Tag: monopsony power

Most football fans will probably never have heard of an organisation called FIFPro but, if it is successful, the labour market for football players could change quite radically.

FIFPro represents over 65,000 players from around the world. It is effectively an international trade union whose main objective is to promote the interests and defend the rights of professional football players. Its president, Philippe Piat, has recently announced that the organisation will challenge the way the current transfer system operates and is prepared to take its case to the European Commission and the European Court of Justice.

FIFPro’s argument is that players are being exploited under the current system. This may seem difficult to believe in the week when Luis Suarez signed a new four-and-a-half-year contract at Liverpool with earnings of £200,000 per week. However, referring to the transfer system, Piat stated that:

These legal and monetary shackles binding footballers to their current clubs can no longer be accepted and upheld. Football players are workers and only when they are able to enjoy the rights enshrined in law and enjoyed by all other workers, will Fifpro be satisfied.

In order to understand this argument, it is important to understand how the transfer system has evolved and how it now operates.

When the Football Association (FA) first accepted professionalism in 1885 it introduced a registration system. Before this reform it was possible for players to play for different teams each week. The new system meant that players had to register with a club at the beginning of each season. If a player was not registered with a team he was not allowed to play. He could only change team mid-season if his current club and the FA agreed to the transfer of his registration details to a different team. However, a player was free at the beginning of each season to register with a different team. Therefore there were no constraints on his mobility between teams from one season to another.

Significant changes were made to the system in 1893 when the retain-and-transfer system was first introduced. The new scheme allowed teams to keep retaining players they had initially registered for another year. This effectively meant that when a player was signed by a team he was tied to that team for as long as they wanted him. The mobility between clubs from one season to another had been removed. This gave the clubs significant monopsony power in the labour market. If a player wanted to change teams, he had to make a transfer request but the team was under no obligation to put him on the transfer list and allow him to move. Teams could decide to put players on a transfer list and would only allow them to leave if an agreeable level of compensation (a transfer fee) was offered by another team. A maximum wage of £4 per week was also introduced in 1901.

The system was periodically challenged and a number of minor changes were made. In particular, the conditions under which a player could be retained by a club were gradually altered. Originally a player could be retained by a club even if his contract was not renewed. Effectively a team could stop a player moving to another club by holding onto his registration without having to pay him. This was changed so that a minimum wage had to be paid to a player if he was to be retained by the team that held his registration.

The first major change to the system came in 1963 from a player called George Eastham. In 1959 he failed to sign a new contract with Newcastle United and made a transfer request which the club promptly rejected. Although they did eventually allow him to leave and join Arsenal, he still took his case to the High Court and the judge concluded that the retain-and-transfer system was an unreasonable restraint of trade. Following this judgment the system was amended so that, in order to retain a player, a club would have to offer the player a new contract with terms and conditions which were at least as good as the previous one. If this was done, then a player could be retained by a club and his registration would only be released if an acceptable transfer fee was offered by another team.

Perhaps the biggest change to the system was made in 2001 following the famous Bosman ruling. Jean-Marc Bosman had wanted to move to the French side Dunkirk, but FC Liege, the club that held his registration, demanded a transfer fee that Dunkirk were unwilling to pay. Bosman took his case to the European Court of Justice and in 1995 a decision was made that the system was in breach of European Union law on the free movement of people. Following this ruling, an informal agreement was reached between the European Commission, FIFA and UEFA. From 2001 players over the age of 23 were free to leave their clubs once their contracts had expired. Transfer fees no longer needed to be paid for players who had reached the end of their contracts.

In September 2013, Mesut Özil joined Arsenal from Real Madrid on the deadline day of the transfer period for a reported fee of £42.5 million.

