The Economic Battlefield of the NBA Lockout

The following is a guest post by David Berri, a Professor of Economics at Southern Utah University. He is also the lead author of Stumbling on Wins, the general manager of the sports-economics blog Wages of Wins, and is a frequent contributor to the Freakonomics blog.

Monopsony vs. Monopoly: The Economic Battlefield of the NBA Lockout
By David Berri

With the NBA away, sports fans are looking for something to satisfy their need to watch teams strive for victory.  Well, why not take a look at the teams competing in the lockout?

Okay, maybe this is a contest only a sports economist could love. But while it may not appeal to everyone, the labor dispute is still best thought of as a contest between two teams. 

The first team is the NBA owners. The owners are the dominant buyer in the world market for elite basketball talent, so they have substantial monopsony power. In the other corner are the players, who are currently trying to disband their union. This union gave the players monopoly power in the sale of elite basketball talent (more specifically, in helping to determine the conditions under which individual players would sell their services). When a monopsony meets a monopoly on the economic battlefield, the outcome is determined by bargaining. And in that case, bargaining power – or what we call leverage – means everything.

At the onset of the lockout, the leverage was with the owners. This is primarily because the money made in basketball comes at different times for the owners and the players. The players are paid for the regular season, and receive regular paychecks throughout the season. So once regular season games are lost, the players start losing money.

The owners also lose money when games are not played. But the owners also make a significant chunk of their money after the regular season ends. When the regular season paychecks stop, the owners start making money on the playoffs. And that means the owners are not quite as bothered by games being cancelled at the beginning of the season. What matters most for the owners is having enough of the season so that the playoffs can be played.

So this past summer, the owners were willing to hold out for a better deal. The players were much more anxious to reach a deal before paychecks were lost forever. This gave the owners an advantage over the summer.

Given the disparity in bargaining power, we should not be surprised that the owners have “won.” The game’s not over yet, but given the final offers we have seen from both the players and the owners, we know that even if the owners accepted the players’ last offer, the owners would be doing better than they did after the last Collective Bargaining Agreement (an agreement the owners seemed quite happy to accept a few years ago).

Although the outcome seems determined, there’s still time on the clock. And the owners are looking to run up the score by increasing their margin of victory. To fully understand that move, we need to understand that the owners’ team consists of two players: large market teams and small market teams. No one disputes the notion that the large market teams – in places like Los Angeles, New York, and Chicago – are doing quite well. In contrast, teams located in places like Charlotte, Memphis, and Indianapolis are not doing as well. This had led the small market teams to ask for more money from somebody.

Such a move reminds one of a similar contest in baseball in 2002.  About ten years ago, Major League Baseball claimed most teams were losing money and that the players needed to make concessions in the name of competitive balance. Does that sound familiar?  Yes, it is the same argument we hear from NBA owners today.

Well, the owners in baseball didn’t get everything they asked for in 2002. What they did get was about a billion dollars moving from high-revenue teams (i.e. the Yankees) to low revenue teams (like the Pirates). Theoretically, this money was supposed to allow the Pirates to purchase better talent. In practice, this money didn’t seem to get spent on players, but it did allow the Pirates – one of the worst teams in professional sports in North America — to turn a profit. Regardless of how the Pirates spent the money, it is clear the 2002 labor dispute was not entirely a contest between the players and the owners. The most important combatants were the small market and large market teams.

Ten years later, the competitive balance in baseball hasn’t really changed. And the players in baseball are still not subject to a salary cap or a luxury tax which would prevent the Yankees from dramatically outspending everyone else in baseball. But with money flowing from New York to places like Pittsburgh, baseball now has labor peace.

One suspects the story in the NBA will eventually play out in the same fashion. Here is how I see the play-by-play so far:

  • The small market teams began by asking the big guys for more money
  • The large market teams told the little guys to ask the players for some money
  • The players – with limited bargaining power at the beginning of the season – have given up some money
  • The owners – led by the small market teams – want even more
  • The players have now indicated – through the willingness to pursue legal action – that the offer the small market teams prefer is not going to work. In other words, the players have indicated that they are willing to sacrifice the season – and the money-making playoffs – rather than accept the last offer from the owners. 

This last move by the players is designed to give them some leverage. And so that puts the ball back in the court of the large market teams. Will they step up and bail out the little guys, as the Yankees did back in 2002?  Or will the big guys insist the players transfer even more money to the small market teams?

