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Is an exit fee a barrier to entry?

2012 September 18
by Phil Miller

The big news out of the ACC is that Noitre Dame has been unanimously voted in as a member of the conference… in every sport but football (of course) and hockey.  The not-so-big news in the grand scheme of things is that the ACC voted 10-2 to increase its exit fee from $20 million to more than 2.5 times that amount: $50 million.

One of those two naysayers was Maryland’s president Wallace Loh.  Loh voted against the increased exit fee because it could be seen as a barrier to entry by some who may otherwise want to join the ACC (source here, another here).  I can see how an exit fee per se might be seen as a barrier to entry (before I join your club, I want to know what it costs to get out should I decide to leave).  But that decision by any entrant would have to be one of expectations*, not one of certainty, meaning the expected exit penalty is what matters here.

The decision to leave a conference and join a new one is already a huge decision.  Old relationships have to be uprooted and new relationships have to be forged.  An exit fee to the current conference will have to be paid.  Coaches of programs, who have built up some “coaching capital” which would include things such as the familiarity with playing current conference programs and recruiting relationships, will have to build up new coaching capital.  None of this is easily done.

So while I don’t want to completely poo poo away the effect of the exit fee in the decision to join a conference, my guess is that the average school switching conferences does not expect to leave that new conference (although TCU did just that when it left Conference USA to join the Big East which it then left to become a member of the Big XII).   If an entrant thinks the chance of leaving is nearly 0, then the expected exit fee isn’t really that big a deal.

*It would also involve discounting the exit fee to its present value.

One Response
  1. Zach permalink
    September 18, 2012

    I had to be “that guy” but since this is an economics blog I have to point it out- how is 50 million more than 2.5 times 20 million?

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