#52. The economics of football – a load of balls

Behind the scandals and the allegations swirling around the game of football, the real problem has been hardly discussed at all by commentators. At the heart of the problem is a basic matter of economics.

FIFA has a monopoly, and behaves much as monopolists usually do. The power and near-immunity from consequences of any cartel on this scale is such that the near-inevitability of abuse is hard-wired into the structure.

The axiom that “absolute power corrupts absolutely” is as true of economics as it is of government.

Much the same, unfortunately, is true of the national leagues, which function as price-fixing cartels, to the enormous detriment of the football-loving public.

In fact, elite football is a copybook example of how damaging monopoly can be, and why competition can alone protect the consumer. Though it seems unlikely that anti-competitive behaviour in football can or will be – err – tackled, the lesson which this teaches is applicable far more widely.

That lesson is that, whilst competition promotes the best interests of the consumer, monopoly and oligopoly do the opposite.

* * * * *

The football world has been shocked, though seemingly not altogether surprised, by the investigations into FIFA, the governing body of the global game. Whatever the outcome where FIFA is concerned, it is to be hoped – though, sadly, not expected – that regulators will take a closer look at how the professional game more generally is structured.

Unfortunately, historical timing makes it unlikely that Adam Smith (who was born in 1723 and died in 1790) was a football fan. Otherwise, since he was born in Kirkcaldy, he might have supported Raith Rovers, which was not in fact formed until 1883.

But Smith’s strictures on cartels have remarkable applicability to football today. One of his most famous observations is that “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

On another occasion, Smith referred specifically to butchers, bakers and brewers, pointing out that it is not through the benevolence of these tradesmen, but through competition, that the interests of consumers are protected.

To appreciate quite how true this is, just imagine if all the bakers in the country got together into a cartel to control the sale of bread. The result, beyond a doubt, would be “a conspiracy against the public”. Prices would be fixed at high levels, and quality standards would very probably deteriorate as well.

In Britain, we had something not too far from this with the Corn Laws (1815-46), implemented by a Parliament of landowners to fix the price of wheat. Today, thankfully, the authorities would not allow something quite this blatant and this damaging to happen.

FIFA, on the other hand, has a near-total monopoly of world football. Ultimately, the real problem with FIFA lies not in dubious practices, or in the behaviour of individuals, but in its status as a global football monopoly. There is only one FIFA, and only one World Cup. So, whether you are a supporter or an advertiser, it is – so to speak – “the only game in town”, and is priced, accordingly, in a monopolistic way. In the absence of genuine competition, of course, influence – however obtained – becomes far more important.

Just as serious, where customers are concerned, is the way in which national elite football leagues function as blatant cartels, and it seems unarguable that the consumer – in this case, the football fan – suffers gravely as a result.

* * * * *

In economic terms, the suppliers – that is, the football equivalents of Smith’s bakers, butchers and brewers – are the clubs. These clubs compete strenuously on the pitch, but as businesses they do not really compete at all. Instead, they are organised into leagues – which function as price-fixing cartels.

What ought to happen, if free market principles applied, is that each club would sell, independently, the television rights to its home matches, with sharing arrangements operating for the small number of games staged at neutral venues. The broadcasters could thus drive prices downwards by setting individual suppliers – clubs – against each other.

The cartelisation of football does not, unfortunately, stop there. The collective sale of broadcasting rights is restricted to two or at most three broadcasters, and rights to individual matches are sold as aggregates rather than separately.

Just imagine if the rights to each game were sold individually, and to at least two competing broadcasters – the cost of watching football would fall dramatically.

* * * * *

None of this is going to happen, of course. The football industry would be vehemently opposed to the injection of competition in this way, arguing that its revenues would collapse.

Indeed they would, because the whole point of a cartel is to fix prices at artificially high levels. Of course, the clubs’ costs would collapse as well, because wages and transfer fees are themselves inflated by the monopolistic fixing of football’s income at artificially high levels.

Spare a thought here for the spectator, be he or she watching from the terraces, on television at home, or in a bar or pub. Even if nothing can – or rather, will – be done to get the ordinary fan a better deal, we should never forget that anti-competitive structures, not individual behaviour, are the real source of the ills in the game.

In this respect, football is no different from other aspects of the economy.

Competition is the best friend of the consumer.

Monopoly is his worst enemy.

11 thoughts on “#52. The economics of football – a load of balls

  1. Probably the same arguments apply to Formula 1 racing? A sport which I love, but which I have watched live on only 2 occasions in my life … because the cost of a ticket is nigh unaffordable.

    Another piece of lateral thinking there Tim; thanks. Will share with my Facebook football fanatic friends!

    • Thanks, and do share it – I lose count of how many football fans I hear grumble about “too much money in the game”. Now you mention it, there are parallels with F1 – both are drenched in advertising and sponsorship.