In sum, this is a contest with three players. If the small market teams are satisfied – either by the large market teams or the players – we will get an NBA season and an era of labor peace. If the small market teams are not satisfied however, then we may be without an NBA season for quite a long time to come.

Let me close by noting that just as we saw in baseball, none of this is about the fans. Yes the owners in the NBA claim – just as baseball claimed 10 years ago – that this is all about competitive balance. Unfortunately, there is simply no evidence that competitive balance is changed dramatically by luxury taxes and salary caps. In other words, this deal is not going to be something that will transform the Charlotte Bobcats into title contenders (especially with Michael Jordan calling the shots in Charlotte).

Furthermore, after the final agreement is in place and the players start collecting less money, do not expect your ticket prices to go down. Ticket prices in sports are driven by demand. Martin Schmidt and I have published research that indicates that demand will not be impacted by this labor dispute, and so ticket prices probably will not be changed much going forward. In other words, regardless of how this contest is eventually decided, fans are just going to have to be happy watching pro basketball again.

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COMMENTS: 20


  1. Robert Kahn says:

    A friend of mine had pointed out that an interesting comparison can be made between the NBA and NFL disputes this year, though his comparison was not in quite the following language. The owners of many small teams in the NBA, as you say, do not make much money on the regular season games. This meant they could afford to cancel large parts of the season. However, pretty much all the owners of NFL teams do loose money if they cancel games. Therefore, with cancelling the season being an incredible commitment, the NFL lockout resolved before many of the games had been cancelled, and came to a [more] equitable resolution.

    This explains the way the offers played out, but one thing which I find interesting is – knowing that many NBA managers could make a credible commitment to cancelling games, why did the NBA players not fold earlier? Were they counting on the profitable team managers?

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    • Saru says:

      Or maybe because the NFL was more equitable to begin with, and thus no need to the small market teams to demand more money. Being stuck in Green Bay hasn’t hurt the Packers this year.

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      • John B says:

        Hidden due to low comment rating. Click here to see.

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  2. james says:

    As I understand it, players receive a set percentage of BRI, and some money is held back throughout the season in case BRI is lower than projected, which is usually, but not always the case. If BRI is higher, players get more, and lower, players get less, based on the actual income. Given that, I’m curious why NBA owners would benefit more from playoffs than the players, while the players benefit more from a regular season. I get the missed paychecks, but wouldn’t player salaries equal the agreed upon percentage of BRI, regardless of how many games are played?

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    • Chris W says:

      In the playoffs, teams have a greater profit margin because their revenue increases (more attendance, better TV ratings) while their expenses (staffing for the arena, player cut of the BRI) essentially remains the same as as a regular season game. I’m pretty sure the local TV money isn’t shared (with non-playoff teams), which gives a further financial incentive for teams to win.

      Interestingly, some teams are willing to operate at a loss during the regular season, because they will recoup that money in the playoffs. More risk (higher payroll) = more reward (deeper in the playoffs).

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      • james says:

        Appreciate the response, Chris, but I don’t think this quite gets at my question. From what I’ve seen, BRI for the league as a whole is roughly $4 billion. Let’s say $3 billion of that is regular season revenue, and $1 billion is playoff revenue.

        Under that scenario, the 30 teams average $100 million in revenue, while the 16 playoff teams each get an additional $60 million. Under the current proposal, the players would get $2 billion, or about $66 million per team. For the teams that make the playoffs, that’s obviously a great boon, but for the other 14 teams, it doesn’t help them at all, and overall, the player salaries are determined with the playoff revenue included.

        The fight here by the owners is being led largely by teams that don’t make the playoffs, so its hard for me to see how the owners gain any leverage by playing playoff games and not regular season games.

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  3. Brock Swanson says:

    I’ve seen a lot of economist talk about “competitive balance” and whether a cap would actually increase it in the NBA. Here’s what I think.

    1. The empirical studies in this area are incredibly messy. The number of factors involved, the complexity of the systems and “caps” involved, and the incredibly small sample sizes produce conclusions of questionable, at best, value. Disagree if you want, but keep reading and then see whether you still care what those studies may or may not have found at the end.

    2. Some studies have attempted to quantify the magnitude of the effect spending has on winning and concluded that it is relatively small in comparison to other factors. But there is only 1 winner in the NBA every year and 29 losers. And it doesn’t take any in-depth analysis to know that the difference between the winner and a number of the losers is razor thin. When it comes to being that one winner, every marginal advantage matters. Take last year’s finals matchup as an anecdotal example. Both Miami and Dallas were very successful at all those factors everyone argues are more important than spending, like drafting, free agency, etc. But Dallas got to spend 20 million dollars more than Miami because of the cap system in place. Do you think Miami would have had a better chance at winning if they had an additional 20 million to spend or aquire players?

