Collusion Essay

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Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an agreement among firms to divide the market, set prices, or limit production. It can involve wage fixing, cut backs, or misrepresenting the relationship between the colluding parties. Collusion is largely illegal in the United States, Canada and most of the EU due to competition/antitrust law, but implicit collusion in the form of price leadership and tacit understandings still takes place. Tacit collusion occurs in an industry where cartels are illegal or overt collusion is absent. In this situation, two firms may agree to play a certain strategy without explicitly saying so. Oligopolists usually try not to engage in price cutting, excessive advertising or other forms of competition. Therefore, there may be unwritten rules of collusive behavior such as price leadership. A price leader will then emerge and sets the general industry price, with other firms following suit. (O’Hagen) In this essay, I aim to analyze a case in which tacit collusion has taken place, and investigate the relationship between collusion and economic theory.

I have chosen to investigate the National Football League, NFL, in America. The NFL consists of 32 teams and therefore 32 owners. The NFL has legal agreements in place with the NFL players association, which is like a trade union for all the players. Typically in professional sports, collusion refers to when two or more teams act together to deprive players of collectively bargained rights. The NFL and the NFLPA have agreed on anti-collusion laws in their collective bargaining agreement. Unlike footballers in this country, the NFL had a salary cap. The NFL's cap was a strict cap that the teams had to stay under at all times, with penalties for violating or circumventing the cap including fines of up to $5 million, cancellation of contracts and/or loss of draft picks. There was also a hard floor, which is the minimum payroll the teams must pay their players. Both the cap and the floor were adjusted annually based on the league's revenues, and they increased each year. (Howard Bartee) In 2009, the final capped year under the current agreement, the cap was $128 million per team, while the floor was 87.6% of the cap. Using the formula provided in the league's collective bargaining agreement, the floor in 2009 was $112.1 million. The salary floor percentage would have increased 1.2% per year until it reached 90% of the cap in 2011. (Howard Bloom)

However, at the end of the 2009 season, the owners of the NFL teams decided to back out of the collective bargaining agreement. This therefore meant that the salary cap was no longer valid. It is generally expected in this situation that with complete freedom, the billionaire owners would go head to head in competition to try and build teams with the best players together which would lead salaries being driven up. In this situation where all the teams are competing for the best players, the strategy would be to offer more money to a player than a competitor. In theory therefore, the average expenditure on salaries per team should have significantly increased for the 2010 season. However this was not the case, and instead it seemed that none of the 32 teams were offering large increases in the size of contracts to players. This is very much unusual in the sporting world and therefore suspicions of tacit collusion arose, and I will investigate what motives there could have been for this possible collusion.

The NFL is comprised of 32 owners who have control over the whole market. There is only one product, and there are no alternatives for the players of this specific sport. The owners can therefore act as a large oligopoly with very high barriers to...
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