Although the ease with which players can change teams has significantly improved over the past 50 years, they still face constraints on their labour mobility that are unusual for employees. Most workers simply have to give a period of notice in order to change employer. These vary between jobs but are not usually longer than 3 months. FIFPro’s argument is that professional football players should have these same rights. This would allow Luis Suarez to leave Liverpool at any point in the next four and a half years without any transfer fee having to be agreed. He would simply have a serve out a short period
of notice and then he would be free to join any other club. Under the current system he would have to wait four and a half years until the
end of his contract before he could leave without a transfer fee having
to be paid.

Whenever the transfer system has been challenged the football authorities have always used the same defence – sport is different from other industries because of the importance of maintaining an appropriate level of competitive balance. It is argued that the ease with which players can change clubs needs to be restricted in order for this level to be maintained. Ultimately a judgment will have to be made between this argument and the principle of freedom of movement.

Articles

Fifpro to launch legal challenge against transfer system because it shackles players The Telegraph (17/12/13)
Who gains from Fifpros world without transfers? What a surprise the rich The Telegraph (18/12/13)
Fifpro’s tilt at the transfer market is to be welcomed The Guardian (18/12/13)
Players’ union Fifpro to take transfer system to European courts The Guardian (17/12/13)
The 1960s The PFA.COM (18/12/13)
Luis Suarez signs new long-term Liverpool deal BBC Sport (20/12/13) .

Questions

  1. Explain why the marginal revenue product of footballers is so much higher than it is for people in most other jobs. What impact do you think technology has had on the marginal revenue product of footballers over the past 20 years?
  2. Draw a diagram to illustrate how the wage rate for footballers would be determined if the labour market was perfectly competitive.
  3. What is monopsony? Explain how the retain-and-transfer system could give football clubs monopsony power in the labour market.
  4. Draw a diagram to illustrate the impact of monopsony on wages and employment in the labour market for professional footballers.
  5. Explain how limiting the mobility of players might help to maintain the level of competitive balance in a league.
  6. If the proposals by FIFPro were accepted, what impact do you think it will have on players’ wages?

Imagine if none of the clubs in the English Premier League (EPL) or English Football League (EFL) had junior or youth teams. Instead envisage a situation where all of the talented young footballers in the country go to college or university to develop their skills. Then once a year there is a big televised event where each of the clubs in the EPL and EFL take it in turns to choose which young college/university players they would like to recruit.

Strange as it sounds to football fans in Europe this is exactly what happens in American Football in the USA. It is called the NFL draft and this year’s event took place over three days between 25th and 27th April at Radio City Music Hall in New York. There was greater interest in Britain than usual in this year’s event because of the involvement of 24 year old Menelik Watson who was born and raised in Manchester. Although originally a basketball player, coaches spotted his potential to play American football in the NFL and two years ago he obtained a place at Florida State University.

The NFL draft has seven rounds. Each of the 32 teams has the right to choose one player in each round. An important design issue for any draft system is how to determine the running order in which the teams make their choices. Obviously all 32 teams would like to get the first chance at recruiting the most talented of all the college players. The NFL’s solution to this allocation problem is an interesting one. The team with the worst playing record from the previous season gets the first choice in each round. In the 2012-13 season this happened to be the Kansas City Chiefs who played 16 games and only won 2 of them. The second choice in each round goes to the team with the 2nd worst playing record from the previous season and so on. The final choice in each round goes to the previous year’s Super Bowl champions who in the 2012–13 were the Baltimore Ravens. Another interesting characteristic of the system is the ability of teams to trade draft choices. For example in 2013 the Oakland Raiders traded their choice in the first round (which was the 3rd choice overall) with the Miami Dolphins for their choices in both the first and second round (12th and 42nd choice overall).

What is the rationale for having a draft system? It was first introduced in February 1936 and many commentators have argued that it has been a key factor which has helped to maintain competitive balance in sport. The man behind the idea, Bert Bell of the Philadelphia Eagles, argued that without this type of system the sport would be dominated by the 4 richest teams. He stated that:

Every year, the rich get richer and the poor get poorer. Four teams control the championship. Because they are successful, they keep attracting the best college players in the open market, which makes them more successful.