    3. Rather than get bogged down in the messy empirical studies, I think it’s more useful to look at the basic theory, which is actually really easy to understand in this context. Take the game of Monopoly. Everyone starts with the same amount of money. If the banker handed out significantly more money to one of the players, or one of the players could bring some money from his Monopoly set at home, that player would have an advantage. Would that player be guaranteed to win? No. The decisions the players make and a huge chunk of luck play significant roles in the outcome of the game. But that player indisputably has a greater chance to win than he would without the extra money. That doesn’t seem fair right? Can everyone agree on that? While you might want to be the player with more money, no one wants to play against that guy. And more importantly, if Monopoly were a spectator sport, wouldn’t you rather watch a game where everyone started off equal and it was their ability at playing Monopoly and the roll of the die that determined the game rather than one where some of the players started off with a significant advantage? To take the money out of the picture and put everyone on a level playing field, you have to share the initial money from the bank equally and cap the spending to the money from this Monopoly set.

    4. That’s it.

    5. So let’s apply that to the NBA. The easiest way to make sure everyone has the same pile of money would be to pool all revenue and costs and share the difference equally between the teams and to cap spending on players to that amount. In practice, you might not have to enforce a cap because teams are reluctant, to put it mildly, to operate at a loss. But to ensure a fair system, it would have to be there, or some rogue billionaire (Prokhorov?) could still bring his own Monopoly money from home, and that doesn’t seem fair, does it?

    6. The problem with that system? It dramatically reduces the incentive for teams to minimize their individual costs and maximize their revenues, because they will only see 1/30th of any gain. This hurts everyone in the system.

    7. The best solution, in my opinion, seems to be to share a substantial amount of revenues and set a cap above the shared revenues minus costs, but not so far that any of the teams, if well-managed, couldn’t reach it with the addition of their own revenues.

    8. Has this little exercise convinced you that both revenue sharing and a cap are necessary to ensure a fair system in a game setting? Pretty simple right? Where have I gone wrong?

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    • ChrisB says:

      Brock,
      there are several places where your argument doesn’t sound right:
      - The data actually isn’t small: the world is a big place and there are lots of countries with professional sports leagues. You will hardly ever find caps and revenue sharing.
      - Your Monopoly example doesn’t fit for several reasons. For the players (with in sports would be the owners): Monopoly is a zero-sum game where one player wins and all others go broke, so starting positions matter. In sports, not even everybody’s goals are the same – even in teams with a loss, the owner might be in it for the ego boost anyway.
      - Even if in your Monopoly example spectators preferred a level playing field (which I doubt), in the real world people could care less. The misconception is that sports are about fairness. They aren’t – they are about entertainment and giving people a good story to watch. Sure there are people who like games of pure skill; but the masses prefer drama and excitement and David vs. Goliath “miracles” – or having their favorite Goliath beat David to pulp. Again, just look at the data all over the world – there are always clubs who spend a lot more than the rest, without detriment to fan numbers. If fairness and pure skill were really so important to fans, Chess would be one of the most popular spectators sports – it is a game of pure skill, it is easy to televise, the rules are a lot easier to understand than of any American team sport, and you can have it in any lenght of matches with lots of commercial breaks… ;-)

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      • Brock Swanson says:

