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Source link: http://archive.mises.org/9924/coyote-ugly-ii-the-wrath-of-antitrust/

Coyote Ugly II: The Wrath of Antitrust

May 8, 2009 by

In response to my earlier post on the Phoenix Coyotes’ bankruptcy filing – and the National Hockey League’s opposition to selling and relocating the team to southern Ontario – a commenter wrote,

Hockey, like McDonalds, is a franchise business. In a franchise, ownership is divided is between a local businessman and a larger group of shareholders. In return for some amount of start up capital and a tried and true business model, the local businessman is obligated to abide by certain rules that the shareholders lay out, even if he believes these rules hurt his business.

I would like to know more about the owners of the Pheonix team and their contract with the NHL before I pass judgment on the situation.

These are fair points. Of course, if the franchise holder doesn’t like the rules it agreed to, it can always file an antitrust lawsuit. Which is exactly what the Coyotes have done.Technically, the Coyotes have brought an action before the Bankruptcy Court in Arizona against the NHL to prevent the league from interfering with the proposed sale of the team to the southern Ontario group. The NHL previously filed a motion to dismiss the bankruptcy petition on the grounds that the league has been in actual control of the Coyotes for some time, and that any relocation of the team must occur under the league’s constitution and bylaws. The Coyotes maintain they are free to disregard these contractual agreements as a matter of public policy:

Coyotes Hockey, LLC (“Coyotes”) seeks injunctive relief under federal and state antitrust laws in connection with a threatened loss or damages resulting from the NHL’s unlawful exercise of market power in the market for major league men’s professional ice hockey contests in the United States and Canada. The NHL is excluding competition and restraining trade in that market through the application of unreasonable restrictions in its Constitution and By-Laws which are preventing the relocation of the Coyotes from Phoenix, Arizona, to Hamilton, Ontario.

This is a classic example of antitrust reasoning: A successful business has “monopoly power” in a market it created, and thus property rights should be restricted to what is “reasonable,” in the judgment of a monopoly state court. Of course, the Coyotes say it’s all about protecting the consumer:

The relevant product market is the provision of major league men’s professional ice hockey contests. There are peculiar and unique characteristics that set major league men’s professional ice hockey apart from other sports or leisure activities. Close substitutes do not exist, and watching or participating as a fan in major league men’s professional ice hockey is not interchangeable with watching or participating as a fan in other sports, leisure pursuits or entertainment activities. Assuming a small, but significant, non-transitory increase in price to attend major league men’s professional ice hockey, fans will not switch to attend other sports or entertainment activities. Accordingly, there is a unique and separate demand for major league men’s professional ice hockey.

Another classic argument: Customers won’t respond negatively to a price increase, so the government must intervene! Preceding such nonsense, of course, is the notion that “major league men’s professional ice hockey” is somehow a unique and precious resource with no available substitutes. Coincidentally, an article in today’s Wall Street Journal contradicts this claim. The Journal followed the surge in popularity of the Washington Capitals thanks to its superstar forward, Alexander Ovechkin:

In Washington, where the Capitals have long been the poor stepchild to football’s Redskins, Mike Kardash, an attorney in Gainesville, Va., dumped his Redskins tickets two seasons ago and began attending more Capitals games. “It’s just more fun to watch,” he says, comparing Mr. Ovechkin to longtime Redskins lineback LaVar Arrington for his bruising hits and speed. Mr. Ovechkin, he says, “he’s why people go.”

Now, admittedly, Mr. Kardash is not a legitimate economic actor. He’s a real person, not a theorem concocted by antitrust economists. Still, his irrational example suggests there might be some people who consider hockey interchangeable with other sports or – gasp! – other non-sports endeavors, such as going to the movies. And if that’s the case, perhaps the NHL’s “monopoly” isn’t all that it’s cracked up to be. Especially considering how several teams are failing – like the Coyotes, who claimed $73 million in losses since 2007 in its antitrust complaint.