Some evidence for the success of the scheme is that in the last 15 years the Super Bowl has been won by 10 different teams. However in 1934, just before the scheme was proposed, there was another major issue for team owners. The Brooklyn Dodgers and the Philadelphia Eagles had become involved in a bidding war for a very talented young player called Stan Kostka. Brooklyn won the battle but had to pay him a salary of $5,000 – the same amount that was paid to the star player in the league. Some people have argued that the real purpose of the draft scheme was to limit the pay of young players by effectively reducing any competitive bidding for their services. Once drafted, a player is expected to join the team who selected him. There may be some protracted negotiations over his final salary and bonuses but the only option open to him if an agreement breaks down is to re-enter the draft the following year. This effectively gives the teams monopsony power which may enable them to restrict players pay to below that of their marginal revenue product. For example although Andrew Luck, the first choice draft pick in 2012, reportedly earns just over $20million from his 4 year contract with the Indianapolis Colts some commentators have argued that his true market value is over $100 million.

The good news for Menelik Watson was that he was finally drafted by the Oakland Raiders and was the 42nd overall player chosen in the draft process. This is the highest choice ever made by a team in the NFL for a player born and brought up in Britain. The final outcome for the league as a whole can be seen on the NFL website.

NFL Draft 2013: Your essential comprehensive guide BBC Sport Simon Clancy (25/4/13)
NFL Draft 2013: Menelik Watson goes to Oakland Raiders BBC Sport, (26/4/13)
NFL Draft makes Menelik Watson Oakland Raiders’ second British player The Guardian, Paulo Bandini (27/4/13)
NFL Draft: Manchester’s Menelik Watson looking to start with Oakland Raiders right away Sky Sport, Paul Higham (28/4/13)
Manchester’s Watson lands dream NFL job after being drafted by the Oakland Raiders Daily Mail, Matthew Sherry (27/4/13)
Abolish the NFL Draft Sports on Earth, Patrick Hruby (25/4/13) .

Questions

  1. Explain why the marginal revenue product for sports stars is so much higher than it is for people in most other jobs.
  2. Draw a diagram to illustrate how the wage rate for players would be determined if the labour market was perfectly competitive.
  3. Assuming that the marginal revenue product for sports stars was in fact lower than that of most people in other jobs, draw a diagram to illustrate why they would still tend to be paid so much more.
  4. What is monopsony? Explain how the draft system could give the teams in the NFL monopsony power.
  5. Draw a diagram to illustrate the impact of monopsony on wages and employment in the labour market for NFL players.
  6. Can you think of any perverse incentives that the draft system could create for the performance of teams towards the end of the regular season.

Two of the biggest publishing companies, Pearson of the UK and Bertelsmann of Germany are to form a joint venture by merging their Penguin and Random House imprints. Bertelsmann will have a majority stake in the venture of 53% and Pearson will have 47%.

The Penguin imprint, with a turnover of just over £1bn, has an 11% share of the English language book publishing market. Random House has a 15% share, with turnover of around £1.5bn. The new ‘Penguin Random House’, as it will be called, will have nearly 26% of the market, which should give it considerable market power to combat various threats in the book publishing market.

One threat is from online retailers, such as Amazon, Apple and Google, which use their countervailing power to drive down the prices they pay to publishers. Another threat is from the rise of electronic versions of books. Although e-books save on printing costs, competition is driving down prices, including the prices of paper books, which may make publishers more reluctant to publish new titles in paper form.

There has been a mixed reception from authors: some are worried that an effective reduction in the number of major publishers from six to five will make it harder to get books published and may squeeze royalty rates; others feel that an increased market power of publishers to take on the online retailers will help to protect the interests of authors

The following videos and articles look at the nature of this joint venture and its implications for costs, revenues and publishing more generally.

