A professor in the USA recently posed an interesting dilemma to students taking his psychology exam. At the end of the exam students were provided with a bonus question in order to gain extra credit. All they had to do was decided whether they would like two or six additional marks adding on to their final score. The twist was that if more than 10% of the class opted for an additional six marks then everyone would get nothing added on!
The professor had placed the students in a prisoner’s dilemma scenario. To see this consider an individual student weighing up which option to choose; if more than 90% of the class chose two additional marks, then this student is better off choosing six additional marks. Whereas if more than 90% of the class chose six additional marks, then this student is indifferent between the two options (the student will get no additional marks regardless of their choice). It follows that choosing six additional marks is a weakly dominant strategy.
In a similar fashion, in the classic prisoners setting keeping quiet is collectively better, however, each criminal has a strong individual incentive to confess. Likewise, in oligopoly markets the interdependence between firms results in a tension between cooperation and competition. Firms collectively benefit from keeping prices high, but an individual firm has an incentive to undercut its rivals and steal a large share of the market. A strong prediction when self-interested participants play the prisoner’s dilemma game just once and choose their strategies independently is therefore that the prisoners will confess to the crime and that firms will set low prices.
So did the US professor end up giving away many bonus marks? No, about 20% of the class opted for six additional marks and as a result all the students ended up with no extra marks. In fact, the professor claims to have been running the same experiment for the previous seven years and only once has he ended up giving away any bonus marks. On the one hand, this result is consistent with what is predicted in the prisoner’s dilemma game. However, running contrary to this is the fact that around 80% of the students opted for just two additional marks. It would certainly be interesting to see what would happen if in future years the professor relaxed the threshold above which all students get no extra marks.
UMD ‘tragedy of the commons’ tweet goes viral The Baltimore Sun, Quinn Kelley (09/07/15)
A professor tested the ‘Prisoner’s Dilemma’ on his students by bribing them with extra credit points Tech Insider, Will Haskell (17/07/15)
Questions
- Draw the payoff matrix for the student’s dilemma.
- What are some of the possible explanations for around 80% of the class choosing two extra marks?
- How do you think the outcome of the game might have changed if students were allowed to communicate with each other before making their choice on the number of additional marks to ask for?
- How do you think student choices would change if the threshold above which all students get no extra marks was varied?
Last week saw the launch of Apple’s new music streaming service. This will clearly provide serious competition for the existing music streaming providers such as Spotify and Tidal. One important difference is that whilst Spotify offers a free version to listeners funded by advertising revenue, all Apple Music users will be required to pay a monthly subscription charge. However, Apple will allow listeners a free three-month trial of its service.
Initially Apple intended not to pay artists royalties during this trial period. However, it soon reversed this plan when the pop-star Taylor Swift wrote a blog post criticising Apple for this and threatening to withhold her most recent album.
The negotiations between Apple and the record labels are also facing considerable scrutiny from the competition authorities on both sides of the Atlantic. They seem particularly concerned that Apple may have conspired with or pressured labels to withdraw their support for rival streaming services such as Spotify that offer free versions to consumers. Although not clear, it has been suggested that the European Commission’s initial probe into this may have been initiated by a complaint from a company offering such a free version of its service.
On the other hand, there has also been considerable criticism of free music services such as Spotify. One of the cofounders of the Beats music streaming service, which was subsequently acquired by Apple, has argued that the free business model does not properly value recorded music. Likewise, Taylor Swift removed her entire back catalogue from Spotify, and the leading record label, Universal, is applying pressure on Spotify to change its business model. It is currently unclear whether Apple has been directly responsible for Universal’s standpoint. What is clear is that Apple’s entry will shake-up this market and the identity and business model of the future market leader is at stake.
Streaming sets off a painful debate in the music industry Financial Times, Jonathan Ford (22/03/15)
Apple’s new music service will push paid subscriptions, with free samples re/code, Dawn Chmielewski and Peter Kafka (08/05/15)
Taylor Swift is fighting the wrong part of the music industry Financial Times, Jonathan Ford (05/07/15)
Here’s what happens to your $10 after you pay for a month of Apple music re/code, Peter Kafka (15/06/15)
Questions
- What are the key features of the music streaming service market?
