Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 21

Monopsony in the Market for Sports Stars
Occasionally powerful cartels of hirers can achieve a successful monopsony. Professional sports leagues that are able to implement restrictions on competition among teams in hiring players provide several important examples.
Why Study Sports?
Although some economists may indeed be sports fanatics, this is not the primary reason they study the wages of sports stars. Rather, professional athletics represents one of the few industries in which worker productivity is directly observable. Batting averages in baseball, scoring in basketball or hockey, and defensive tackles' "sacks" in football can all be measured and (more importantly) correlated with spectator attendance and television ratings. These provide clear evidence of each person's marginal revenue product-information that is simply not available in most other labor markets.
Monopsony in Major League Baseball
Throughout much of its history, major league baseball limited competition for players among teams with a "reserve clause" that bound players to the teams that first signed them. The monopsony created by this clause was strengthened by a questionable series of court cases that effectively barred the major leagues from prosecution under the U.S. antitrust laws. G. W. Scully constructed numerical estimates of the effects of this monopsony in a famous 1974 article.1 Scully analyzed which aspects of individual player performance (batting averages, on-base percentages, earned run averages, and so forth) were most closely related to a team's overall performance. His analysis of these data showed that most players' marginal value products exceed their salaries by substantial margins. Major stars were especially underpaid relative to the revenue they generated for their teams. For example, Sandy Koufax (the great Dodger left-hander during the 1950s and 1960s) may have been paid less than 25 percent of what he was "worth."
It was only a matter of time before players came to recognize the effect of the reserve clause and took organized action against it. A players' strike in 1972 (coupled with legal action brought by St. Louis Cardinal outfielder Curt Flood) eventually led to the adoption of a free-agent provision in players' contracts as a partial replacement of the reserve clause. Although the leagues have tried several actions to reestablish their cartel position (such as caps on team salaries and limiting league expansion), they have been unable to return to the powerful position they occupied prior to 1970
Basketball and Michael Jordan
Similar research on professional basketball players' salaries suggests that the National Basketball Association (NBA) has at times been able to exercise monopsony power. Although the NBA never had the advantage of the reserve clause (because, unlike baseball, it is not exempt from antitrust laws), various draft limitations and salary-cap provisions have served to restrain salaries to some extent. Stars from the 1950s and 1960s such as Wilt Chamberlain, Bill Russell, and Oscar Robertson were probably the most affected by such limits. But it appears that even Michael Jordan (undoubtedly the most famous sports figure of the 1990s) may have been underpaid. Of course, it is hard to feel sorry for Jordan, who was still earning over $10 million a year (as well as getting income from Nike and MCI endorsements) after returning from his brief, mediocre career as a minor league baseball player. But empirical research suggests that he may have been worth over $70 million per year to the NBA as a whole in terms of the higher television ratings they enjoyed when he played
The National Collegiate Athletic Association (NCAA) currently forbids student-athletes from obtaining any form of compensation for their performance. Given the huge revenues that schools receive from sports (especially football and basketball), should the NCAA be regarded as a monopsonistic cartel? In practice how does competition for the best players manifest itself in college sports? How does the possibility of playing at the professional level affect schools' and athletes' decisions?