        Hi ChrisB, thanks for the response.
        -I am not trying to argue that fairness is the end all be all. There are a lot of factors that contribute to the appeal of a sport for spectators. While chess may have fairness, it doesn’t have much else that spectators want to watch. But I think it goes too far to say that fairness doesn’t play a significant role. To take it to an extreme, if the teams in NY and LA got an extra point every time they scored a basket, I think it would make the game less appealing to spectators. As the possibility that David is going to beat Goliath becomes smaller, the game loses some appeal.
        -The fact that hardly any sports leagues have caps and revenue sharing is exactly my point; there is little data about what the effects of those provisions would be. Even those leagues that have some sort of cap, like the NFL, have so many exceptions (like renegotiated contracts and prorated signing bonuses) that it is hard to capture any effect. So it seems ridiculous to me to claim that the empirical studies can show that caps have no or little effect on competitive balance. The fact that few leagues have caps and revenue sharing doesn’t say anything one way or the other about their effect if they were implemented. Most leagues don’t have caps and revenue sharing and also don’t have much competitive balance. Perhaps the point you are making is that competitive balance is not a worthwhile goal. That is a whole different conversation. On that point, all I can do is say, anecdotally, that the most popular professional sports league in America, the NFL, is also the one with the most competitive balance. I’m merely trying to address the claim that caps don’t affect competitive balance. The empirical studies can’t show that. The theory indicates that they would.
        -As for the owners’ motivations, while certainly varied and complex, a primary motivation for American owners is to win the game. I think there is this myth of the owner who could care less about winning. But, outside of an anecdotal example or two, I don’t think the evidence supports it. Take the baseball example mentioned in the article, where the author seems to suggest that the Pirates took their revenue sharing to the bank rather than use it to improve the team. That claim seems to be largely refuted by the evidence. All of the MLB teams but one (not the Pirates) spent more than 80% of their revenue after revenue sharing on baseball operations. As a percentage of revenue, spending fell within a rather narrow band regardless of the teams total revenue number. The Yankees and the Royals both spent 94% of revenues on baseball operations. Revenue was the driving force behind spending, not the “greedyness” of any individual owner. They were all playing to win (while not taking a financial loss, only a very few teams were willing to operate at a loss, even short term).
        http://sportsillustrated.cnn.com/2010/writers/joe_posnanski/04/19/baseball.revenue/index.html
        And if they are not seeking to maximize profit, most all of the side benefits of owning a team are significantly greater if the teams wins, particularly if it wins a championship. You don’t get to wear that big, diamond encrusted ring to your cocktail party unless you win the championship. And winning a championship is the best way to get the voters to subsidize that new stadium.
        Simply put, American sports team owners are best viewed as sportsmen, not profit maximizers. A lot of European team owners may not be sportsmen, but the American ones generally are. That’s what I think gives the Monopoly example some weight.
        See this article for some discussion of this stuff:
        http://www.vanderbilt.edu/econ/faculty/Vrooman/vrooman-rio-sports-special.pdf

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      • ChrisB says:

        Yes, my point was that (because professional sports is part of the entertainment industry) competitive balance is only important as far as its lack lessens spectators’ enjoyment of the game. Football (the real kind, not the American one), has very little competitive balance and arguably more fans worldwide than any other sport. I can think of at least one sport (think of two wheels and pedaling ;-) ) that was more or less openly rigged and very few fans cared…

        Beyond that I find the American franchise system somewhat silly, but that is just personal preference since I come from the European multi-league systems with promotions and relegations. Come to think of it, having the 30 NBA teams in two tiered leagues might actually get rid of some of the balance problems…

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    • BrianJ says:

      Hi, Brock

      Have you considered that “competitive balance” is not automatically a function of revenue, and that maybe a cap isn’t the way to achieve it?

      I wonder if you’ve seen this and what you think about it:

      http://espn.go.com/blog/truehoop/post/_/id/32841/the-payroll-and-competitive-balance-myth

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      • Brock Swanson says:

        Hi BrianJ,
        That’s exactly what I’m talking about in my first point.
        I can’t really say anything about the findings without seeing the actual analysis, but I have doubts about the ability to draw the conclusion that caps and revenue sharing don’t matter much from the data available for a couple of reasons.
        First, the data set is really small, only 30 teams in the NBA, and all kinds of problems if you are going to try and lump multiple years together to try and get a bigger data set, which still wouldn’t be that big. I’d be surprised if there is enough data out there to reach robust results of any kind. So I’m not surprised that you can’t statistically significant differences between leagues before and after various cap like things, nearly all of which are fraught with so many exceptions that they aren’t really the kind of cap I am talking about.
        Second, nevertheless, all those cap like things and revenue sharing might be having some effect. For example, Chicago only spent 55 million last year because it was prohibited from spending any more. For comparison’s sake, the economist referred to in the article you cited, Andrew Zimbalist, found that variance in payroll accounted for 7 percent of variance in win percentage in basketball, but accounted for 15-30% in the much less capped baseball, http://online.wsj.com/article/SB10001424052748703683804574534021373434110.html
        I’d guess that number would be even higher if we looked at European football teams, who often have no cap or revenue sharing.
        That superficially might suggest that the capping measures already in place are making a significant difference and that further capping would as well.
        Third, I can’t even begin to guess how things like the multi-tiered cap system, draft salary scales, maximum salary cap, and nature of the cap exceptions (particularly the Bird, which favors drafting rather than signing players) screws with the results, but I can’t kick the feeling that it does.