- What are the pros and cons of Spotify’s business model?
- Why might the views on free streaming services differ between small and large artists and labels?
- How do you think the music streaming market might develop in the future?
As was discussed on this blog, the rights to broadcast live Premier League football matches in the UK were recently auctioned off for a staggering £1.7bn per season. In the Premier League all of the clubs join forces to sell the rights collectively.
On the face of it, this collective selling would appear to be a potential breach of competition laws that prevents agreements between firms. However, despite some concerns and complaints, collective selling of football TV rights has been allowed, firstly because it is argued that it results in a more equal distribution of income amongst clubs, thus enhancing competitive balance and resulting in a more attractive product for the fans; secondly, because some of the revenue raised is redistributed down the football pyramid to lower league clubs.
In contrast to the Premier League, in Spain the clubs have traditionally sold their rights individually. This has been regarded as a significant advantage for the Spanish giants, Barcelona and Real Madrid.
For the 2013–14 season in total clubs in the top division in Spain earned substantially less than their counterparts in England. However, Barcelona and Real Madrid earned around 1/3 of the total and more than any club in England, whereas the league winners that year, Atletico Madrid, earned only around half that of Cardiff City which finished bottom of the Premier League. Despite this, it is interesting to note that, at least in terms of league winners, the Spanish league has been more competitive than the German league despite the rights being sold collectively in the latter.
However, the way in which the rights are sold in Spain may be about to change. A few weeks ago, following pressure from the majority of clubs, the Spanish government approved a law that will introduce collective selling. The sport ministry spokesman described this change as allowing Spanish football to ‘adopt to modern times’.
It has been reported that there is a clause in the legislation that guarantees all clubs an increase in revenues above what they currently earn from selling their TV rights individually. This may have been essential to persuade the larger clubs, in particular Barcelona and Real Madrid, to support the new legislation.
The change in legislation still needs to be cleared by the Spanish parliament and there has been a threat of strike action. It is also unclear how the clause described above might affect the standing of the collective agreement under competition law.
Assuming the change does go ahead, it will be interesting to see how much the subsequent collective sale of TV rights raises. One estimate suggests a significant increase, but still much less than in the Premier League. Even more fascinating will be in the longer term to see what knock-on effect this has on the degree of competitive balance in the league.
Barcelona back collective TV rights in La Liga City a.m., Joe Hall (04/08/14)
Is the balance of power in Spain’s La Liga set to change after historic TV rights change Sport.co.uk, Jason King (02/05/15)
Court suspends Spanish football strike Financial Times, Tobias Buck (14/05/15)
Questions
- Why does competition policy typically prohibit agreements between firms?
- Do you think collective selling will always have a significant effect on the degree of competitive balance in a sports league? What other factors are likely to be important?
- Assuming the new legislation goes ahead, how do you think Spanish football will change?
- Can you think of any other situations where agreements between firms may be beneficial?
In December the European Commission (EC) fined 5 envelope makers from Sweden, France, Germany and Spain a total of almost €20m for participating in a cartel. Between 2003 and 2008 these firms had coordinated responses to tenders, fixed prices and exchanged information. This increased the prices paid by their buyers who were stationary distributors and large companies.
Commenting on this case the European Competition Commissioner Margrethe Vestager stated:
On this case we have closed the envelope, sealed it and returned it to the sender with a clear message: don’t cheat your customers, don’t cartelise.
The EC initiated an investigation and undertook dawn-raids on the companies involved following a tip-off from a whistleblower. The Commissioner also had this message for other firms considering taking part in a cartel:
I do hope that you realise that just a simple tip-off from a whistle-blower, from within the company or from a customer is all it takes for your cartel to come up on our enforcement radar.
A previous post on this site highlighted the fact that the game of golf has played a prominent role in a number of previous cartels and that in these code names for their activities were sometimes adopted. The envelope cartel seems to have gone one step further by combining the two and referring to their cartel meetings as ‘golf’ or ‘minigolf’ appointments.
All firms involved in the cartel settled their case with the EC, resulting in reduced fines. The EC encourages such resolution of cases because it frees up resources and allows them to pursue a larger number of cases. In addition, the fines imposed on two of the companies were reduced due to their inability to pay.
