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The Fallacy Of Fragile Demand for “Amateurism”

By Andy Schwarz
26 min read

“… we must determine whether allowing student-athletes to be compensated for their NILs is ‘virtually as effective’ in preserving popular demand for college sports as not allowing compensation. In terms of antitrust analysis, the concept of amateurism is relevant only insofar as it relates to consumer interest.”

 

At the core of its legal arguments, the NCAA argues (without market-based evidence) that amateurism is unable to stand on its own in the marketplace and that rules that provide for collective punishments, including full-on boycotts of athletes who seek their market rate, are necessary for the product to exist, and therefore the NCAA is immune from antitrust scrutiny.

 

Consider the so-called Sanity Code, by which the NCAA banned all scholarship aid in 1948 in the name of amateurism. Under the antitrust laws, there could be no justification for a complete ban on scholarships, given the extreme consumer demand for scholarship-based college sports. However, from the NCAA’s position (and as they argued to the Ninth Circuit), the question is not whether “sanity” was needed to produce college sports, but whether “sanity” was a reasonably necessary means of ensuring that amateurism existed, regardless of whether amateurism itself was necessary to produce college sports.  The Courts have begun to see the NCAA’s claims as weak, calling them anti-competitive.  So, for example, the Court rejected the idea that a return to the days of no scholarships at all would be legal, but to date the NCAA’s claimed right to set a fixed price for athletes has not been entirely struck down.

 

In contrast to this muddy legal picture, the economics are quite clear. Underpinning the application of the Rule of Reason to team sports is the simple truism that it takes more than one team to field a competitive sport contest. Once coordination between two teams, likely economic competitors off-the-field (in some markets), is recognized as necessary for those teams to become sports competitors on-the-field, the normal legal standard against agreements among competitors to regulate output clearly must be modified for sports. But despite this recognition, the major sports leagues (with the obvious exception of baseball, though even baseball’s unique antitrust exemption has been clarified by the Curt Flood Act not to include agreements on pay) as well as college sports have all been found liable for violations of the Sherman Act under the Rule of Reason.

 

An important economic grounding for why such a legal framework makes sense is the idea that prices in a specialized labor market are typically set, not primarily by supply and cost factors but rather mostly by demand factors.  This is because the cost to produce a football player or even an assistant coach is fairly low relative to the competitive wage an athlete or coach can earn, and that market rate is usually substantially higher than the athlete or coach’s next-best wage offer outside of sports. As a matter of economics, it is clear that what is driving up the price of talent is demand.

 

This boils down to a simple first-year undergraduate economic concept, namely the difference between movement along a demand curve, caused by a change in the cost of supply, versus movement of a demand curve, caused by the increased value of the product to its purchasers: higher demand. The former has the potential to cause reduction in output—as prices rise for factors unrelated to demand, the least-valuable product may find itself without a buyer willing to pay its now higher price.

 

 

But in the latter case, a situation in which demand itself drives up price, the idea that purchasers will find these new prices unaffordable is economic nonsense— the prices have risen only because consumer demand has grown. The result, eminently natural to economists but seemingly contradictory to some lay folk, is one in which price and output rise.

 

 

What sort of economic phenomenon would involve an increase in demand? Imagine a wonderful world in which cinnamon powdered donuts were found to have cancer-fighting properties, so that instead of chemotherapy, certain cancers could be treated with a daily dose of donuts—and moreover, sufficient proactive donut consumption could stop cancer before it starts. One can easily see that the desire of consumers to purchase donuts would rise, even in the face of a price increase, simply because as wonderful as these little powdered gems may be today, adding in the additional benefit of curing cancer would surely grow their popularity.

 

This effect is similar to what happens when artificially capped demand is set free (e.g., by ending collusion). Price rises, not because the cost of supply changed, but because effective demand has grown.

 

With this in mind, it should be clear that rational sports franchises really cannot drive up the price of talent to the point where no one can afford to purchase it. Even if, for example, the richest team in the NFL wants to pay its head coach $50 million per year, the ability for that price to drive the price of the thirty-second coach to the point that the thirty-second team cannot afford his salary would require some other source of demand for that coach’s services.