        But I think ultimately my disagreement comes down to a difference in the perception of what the marginal advantages conveyed by an additional ability to spend are. Those articles and Andrew Zimbalist (who was employed by the Player’s Union) say, 6 or 7%, that’s tiny. But even assuming the 6 or 7 % numbers are right, that seems like a huge advantage to me because the marginal differences between teams is so small. 1 win, let alone 5 or 6, over an 82-games-plus-playoffs season is often the difference between winning a championship or not, getting home court advantage or not, making the playoffs or not.

        And finally, maybe I’m just getting caught up in a distinction between competitive balance and fairness. A more fair system should tend to support competitive balance, but it certainly doesn’t guarantee it. I’m for a fair system even if it doesn’t. To me, competitive balance in terms of actual outcomes isn’t the goal. If LA just happens to be consistently better managed and wins every year, then so be it. I just want a level-as-we-can-make-it playing field. Not absolute equality, but equality of opportunity. Isn’t that what America is all about?

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      • BrianJ says:

        Hey, Brock

        Sorry I took so long to get back, but I wanted to digest your comment (along with my Thanksgiving food) before answering. What jumps out at me is the following:

        “First, the data set is really small, only 30 teams in the NBA . . .”

        It seems to me that the data set is actually very large, i.e., 100% of the teams in the NBA. I’m no statistician, but it seems to me that a sample size incorporating all the teams in the league about which we’re discussing ought to be sufficient to draw conclusions about that same league.

        Per the link, the list of teams that spend the most is not close to the list of teams that win the most. The winners list most closely mirrors the list of teams that draft well.

        (I think most of us define “winners” as teams that win significantly more games than they lose and periodically have a potential of winning the league–the 29 teams which aren’t NBA champions in a given year are not necessarily “losers.”)

        Winners are far more reflective of good management (including drafting) than big spending. At the risk of making a cheap point, I’d suggest that the L.A. Clippers have the same advantages as the Lakers relative to market and revenue potential. Clearly, there’s got to be another difference–crummy management (as reflected by poor drafting). In a scenario where every team were limited to a fixed spending amount, you’d still have bad teams with worse management, and I suspect they’d be the same ones we have now.

        As an NBA fan, this is certainly consistent with my unscientific observation over the years.

        Anyway, I suppose it’s a moot point now, as it looks like they’re going back to work.

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  4. Horatio says:

    I did learn a new word reading your article. Monopsony. Thanks!

    Here is my question, how does any of this play out enough for an individual player to drive them to care?

    If player X is a super star like say Dirk Nowitzki, how is his salary impacted by a 51-49 split vs a 50-50? I could see it affecting the lower tier players similar to the salary cap in football. But how many of them are there and how much clout do they have in the negotiation? In addition a number of players are in their final years. I assume current contracts remain valid. Why would they care about that small difference since it is unlikely they would negotiate a new contract before retirement gets them.

    A super star is missing a great deal of money now by not playing. I don’t see how they get that back under any proposal on the books. Where is their incentive?

    Just some things that puzzle me about the entire process.

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  5. Adam says:

    Boring article. I wish an economist would write about the actual economics of the dispute. For instance, why are a group of 400+ players stuck on the issue of tax paying teams being able to offer larger exception contracts that will benefit only a handful of players and hurt everyone else with the resulting escrow reductions? Is it because agents are really the ones driving this and they get paid on the stated contract values with no escrow modifications? Is it because players don’t understand the algebra of raising one salary when total compensation is fixed at 50%?

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    • bigjeff5 says:

      I think you missed the part where it’s the NBA owners driving the lockout, not the players.

      The owners want the players to pay less money, the players don’t want to pay less.

      The owners have significant leverage over the players, but it weakens as the lockout deepens into the season.

      The players have been forced to give major concessions – about 12% of their salary in fact.

      The most influential players (i.e. the super-stars) want to disband the player’s union so they can negotiate more favorable individual contracts for themselves and get that 12% back, and probably more for the biggest stars. It is not yet clear whether they will be successful, but again their negotiating power grows as the lockout continues.

      What part of this is difficult to understand?

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  6. Jimmie Guymon says:

    Can you please let me know how much an average paid player in the NBA will lose if they take a 50/50 split.

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    • College Wolf says:

      Going from 57% to 50% of BRI will cost each player approximately 12% of their salary for the upcoming season(s).

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  7. College Wolf says:

    Good stuff, thank you.

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  8. Nate says:

    Thanks for this article. Really put this whole thing in a new perspective for me.

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