Finally, it is also interesting to note that, following the collapse of the cartel, one of the companies involved went into liquidation and subsequently merged with one of its former cartel co-conspirators. This coincides with broader evidence of merger activity following the breakdown of cartels. One explanation for this is that merger activity is a response to competition breaking out in the post cartel environment.
Antitrust: Commission fines five envelope producers over €19.4 million in cartel settlement European Commission – Press release (11/12/14)
EU regulators bust envelope cartel in time for holiday cards The Guardian (11/12/14)
European Commission fines envelope cartel €19.5m PrintWeek, Simon Nias (06/01/15)
Kipper Williams on the envelope cartel The Guardian, Kipper Williams (12/12/14)
Questions
- What are the key features of the market for envelopes?
- Do the features of this market make it particularly prone to collusive behaviour?
- What are the trade-offs involved in reducing the fines for firms that are willing to settle?
- Is it right that cartel fines are reduced if firms are unable to pay?
With the new Premier League football season only a week away, TV companies are heavily advertising the matches they will be showing. Until recently, BSkyB, having seen off competition from Setanta and ESPN, appeared to have an untouchable position in this market. However, competition now appears to be intensifying.
BT entered the market in 2012 by paying £738m for the rights to screen 38 Premier League matches a season for 3 seasons, with Sky showing another 116 matches. BT is clearly heavily backing its sports coverage with an initial outlay of £1.5b and them continuing to sign up high profile presenters and ambassadors including former players and a current manager.
Furthermore, BT dealt Sky (and ITV) a hefty blow last year when it outbid them to win the rights to exclusively show European club competition matches from 2015. Sky responded by saying that:
We bid with a clear view of what the rights are worth to us. It seems BT chose to pay far in excess of our valuation
If true, this would illustrate the winner’s curse which can arise in auctions. However, John Petter, chief executive of BT Retail, said that the deal demonstrated that BT Sport was committed to establishing itself in this market and countered Sky’s suggestion that they had overpaid by saying:
They would say that, wouldn’t they? Secretly, I’d expect them to be kicking themselves and full of regrets this morning
Clearly important to BT’s strategy is bundling its sports coverage in for free with their broadband packages. This is not without controversy since, at the same time as spending vast amounts of money to setup its sports coverage, BT is receiving large government subsidies to improve rural broadband provision.
An important forthcoming ruling from the Competition Appeal Tribunal will have a significant effect on how competition between BT and Sky develops. In this case Sky is accused of abusing its dominant position by refusing to supply BT’s YouView service with its sports channels at a reasonable wholesale price and could now be forced to do so.
It will also be fascinating to see how BT Sport’s strategy develops over time. BT is unlikely to continue 
to provide all its coverage for free once it includes the European matches that it has won the rights to show at great expense. It will also be fascinating to see the extent to which it continues to have success in winning broadcasting rights in the future.
Competition will inevitably push up the amount that the Premier League raises in the next rights auction. Current predictions are that these will be sold for over £4bn, up from £3bn in the previous auction. This will increase the amount the Premier League clubs receive and is also likely to further push up player wages. It remains to be seen the extent to which this will benefit viewers, not to mention pubs wishing to show the games some of whom have in the past looked for alternative solutions because of the high prices they have to pay.
BT wins court battle forcing review of Sky wholesale pricing decision The Guardian, Mark Sweney (17/02/14)
BT Sport does little to lift BT TV homes informitv – connected vision (01/08/14)
BT Sport continues to invest in football line-up MediaWeek, Arif Durrani (29/07/14)
Questions
- What are the key characteristics of the market for sports broadcasting rights?
- What are the pros and cons for consumers of BT Sport’s emergence?
- How do you think Sky might respond to competition from BT Sport?
- How do you think BT Sport’s strategy might develop over time?
A professor in the USA recently posed an interesting dilemma to students taking his psychology exam. At the end of the exam students were provided with a bonus question in order to gain extra credit. All they had to do was decided whether they would like two or six additional marks adding on to their final score. The twist was that if more than 10% of the class opted for an additional six marks then everyone would get nothing added on!