But the Coyotes maintain the NHL is still the bad guy by maintaining geographic mini-monopolies. Every NHL club agrees to respect the “territorial exclusivity” of its fellow members. Thus, the Coyotes can’t simply relocate to Hamilton, Ontario, because that’s within 50 miles of both the Toronto Maple Leafs and the Buffalo Sabres:

Granting another franchise absolute veto power over a competitor’s relocation to Hamilton, Ontario, is facially anticompetitive and would deny consumers the benefits that would flow from increased competition. A new NHL franchise in Hamilton, Ontario would compete with the Toronto Maple Leafs and Buffalo Sabres. Entry of a third NHL club in this traditional hockey region would increase competition, increase the output of hockey, increase the number of fans attending hockey games and increase fan intensity levels in the relevant market.

Well, there’s nothing stopping anyone from setting up their own hockey league and putting as many teams as they want in Hamilton, Toronto, or Buffalo. But the Coyotes say that’s not a viable option because of “barriers to entry” – meaning that the NHL is already successful in those markets and customers won’t instantly flock to a new entrant with no track record. It’s really, really unfair that a new entrant would have to – what’s the word? – compete in the marketplace.

But isn’t it wrong to deprive hockey-crazed Ontarians even more NHL-brand hockey? Well, if that’s the case, then why aren’t the league’s rules regarding equal allocation of home games an antitrust violation? In other words, if the Coyotes apply their own argument consistently, it’s an illegal “restraint of trade” for the NHL to mandate every club gets 41 home games when some teams clearly could support more home games and others less. Again, the Coyotes are a perfect example. The team has had poor attendance in Phoenix. Toronto and Buffalo should have filed an antitrust suit to take away some of Phoenix’s home games in order to provide more home dates for their own fans.

The Coyotes argue that relocation restrictions are “unreasonable,” yet other common league rules are somehow legally permissible:

Although individual teams are part of the NHL and many activities of the NHL are legitimate under the antitrust laws, including the negotiation of labor agreements with players, the negotiation of national television broadcasting arrangements, and the promulgation and enforcement of agreed rules of play, other activities which are anticompetitive and not necessary for the success of the NHL in providing major league, professional ice hockey games are illegal and unreasonable restraints of trade.

Labor agreements aren’t simply permitted under antitrust; unions are granted state-sanctioned monopolies over all labor in a defined market. But that’s considered “reasonable.” As for television rights, that was only allowed after the U.S. courts initially outlawed such voluntary agreements and Congress had to intervene. It was a question of political-pull, not “reasonableness” under the law. Ultimately, the Coyotes argument is a demand for the state to substitute its judgment for the plain terms of a contract that the Coyotes and the other NHL clubs presumably signed in good faith. (Unless the Coyotes are making the type of argument alluded to by Mr. Kinsella below; perhaps the Coyotes simply clicked “I agree to the terms of the NHL Constitution” without reading the document first.)

All that said, I agree with the Coyotes that the NHL appears to be exercising poor business judgment in preventing the relocation of the team to Hamilton. But it is also the NHL’s judgment to exercise and not that of a court answering a mystical appeal to the antitrust spirits.

{ 5 comments }

Bruce Koerber May 9, 2009 at 6:54 am

Ask yourself this question: “Without funny money would there be a hockey team in the blazing hot desert?”

Art Carden May 9, 2009 at 8:43 am
Vanmind May 9, 2009 at 8:30 pm

“Without funny money would there be a hockey team in the blazing hot desert?”

Keep in mind that Arizona is a winter destination for many Canadian “snowbirds.” I suppose you could say that funny money has allowed more Canadians to spend time in the warmer clime.

Dammit, Canadians, back to your igloos.

B. Ranson May 10, 2009 at 9:33 pm

I just read the recent Wall Street journal article on the Coyotes’ bankruptcy. The situation is complicated, to say the least.

The WSJ article reports that the NHL is the Coyotes’ “lead creditor, with 37 million in secured debt.” As a creditor facing the prospect of getting back pennies on the dollar, the NHL may believe that James Balsillie’s offer is to low.

As long as the case is in bankruptcy court, the NHL has every reason to hold out. While things are still undecided, it would be foolish for for the NHL to do anything except insist that the team abide by its contracts with the NHL and pay back its debt to the NHL in full. After all, if the bankruptcy proceedings are eventually are favorable to the NHL, they could still sell the team to Mr. Balsillie.

larry July 10, 2010 at 8:35 am

helo al

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