 

Into this basic economic framework comes the NCAA’s idea that if athletes are allowed to be paid a market price, the product of college sports would cease to exist. Economically, this idea is false.  Such a market would have a relationship between compensation and consumer demand that followed the following schedule, where demand grows as compensation increases (from D-III in which athletes themselves pay to play, through D-II and FCS football) to the point of supposed maximum popularity, the FBS limits, after which, according to the NCAA, demand would begin to decline:

 

 

Going beyond this point requires costly investments that yield negative returns. Only an irrational or incompetent firm would take such steps. Thus,  no collective action would be needed to prevent an NFL team from installing sharp spikes on every seat in its stadium—the process would increase costs and at the same time decrease attendance. If payments to athletes above some level are demand decreasing, they would be as likely to happen absent a government mandate as a costly spike-installation process.

 

This is the economic fallacy behind the Ninth Circuit majority’s opinion in O’Bannon. The Ninth Circuit concluded that

 

“The difference between offering student-athletes education-related compensation and offering them cash sums untethered to educational expenses is not minor; it is a quantum leap. Once that line is crossed, we see no basis for returning to a rule of amateurism and no defined stopping point; we have little doubt that plaintiffs will continue to challenge the arbitrary limit imposed by the district court until they have captured the full value of their NIL.”

 

But if there is “no basis” in the market that will stop payments at some sub-market level that defines amateurism, and instead consumer demand will drive teams to pay athletes “until they have captured the full value of their NIL,” then, as a matter of economics, any arbitrary limit is inherently unnecessary. Rather than laying out an argument for why a strict, collectively enforced rule defining amateurism was necessary to preserve consumer demand, the majority in O’Bannon unknowingly showed a concern that if left unencumbered, the higher prices that would result would disprove the necessity of rules enforcing NCAA-style amateurism for maintaining consumer demand. After all, what industry in the history of American business has ever voluntarily incurred higher costs with the known goal of lowering consumers’ evaluation of the product’s quality? The very idea that athletes have a full value of their NIL that is currently being denied to them is evidence that the restraint of cost of attendance (COA) is too low, because that full value is only set in the context of consumer demand.  If consumers demand amateurism there is no risk of pay rising higher in a less constrained market.  On the contrary, if demand does not fall when pay exceeds the amateur threshold, then if left unconstrained, pay will rise to the full value.  In the process, that increase will have served as an economic demonstration that enforced amateurism had not been driving consumer interest in the sport.

 

 

Just as in the examples above, if payment rises for reasons driven by demand, rules designed to restrain that increase are almost certainly anti-competitive as a matter of economics.

 

Recall that the majority found the NCAA’s actual rule, which limited scholarships to what was then known as a Full Grant-in-Aid (GIA) (several thousand dollars below full COA)were “more restrictive than necessary” and thus violated the Sherman Act. The idea that (a) the next dollar beyond COA would destroy demand and that (b) schools would knowingly make that quantum leap remains an untested assumption. As the dissent in O’Bannon explained,

 

“After an extensive bench trial, the district court made a factual finding that payment of $5,000 in deferred compensation would not significantly reduce consumer demand for college sports. This finding was supported by extensive testimony from at least four expert witnesses. There was no evidence to the contrary.” 

 

However, purely arguendo, suppose the majority in the Ninth Circuit has unearthed some magical property of demand that applies to college sports and to no other market, which is that as long as consumers feel someone is minding the store to ensure “sanity” or “amateurism,” consumer demand is safe, but that if consumers feel some school is cheating, then the entire system will collapse. Surely then, one might ask whether the NCAA must step in to prevent schools from crossing that mystical line of demarcation, beyond which market collapse looms.