Videos and webcasts
Penguin and Random House merge to take on digital giants Channel 4 News, Matthew Cain (29/10/12)
Penguin and Random House confident merger will be approved BBC News, Will Gompertz (29/10/12)
Penguin Books and Random House to merge BBC News, Matt Cowan (29/10/12)

Articles
Random House and Penguin merge to take on Amazon, Apple Reuters, Kate Holton (29/10/12)
Pearson’s Penguin joins Random House Independent, Amy Thomson and Joseph de Weck (29/10/12)
Penguin and Random House sign merger deal Financial Times, Gerrit Wiesmann and Robert Budden (29/10/12)
March of the Penguin The Economist, Schumpeter blog (29/10/12)
Penguin chief: News Corp can’t derail Random House deal The Guardian, Mark Sweney (29/10/12)
Penguin and Random House confident merger will be approved BBC News, Anthony Reuben (29/10/12)
And so I bid Penguin a sad farewell Independent, Andrew Franklin (29/10/12)

Questions

  1. How does a joint venture differ from a merger?
  2. What types of economies of scale are likely to result from the joint venture?
  3. How are authors likely to be affected?
  4. Will the joint venture benefit the book reading public?
  5. The relationship between publishers and online retailers can be described as one of ‘bilateral oligopoly’. Explain what this means and why it is impossible to determine an ‘equilibrium’ wholesale price of books in such a market.
  6. What criteria would the competition authorities use to assess whether or not the joint venture should be permitted to proceed?
  7. What is likely to be the long-term outlook for Penguin Random House?
  8. Assess the benefits and costs of a News Corporation takeover of the Penguin division? This was an alternative offer to Pearson had it not gone with Bertelsmann. (News Corp. has the Harper Collins imprint.)

When crude oil prices go up, the prices of petrol and diesel go up pretty well straight away and by the full amount, or more, of the crude price rise. When crude prices go down, however, road fuel prices are often slow to fall; and when they do, the fall is less than the full fall in crude prices.

Click on charts below for a larger version. Click here for a PowerPoint of the left-hand chart.

In response to complaints of motorists and haulage companies, the Office of Fair Trading has announced that it will investigate the link between crude prices and prices at the pump. It will report in January 2013.

The review will consider questions of competition and market power. In particular, it will look at the power of the oil companies in determining the wholesale price of road fuel.

It will also examine the retail fuel sector and whether supermarkets are driving out independent retailers. The claim of many independent petrol stations is that supermarkets are selling below cost as a lost leader to encourage people to shop in their stores. They also claim that supermarkets use their buying power to obtain fuel more cheaply.

What is more, most of the petrol stations that are not part of supermarkets are owned by the oil companies. Again, independents claim that oil companies supply fuel more cheaply to their own stations than to independents.

As a result of what many independents see as unfair competition, many are driven out of business. Today there some 9000 petrol stations in the UK; 20 years ago there were twice as many.

The following articles look at the remit of the OFT investigation and at the competition issues in the road fuel market.

Articles
Formal inquiry tries to ease motorist pain at the pumps ITV News, Laura Kuenssberg (5/9/12)
OFT to scrutinise retail petrol market Financial Times, Caroline Binham (5/9/12)
OFT launches probe into pump prices Channel 4 News (5/9/12)
Petrol and diesel prices: Office of Fair Trading launches competition inquiry Guardian, Terry Macalister (5/9/12)
Petrol and diesel price review is launched by OFT BBC News (5/9/12)
Are supermarkets to blame for the devastation of independent petrol retailers by deliberately selling at a loss? This is Money, Tom Mcghie and Neil Craven (8/9/12)
OFT petrol pricing probe welcomed The Grocer, Beth Phillips (7/9/12)
Private businesses welcome OFT’s fuel price investigation Talking Retail (6/9/12)
10 charges that make consumers scratch their heads BBC News Magazine, Lucy Townsend (6/9/12)

