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Managing a Brand v. Restricting Competition

2010 May 25
by Brian Goff

Brad has done an excellent job of keeping TSE readers informed and discussing elements of the American Needle v. NFL case including posts on oral arguments, key implications, and a comprehensive listing of useful links on briefs and related materials.    As his links page notes, economists filed friend-of-the-court briefs on both sides of the case.  The pro-American Needle brief includes a Who’s Who of sports economists, while the pro-NFL brief includes several antitrust heavy hitters.

I wanted to step back from the details and implications of this particular case and give the non-economists among TSE readers a brief view of the underlying economic tensions.  While some may think economists suffer from a chronic case of  internal disputes, that’s really not the case.   There are really broad areas of agreement among economists.  Although I tend to lean toward the views expressed by the “sports econ brief,” the issue of whether sports leagues should be viewed as single entities or joint ventures of disparate firms is tricky.

At the economic heart of the matter turns on whether a league’s/association’s activities are making the product better, promoting attributes valued by consumers — “brand management” –  or merely extracting value from consumer or resource suppliers by limiting competition.  The tricky part is that many activities fall along a spectrum of these two extremes.   Speeding up games may fall close to extreme of brand management but most activities incorporate a little or a lot of both brand managing and competition restricting.  For example, limiting player movements or pay may promote competitive balance and “the brand” while limiting competition and providing market power to owners vis-a-vis consumers, players or other resource suppliers like American Needle.  As a result, the specifics of the case and emphasis/perspective of a particular analyst influences whether brand management or competition restriction is deemed dominant.

The 7th Circuit opinion in the American Needle case leans heavily on the 1996 7th Circuit case of WGN/Bulls v. the NBA (“Bulls II”) where Frank Easterbrook, now Chief Justice for the 7th , wrote the majority opinion  (Easterbrook is a longstanding, widely respected figure in law and economics).  He noted:

Whether the NBA itself is more like a single firm, which would be analyzed only under sec. 2 of the Sherman Act, or like a joint venture, which would be subject to the Rule of Reason under sec. 1, is a tough question under Copper- weld. It has characteristics of both.

The 1996 Bulls II case draws very fine (mainly) legal distinctions to find in favor of the single entity concept for the NBA, reversing the 7th Circuit’s 1992 “Bulls I” opinion where the same panel of judges ruled against the Bulls.  In the 1996 case, one of the appellate justices writes a concurring opinion drawing out some of the key single entity v. joint venture issues.  As the 7th Circuit opinions make clear, the single entity-joint venture issue is a complex legal/economic landscape with important landmarks such as the 1984 Oklahoma v. NCAA case as well as more recent events such as the federal district court decision treating the NHL as a “single entity” in regard to the Phoenix Coyotes location (see Phil Miller post) Given this varied landscape, the 9-0 decision is a bit surprising to me.

Narrowly considered and taking antitrust activities as a given, I lean toward limiting the use of the single entity concept for sports leagues to only a bare minimum number of activities.  Fleisher-Goff-Tollison expressed this principle in our 1992 NCAA Cartel book to which Easterbrook refers in his 1996 opinion.  However, I also hold a somewhat inconsistent and more cynical view of antitrust activities when viewed from a broader, longer run perspective informed by empirical work on the political economy of antitrust activity.  On the whole, this work suggests that antitrust often works against rather than for consumer interest.  While the specifics of the NFL case don’t seem to fit this critique closely, reading the varied opinions across time in these cases does lead me to some cynicism about the role of economics.  While econ analysis is employed in the opinions, it not clear whether it is persuasive or merely an tool of convenience for various legal/political leanings.  In his 1996 opinion, Frank Easterbrook chides the District Court judge because

The district court’s opinion concerning the fee reads like the ruling of an agency exercising a power to regulate rates. Yet the antitrust laws do not deputize district judges as one-man regulatory agencies.

Yet, reading these varied opinions, including some of Easterbrook’s, is subject to the same criticism.

3 Responses
  1. Greg Pinelli permalink
    May 25, 2010

    That was a very entertaining dance..but the bottom line is that anti-trust was instituted to protect the lame and the inefficient from those who provided value. I happen to hold that consumers are not the dolts and pawns Courts make them out to be. The NFL is a group of freely associating teams who compete but are not independent in any but the most superficial ways.
    The agreed upon licensing arrangement was beneficial not only to groups that received NFL charitable contributions….but provided dedicated fans with “legitimized” article cache. Those fans who thought they were being ripped off…and second raters like American Needle ought to be subsidized were FREE to refuse to buy NFL trademark goods.
    For those readers who are unfamiliar with anti-trust history…the entire wailing wall was legitimized by Teddy Roosevelt..who never met a free choice he didn’t feel superior to. It was a political power grab and remains to this day a convoluted and ridiculous set of affirmative action business welfare crutches.

  2. Donald A. Coffin permalink
    May 26, 2010

    I’m not clear about exactly what point(s) Greg Pinelli is trying to make, so let me simply focus on one or two things.

    American Needle’s argument is not that they need not be licensed in order to produce NFL items; after all, they did not argue (and could not with any pretense to reasonability argue) that NFL teams do not own their trademarks. Their argument was simply that the NLF was attempting to exercise monopoly power by restricting the number of licensees to one, and that the consequence of doing so would be to disadvantage consumers (and, of course, American Needle). There is evidence that the prices of licensed merchandise did rise following the restrictions on licensees to one.

    The argument about the NFL’s charitable contributions seems to me to be simply a red herring. On what grounds am I to applaud the NFL’s making some charitable contributions with profits (licensing fees) that it was able to raise by monopolizing that market? What the NFL has done, if anything, is to obtain, through monopoly behavior, consumer surplus from buyers of NFL merchandise, and then attempt to buy off potential critics by using some of that surplus to make some charitable contributions. Whoop-dee-do.

    The economic argument for antitrust law and regulation is that monopoly not only transfers surplus from buyer to the monopoly seller, it also reduces the total surplus to the economy, thus making the economy as a whole poorer. And, actually, that analysis of the effects of monopolization seems entirely uncontroversial to me. What remains, then, is an argument that antitrust law and regulation fails to achieve its objective. But I don’t take Pinelli, actually, to be arguing that.

  3. Greg Pinelli permalink
    May 27, 2010

    I happen to understand fully what Mr. Coffin’s argument rests on..if he doesn’t understand mine it’s simply because he fails to recognize that there is a difference between following Statist control of markets and explicating the rationales they employ to justify them.

    In fact..the idea that “surplus” is transferred from buyer to “monopoly” seller is a purely subjective account of the facts. Those who buy “legitimate” NFL brand items obviously receive full value..or they wouldn’t buy them. After all..the last time anyone checked hats, jerseys, jackets etc are NOT required items for survival.

    The ONLY objective anti-trust law achieves is that it transfers control of product from sellers to government. Take a look at the birth of this law…Standard Oil SAVED tens of thousands of lives from deadly fuel explosions that routinely occurred from product supplied by smaller refiners of oil. Teddy Roosevelt saw tremendous political cache in going after Rockefeller and played it to the hilt. Touche.

    A man who was a failure at every business he ever tried got the political opportunity to tell one of the great risk takers and entrepeneurs in history how to do business! So..American Needle made it’s point..the result? Who knows. Charities MAY receive less….the NFL and others who may fall under this ruling..are less free to simply exercise free association and choice.

    That these effects are entirely “uncontroversial” to Mr. Coffin simply affirms that he’s a house man..and that is NOT a complimentary term.

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