 

Though a demand curve like this sounds somewhat improbable, there are consumer markets in which bad apples can spoil the whole bunch. For example, consider the market for organic fruit, in which organic apples, which cost more to produce and may look somewhat less appealing on the shelf, are nevertheless in high demand by a segment of consumers, and where that demand will drop to close to zero if the apples are produced non-organically. In the absence of some form of market regulation, there is little to stop an unscrupulous apple orchard from using pesticides and other tools of the non-organic trade, but labeling the resulting product as “organic” simply to tap into the higher consumer demand that such a sticker can drive. Much like the market for used cars in which lemons drive out quality cars, cheaper faux-ganic fruit can drive out truly organic fruit and leave consumers worse off.  (Apologies for the fruit salad of mixed metaphors.).

 

Organic fruit can be thought of as a form of amateurism. That is, while it results in fruit that is not as aesthetically appealing as mainstream, commercially produced fruit—those same specific characteristics that make it organic are also essential to its consumer appeal. If the NCAA and the Ninth Circuit majority in O’Bannon are correct, amateurism is like this as well; when this demand feature is detached from the product itself, demand has (arguendo) the potential to drop to zero.

 

However, there is no need to ban commercially produced fruit to ensure organic fruit can survive. The solution is not to let all orchards collude to expel any non-organic producers, but rather to establish truth-in-labeling standards.

 

This distinction is illustrative for college sports because the concept that demand hinges on a magical line across which all demand perishes is similar. Almost certainly, the taste buds of organic-seeking consumers would not explode if non-organic food crossed their lips, but their demand function might collapse. And so, the legal remedy emerges by which standards are imposed, either by law or by voluntary associations of organic growers (playing a role much like that of the NCAA) to assure the public that the organic fruit on this side of the aisle truly merits the label “organic” while the fruit on side of the aisle, without such a sticker, may be cheaper, rosier, etc., but is not organic.

 

Under the Rule of Reason, if the organic standards solve an economic problem, such that without coordination, the organic fruit market might collapse, then this is the quintessence of pro-competitiveness. And to the casual observer, the NCAA might seem perfectly analogous to such an organization, voluntarily organizing producers of organic or “amateur” products to ensure consumers know what they are getting and to let them choose among options, secure in the knowledge that their amateur college sports are not really professional sports in disguise.

 

But this view is incorrect, because it ignores the NCAA’s (a) the insistence on a collective boycott by the NCAA of any college team that would deviate from the standard and mistakenly assumes that (b) amateur and college are perfect synonyms and that therefore college and professional are perfect antonyms.

 

THE NEED FOR STANDARDS IS NOT A NEED FOR BOYCOTTS

 

The organic fruit metaphor helps cut through the first issue quite cleanly. Organic fruit likely needs a body to inspect and certify the product as truly organic. It does not require a pledge that no supermarket that wishes to sell organic fruit also sells non-organic fruit.  It does not impose penalties on those orchards or orchard corporate parents that sell some organic and some non-organic fruit. And it does not prevent orchards that are organic from conducting business with those that are not. But the NCAA does prohibit the equivalent conduct, via its rules to expel a member from the association, to terminate all rights and privileges, and most egregiously, to mandate a collective boycott by all other members, even in a scrimmage or exhibition, of any school found in violation of those rules.

 

In the context of a certification organization, the loss of competition driven by the NCAA’s (and its member schools and conferences’) insistence on exclusivity becomes more apparent. Perhaps fans would relish more opportunities to watch a team of college athletes employed by their university play a team of college athletes meeting the existing amateurism rules (such as what happens annually when Army or Navy play Notre Dame), but the fact that the NCAA does not allow schools other than the military academies to pay their athletes as employees prohibits on-the-field and off-the-field competition between these two compensation models. As such, for the NCAA the plausible need for organic fruit certification has turned into an unnecessary ban on non-organic fruit.

