The Rise of the National Basketball Association

1. Economics of Sports Leagues

1 economics of Sports leagues Owners in professional team sports leagues enjoy advantages that other business owners do not. The league owners are, in a sense, a cartel. Cartels are usually against U.S. antitrust laws. All professional team sports leagues have partial or full antitrust exemptions, thanks to the courts and to congressional legislation. Not all cooperation between firms violates antitrust laws. The league owners must have a minimal amount of cooperation in setting schedules, arranging playing rules, and determining champions. These minimal activities, denoted by economists as single-entity cooperation, are permissible because they make competition possible and therefore benefit fans. The owners are not content with minimal cooperation, however; they also seek actions that boost collective profits. These actions include granting territorial rights, fixing minimum prices, establishing a reserve clause and a player draft, and negotiating national TV contracts; economists call these actions joint-venture cooperation. Antitrust authorities would usually consider such activities to be beyond the pale of acceptable behavior. Thus, the owners and their appointed commissioners must persuade legislators and antitrust authorities to countenance such blatant violations. Sports league officials have generally relied upon an argument that such actions prevent ruinous competition and foster competitive balance, the latter being beneficial for fans. In the early days of the NBA, owners’ joint-venture cooperation manifested itself in two primary ways. Because leagues conferred territorial rights that limited direct competition from other teams, or franchises, in the same region, owners had greater discretion over prices they set for their product; this price-setting power often generated greater profits than owners would have earned under more competitive conditions. Owners often stipulated minimum ticket prices as a backstop, lest some desperate owner slash prices unilaterally. The reserve clause and player draft bound a player to a single team. Under the reserve clause, the owner could trade, sell, or release a player at will. This power gave owners disproportionate bargaining leverage over players and generally suppressed salaries relative to what employers facing a more competitive labor market would pay. But there were limits to how far owners could slash salaries. The distinction between single-entity cooperation and joint-venture activities is not without ambiguity. Tampering with schedules and playing rules were not always single-entity activities, as they both could be manipulated to generate additional revenue and profits. However, these manipulations were not necessarily joint-venture cooperation either, in the sense that, say, controlling players was. The manipulations of the schedule and playing rules often benefited the owners only by pleasing fans, whereas the reserve clause primarily benefited just the owners. The NBA’s turbulent birth as the BAA demonstrated that professional sports team owners’ twin advantages of price-setting power over ticket prices and enhanced bargaining power over players were not sufficient conditions to ensure profitability. Price-setting power without sufficient demand could still lead to losses. The challenge was to increase demand, which would have led to higher ticket prices, more attendance, and greater revenues and profits . Greater profits would have enabled owners to pay higher salaries and to improve conditions, helping to erase any fly-by-night image. To generate sufficient revenue, owners might have tried to create greater demand for their product by avoiding that bête noire of professional team sports: competitive imbalance. Some observers argued that basketball owners should have promoted competitive parity, not only through their draft of college players, but by using gate sharing (the sharing of only gate receipts) to shift badly needed revenue from the New York Knicks to owners of teams in smaller cities. Then again, as in many new industries, pro basketball owners may have decided upon a rugged individualist approach of winnowing weak teams. The basketball owners, similar to their brethren in Major League Baseball and the National Football League, found that relocating moribund franchises to cities with stronger demand for their product was a better tactic than sharing revenue from various sources. The owners could have tried to create more demand by improving their product through innovations in rules, or by tapping a new pool of talent, 6 . chapter one such as African American players. Owners might have hoped that a new technology—television—might expand their market and fan base. Profits Similar to their peers in baseball and football, pro basketball owners are loath to reveal profits and losses. They are more likely to divulge losses, though, when they want the public to...