2010 at 7:47 pm

Ah, my apologies for reacting too hastily before understanding what you are trying to point out. I totally agree. I think antitrust laws should be abolished. I completely disagree with Stern and his fines on Steve Kerr and Mark Cuban. I mean, come on, these guys stated the obvious and Kerr was blatantly joking!

Sgc May 31, 2010 at 9:54 am

The Sherman Act specifically exempts labor because (as the Clayton Act clarifies) “labor is not a commodity or article of commerce.” What strikes me as funny about that is that if labor is not a commodity or article of commerce, how is restricting its price anti-competitive?

The answer is essentially that “labor is a commodity when we want it to be one.”

S.M. Oliva May 31, 2010 at 10:19 am

It’s also notable that “professional” services like physicians and attorneys were not directly subject to the Sherman Act until the Supreme Court one day decided they were.

STB May 31, 2010 at 5:56 pm

This is not companies or service providers colluding to set a price, it is unemployed workers forming a union to discuss labor practices. These players are not coming together to determine the price of their product. In fact, the salaries they’ll get are basically already determined. They are coming together to talk about which companies they want to work for. A friend and I are both looking for work. Is it a violation of antitrust laws for us to talk about which companies and cities we’re interested in?

Granted, I have little sympathy for professional athletes and their multi-million dollar contracts that often seem to be handed out regardless of performance (Oliver Perez!), but this article is a bit backwards. The fact that the salaries are basically predetermined for the “max contract deals” is closer to an antitrust violation than the players deciding where they want to create their dynsasties.

Vanmind May 31, 2010 at 10:59 pm

No, collusion is collusion. Talk of “money” is a common but not a necessary aspect.

whohohmann July 10, 2010 at 8:09 pm

To allow three NBA to collude with respect to their respective NBA playing contracts is apparently a violaton of US Antitrust law. The latest admitted collusin between D. Howard; C. Bosh and L. James regardless of whch team they ultimatiely signed with is something the needs to be investigated by the U.S. Justice Department, or the FTC. It is also an apparent violation of NBA Regulations and the NBA should impose sanctions on the parties responsible. Although I am from Cleveland, I recognize that in order for the NBA to survive it must remain competitive and the admittd acts of colluson are anticomptive and will be a disastor for the weaker teams. There is no real advantage to one team being dominant as the fan interest in the othe cities will evaporate and pretty soon the NBA will disintigratedue to fan apathy.
Those identified of colluding should be investigated and the maximum possible fines and othr consequences imposed, including the same sentences being handed out in the business community. The players involved should be taken from the team to which they arrived by colluding and put into a lottery with weighted numbers. For example: the old team and the lower place finishers with cap space can be weighted more favorably in the draft. But to the averave fan what is happening is unacceptable.

Charles May 23, 2011 at 11:51 am

Why is there no FBI or Congressional investigation? Does the NBA lobby any of these agencies in their favor? Stern, from what I have read, condones the practice of players talking with each other. That means the league is potentially rigged for marketing purposes, in my opinion. High market teams, Boston, Dallas, LA, Miami, and New York seem to control the NBA. Free agents colluding with each other on price and team fixing, in my opinion, unethical, and possibly a federal crime if other persons have to go to jail for collusion. They are undermining any legitimacy of the NBA after the Daugherty scandal.

test June 6, 2011 at 4:33 pm

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