 

COLLEGE AND PROFESSIONAL ARE NOT ANTONYMS

 

Thus enters the second source of error—the confusion between college and amateur. College sports would not vanish even if amateur college sports were somehow to do so. These terms are not inherently synonymous. It is easy to see that not all amateur sports are collegiate—any youth soccer league fits the bill.  It is less common to see paid collegiate sports, but this is because of rules in question and the NCAA’s grip over intercollegiate sports. In those rare cases where the NCAA does not govern, such as USA Cycling’s (USAC) Collegiate Racing, there is no prohibition on professional cyclists participating as long as they qualify as bona fide college students. USAC rules stipulate only a minimum level of funding and do not define or enforce any restriction on maximum compensation. The primary requirement is simply that the athlete actually be in college. In a 2011 paper, Schwarz explained that this actually creates four possible options, not the false dichotomy of college or professional:

 

 

The NCAA rules defining amateurism may be analogous to the idea of an organic fruit certifier, but when the NCAA enforces those rules with economic coercion, the analogy breaks down. If the industry needs a standard to define amateurism, and if consumers demand teams that meet that standard, then certification is sufficient to ensure their market demand is met.  Instead, the actual marketplace sees constant efforts by schools to push beyond those rules (which the NCAA tends to call “major infractions”) and sees little decrease in demand with each example. If consumer demand is truly a function of amateurism, then a rigorous standard setting and inspection regime, without the need for collective boycott, would suffice. If there were truly a demand for amateurism, then that consumer demand would be sufficient to prevent teams from making the “quantum leap” that destroys demand, and the promise of a rigorous certification and inspection (but not enforcement) would be all that is needed to ensure against market collapse.

 

A simple mental experiment makes this clear. Assume (arguendo) demand for Auburn football is, as the majority in the Ninth Circuit implicitly assumed, a function of Auburn refraining from crossing some magical line such as COA. Now assume the NCAA investigates allegations that Cecil Newton, father of Heisman Trophy winner Cam Newton, received payment in exchange for his son attending Auburn.   Under the truth-in-labeling assumptions, Auburn wants to maintain the label of amateur to tap into consumers’ demand for amateurism, but Auburn also wants to “cheat” by paying the elder Newton for the services of the younger to improve quality without seeming to cross the threshold of pay above COA. If the NCAA exposes the payment so that consumers are aware that Newton received more than COA, (and if the assumptions about the consumer benefits of amateurism were true) demand for the Auburn product would collapse, just as demand for faux-ganic fruit would collapse if the specific brands in question were publicly revealed to be phony. There is no need to fine or collectively boycott Auburn, because if the assumptions about demand were true, the market would punish Auburn once the NCAA revealed the truth. Instead, as many may have surmised, it is possible the revelation of Cecil Newton having profited off the sweat of Cam’s brow would have had little or no impact on demand for Auburn football.

 

In that case, if Alabama were to choose (on its own) that it no longer wished to play against Auburn, the antitrust laws would have little to say about such unilateral choices. On the other hand, neither would the law prohibit Alabama from continuing to play Auburn, even while maintaining amateurism or instead opting to adopt payments similar to Auburn. If it did adopt a higher pay level, Alabama would be reacting like a normal market participant, adopting additional expenses only because it felt it would please its fans and thereby grow revenue. But such broadening of consumer choice is made impossible by NCAA rules, which stifle that market choice and mandate that Alabama boycott Auburn or else face a collective boycott itself.

 

In both cases, then, what the law allows—collaboration among competitors to ensure a product can exist and thrive—and what the law prohibits—collusion above what is reasonable and necessary or which stifles rather than widens competition—are a better match to a system in which the NCAA maintains a standard definition of amateurism and conducts rigorous audits of schools believed to be violating those standards (as it does now) to certify compliance of those schools that wish to display the certified amateur sticker, but without any enforcement mechanism other than denying that certification to those schools that fail to meet the qualifications. That is, that the NCAA could continue to define the “molten core” of its product as it argued in the Ninth Circuit:

 

“This is the molten core of the rule. This says, this is a rule that simply says in the product that we have, athletes cannot be paid, and we define what pay constitutes.” 

 

What would be different would be that the NCAA would leave it to consumers to enforce that rule with their feet (by attending games played only by certified amateur teams) and their eyeballs (by watching games played only by certified amateur teams) rather than imposing punishments.

 

In such a system, consumers whose demand is truly driven by amateurism will not be fooled into purchasing “shamateur” college football, but those consumers for whom such arbitrary distinctions do not matter—much like those who are fine with apples grown with pesticides—are able to purchase college sports in a market in which restraints on payment (other than those self-enforced by demand) do not exist. In that market, a star athlete might be paid to stay one additional year in college rather than ride the pine in the NBA or NFL, but under NCAA rules, that choice, for schools and for consumers of those school’s sport products, is constrained.