Data
Crude Oil Price Index Index Mundi
Daily Brent Crude Spot Price, 1987 to present day US Energy Information Administration
Current UK Petrol Pump Prices What Pric£?
Fuel Prices WhatGas.com

Questions

  1. Describe the structure of the road fuel market, from oil production through to the retailing of petrol and diesel.
  2. What is meant by the terms ‘monosony’ and ‘oligopsony’? Which companies in the road fuel market have significant monopsony/oligopsony power?
  3. What determines the price elasticity of demand for road fuel in (a) the short run; (b) the long run? What implications does this have for the value of the short-run and long-run price elasticities?
  4. Where is the abuse of market power likely to occour in the road fuel market?
  5. To what extent is it in the consumers’ interests for supermarkets to sell road fuel below average cost?
  6. Examine the data for pump prices and crude oil prices and establish whether there is any truth in the claim that pump prices adjust rapidly to a rise in crude prices and slowly to a fall in crude prices.

Up until a year ago, milk and cheese prices were soaring woldwide (see Cheddar – the king of cheeses at £2000 per tonne). A surging world economy and rapidly growing demand from China and India were driving up commodity prices, including milk and milk-based producs. In the UK, average farmgate prices for milk had risen from 19 pence per litre (ppl) in 2006 to 27.4ppl by October 2008 (see here for data). Since then, however, as the global economy has plunged into recession, milk prices have fallen. By September 2009, the farmgate price had fallen by over 18 per cent to around 22.4ppl. With rising costs for fuel and cattle feed, many dairy farmers are now making a loss and are either quitting, or considering quitting, the industry.

It’s a similar story in Europe, North America and other dairy producing regions of the world. In Europe “the mood is turning sour. Last week 300 tractors dragged milk containers over fields in southern Belgium, dumping a day’s worth of production (see video). Similar protests were made in Germany, France, the Netherlands and Luxembourg. The crisis has driven many EU farmers into a ‘milk strike’, with thousands refusing to deliver to the industrial dairy conglomerates that produce everything from skimmed milk to processed cheese.”

So is this just market forces in action and will prices rise again as the world economy recovers? Or is it a reflection, in part, of the monopsony power of the supermarkets and the milk processing industry? The following articles look at the issues, both in the UK and the rest of Europe and in the USA.

Milk ‘strikes’ and shortages hit Europe as UK dairy industry reels from crisis Observer (20/9/09)
German agriculture ministers meet as European milk crisis escalates Deutsche Welle (17/9/09)
EU Milk Strike Joined by More Than 60,000 Farmers, Group Says Bloomberg (18/9/09)
EU to boost aid for dairy farms BBC News (17/9/09)
Milk: Commission proposes further measures to help dairy sector in short, medium and long term European Commission Press Release (17/9/09)
Milk output fell in August as dairies cut herds Chicago Daily Herald (19/9/09)
New England tries to save dairies The News Journal (Delaware) (20/9/09)

Questions

  1. For what reasons are many dairy farmers now making a loss?
  2. For what reasons has the power balance in the wholesale milk market shifted towards milk purchasers (such as supermarkets) and away from farmers?
  3. How would a phased liberalisation of EU milk production help the UK’s dairy farmers?
  4. Discuss the likely effectiveness of the European Commission’ proposed measures to help dairy sector in short, medium and long term.
  5. What is likely to happen to milk prices over the next two years and what will be the likely effect on supply? Explain your answer and consider the relevance of price elasticity of supply.
  6. “Agriculture officials and farmers in Vermont, New Hampshire and Massachusetts have launched a program called Keep Local Farms. … Organizers say they hope to appeal to consumers’ growing taste for local foods” (see final linked article above). What determines the likely effectiveness of such ‘buy local’ movements? What incentives are there for people to buy local? If countries in general encourage people to buy local, is this a zero sum game? Explain.