Question

Question 2 30 pts This is an excerpt from an article authored by Gerald W. Scully, Emeritus professor of Economics at the University of Texas at Dallas. This article is published at By their very nature, sports leagues are cartels that exclude competition from other companies. You cannot start a baseball team and hope to play he akees e nitd Statthatislargey mt from thoe laws, Exver sine a 1922 court decision Federal Baseball Club of Baltimore v. National League et al.), baseball has been totally exempt. No other sport enjoys such a blanket exemption from antitrust, but all professional team sports have a labor exemption and, since the Sports Television Áct of 1961, a broadcast exemption EconLib by Kenneth A. Small All of the leagues have collusive agreements that govern the selection, contractual arrangements, and distribution of players among the teams. Collectively, these agreements grant a degree of monopsony power (monopoly power over the right to buy something-in this case, player services) to owners. The owners exploit this power by paying the players less than their incremental contribution to revenue. After reading this, illustrate using a graph(s) (up to 2 graphs) how a U.S. Sports League (pick one sports league such as the NFL, NHL, MLB, NBA) earns higher profits when in a cartel agreement Instruction: create the illustration per this question (use online drawing tools OR graph on paper, take a picture and upload OR graph, save as PDF and submit). Upload Choose a File

Answer 1

It is given that National Basket Ball Association has colluded to govern the selection of the players in the basket ball team. This as said gives NBA the monopsony power (a situation when there exists only one buyer and many sellers). In this case, NBA is the sole buyer of services provided by a number of players. The diagram below describes how the league earns higher profits by paying less to the players by exploiting its monopsony power.

oages MC S=AC MRP Demand - Plagess

MRP is the marginal revenue product of the labor. MRP is the product of marginal revenue and marginal product. The league demands players depending upon the additional revenue it gets from the additional productivity of the player.  Thus, MRP represents the demand curve of the league.

Average Cost Curve (AC) is positively sloped because in order to hire more players the cost of the league increases. This also represent the supply curve of the players. The higher the wages, the more is the supply.

Marginal Cost Curve, MC is above AC because in order to attract more players, the league has to increase the wages of all the players.

Monopsony Equilibrium,

MC=MR

Corresponding to the equilibrium condition, the league pays W_M as wages whereas if the league is not colluded, then the league would have paid W_C, the perfectly competitive wages to the players. Thus the area of rectangle AW_MW_CB is the transfer of players income to the league in the form of increased profits. The area of triangle ABCD is the dead-weight loss or the revenue to the society.