 

There was a time during which the NCAA defined amateurism but had no enforcement power. From 1906 (when the NCAA was founded) until 1948, the NCAA frequently described the aspirational goal of amateurism as it was then defined (no scholarships at all) and left it to schools and conferences to enforce such a rule. Few schools and conferences did, yet college sports thrived. Rather than widening consumer choice, in the way that organic labeling rules do, the NCAA’s collective boycott perverts the idea of pro-competitive restraints by narrowing choice and stifling competition between compensation systems. If the market truly wants amateurism, certified amateur sports will sell themselves. If not, there is no economic justification to allow price- fixing to achieve such an outcome if the market outcome would be, as the majority in O’Bannon assumed, one in which athletes capture their full value.

 

EXERCISES FOR HOME STUDY:

Having read this, how does it make you feel about what you do for a living?  Are you good with it?  Here are a few mental exercises you can try to make sure you’re doing the right thing.
Is your commitment to amateurism philosophical or economic?

 

  • If you are truly committed to the concept of amateurism, even in a market where pay is allowed, you won’t feel tempted to make payments. Right?
    • On the other hand, if pay were allowed and you’d go along, your commitment to amateurism may not be as deep as you think.

 

The article explains that “Only an irrational or incompetent firm would take such steps” to pay players more if their fans will buy fewer tickets & watch fewer games as a result.

 

  • If you think your fans won’t like it if you pay your players, why would you ever pay your players even if you were allowed to?
    • On the other hand, if you think your fans will complain if you don’t pay your players if you start losing recruits to schools that do pay, maybe your fans don’t care about “amateurism” as much as you might initially think.

 

Do you think the current maximum GIA approximates the full market level of pay for your GIA athletes? If so, then why would lifting the maximum cap affect the price you pay for athletes?

 

  • On the other hand, if you think ending the cap on pay will drive up the cost of the athletes that you currently successfully recruit, then either (a) you would end up paying them more or (b) someone else would end up paying them more.
  • Either way, this means your athletes are underpaid right now.  Saying they get “enough” is not the same as saying they get their market value.

 

Are you knowingly over-paying recruited scholarship athletes in revenue sports? Are there recruited, full GIA athletes on your revenue teams you could have landed while offering a partial GIA, or would the competition have outbid you if you only offered a partial?

 

  • If you think that without a ceiling on what stars get, then other revenue-sport GIA athletes will get less, ask yourself why you offered those other athletes full GIAs today?
  • Was there extra money you had no other better use for?  Use-it-or-lose-it money for which you simply could find no better than turning a partial revenue GIA into a full GIA?
  • Alternatively, were you concerned that if you offered less than 100%, someone else might out-recruit you?
    • If not, why did you pay them more than the market demanded?
    • If so, won’t that competitor still be willing to pay the full GIA price even if your stars get paid more?  How will you land an athlete worth a full GIA just because you want to offer a partial?

 

Exceptions often are great because they help clarify the rules. One exception to the NCAA rule that athletes cannot be employees of their school is for the military academies, where all athletes are salaried employees of their schools (i.e., the Federal Government).

 

  • Why do consumers watch games between military academies or between one military academy and one state or private school, even though college athletes at the military academies are employees of the Federal Government?
    • Are you sure that if legitimate students were also employees at other schools, college sports would lose popularity?
    • Why is it okay under amateurism that athletes at military academies are guaranteed a job by their school-employer after their eligibility is up, but not for other schools?
    • Why wouldn’t any of these same arguments be true for a college athlete at a state school?

 

Extra Credit Introspection Question: If athletes earn more, will you earn less? Might that be influencing your belief in “amateurism”? If it is, are you really being all that principled?
If you’d like to read more, see the full version of Schwarz and Volante’s:

 

The Ninth Circuit Decision in O’Bannon and the Fallacy of Fragile Demand

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