  2. One thing I don’t understand is why we have a Minister of Sport. Why should the public pay for this? Why is sport put on such a pedestal? As somebody who lives in London, I had a small surcharge added to my council tax to help pay for the Olympic Games. What a cheek! I have no interest in sport and never visit sporting events, and probably that is the same for the majority of the public. Why should we have to subsidise the sports fans? I collect coins but nobody subsidises my hobbies or interests. So far as I am concerned, sport is just war by other means. Just look at the chauvinism it spawns.

  3. Earlier in the week the BBC covered a report from Deloite revealing that Premier League football clubs achieved record revenues and profits. Revenues soared by 29% and now exceeds the top divisions of Spain and Italy combined, and is greater than Germany’s top division.

    All of this was presented as ‘good’ news. My suspicion was that this was straight-forward ‘churnalism’ and a visit to the website of Deloite’s latest press release revealed this to be the case. Deloite’s presented the story as ‘good’ news and it seems that our leading public service broadcaster simply accepted the case without any further thought.

    Future revenue for the clubs is likely to be higher still and the Head of Deloite’s Sport Business Group was quoted as saying that the transformation of Premier League finances will fuel greater global investor demand in top flight clubs.

    I have to say that I take a very different view from the one promulgated by Deloite and repeated by the BBC.

    The stellar growth in revenue means that fans, in one way or another, are paying more money. That may be good for the clubs but surely is not good for the fans; and as we know a very large proportion of the income goes directly to the players in wages – a prime example of the economic phenomenon of a market where the winner takes all.

    Furthermore, if club profitability is increasing and global investors’ come-a-calling they will be taking ownership of more of the country’s income producing assets or entities. In the future more income will be leaving our shores, and at an increasing rate.

    In simple terms Premier League football is now a process for transferring wealth from the 99% to the 1%.

    At one level there is nothing inherently wrong here – it is an outcome of a market created by free agents through voluntary exchange – but as Tim points out the market is run effectively as a price-fixing cartel. Football fans obviously derive satisfaction from watching their team, which must either match or exceed the value of the money that they pay.

    Having said all of this, we need the media to probe, analyse and question; and to draw conclusions. Increasingly the national press seems to be an outlet for the views of the ruling elites and corporate vested interests.

    To be fair, journalists are good people that have been placed in an almost impossible situation – the failing is structural and systemic rather than individual. Regardless of where the fault lays, the consequences are very serious indeed.

    We truly are in desperate straits – the need for guard-dogs has never been greater, unfortunately the system means that too often all we get is parroting.

    • Very true. Part of the trouble is that the media treats sport as fun stuff, and has excellent sports journalists, but because of that it is not reported on by business or investigative journalists.

      You seem to be on side with my views about sports fans being the victims of monopolies (like FIFA) or cartels (like the elite leagues). You have read my take on this – I think it’s pretty straightforward, but I doubt if many (any?) media have even considered this point of view.

  4. I would like somebody to answer my point about why we need a Minister of Sport. What should be the relationship of the state to sport, and why? Should sport ever be subsidised?

    • If I can’t answer this – though I’ll try – I’ll tell you a story my father heard in the old (Communist) Czechoslovakia:

      #1. “I see we’ve appointed a new admiral. How crazy!!”
      #2. “Why is it crazy to appoint an admiral?”
      #1. “Because we don’t have a navy! we don’t even have a coast!! How can we have an admiral?”
      #2. “Why not? We have a minister of justice…….”

      The official line is probably that (1) sport should be encouraged as it is good for our health, etc, and (2) that our sports teams represent our nation, so are of concern to the state.

      But there are other answers, I suspect. Sport, like cultural activities, wants to be treated differently – and helped financially. Tourism is the same. Where I used to live, a lot of money was spent on promoting tourism even though we were already overrun with tourists. The tourist industry doesn’t want to spend on promoting itself, so expects the taxpayer to do it. We don’t similarly promote other industries – if we’re going to promote tourism, shouldn’t Shell and Tesco equally expect taxpayer money spent on “petrol promotion” or “retail promotion”? We could certainly promote bookshops, as being good for the nation, if we’re going to promote sport or tourism.

      Second, if the government gets involved in sport, it thinks it puts itself in touch with “ordinary” people like sports fans. They can wave the flag if our teams win.

      Third, events like London 2012 are seen as examples of “soft power”. Countries only talk about “soft power”, though, if they’re short of “hard power”.

      Finally, if the government doesn’t spend money on sport, how can officials get expenses-paid invitations to the FA Cup final, Wimbledon and tournaments in exotic places?

      Seriously, sport already has loads of hangers-on – the “blazer brigade” – so I don’t suppose a minister for sport does much harm.

      Really, though, sport should fall under the heading of consumer protection – i.e. getting a better deal for sports fans (aka customers) by tackling cartels.

    • Czechoslovakia? I was there in the 1980s. The sight of the navy patrolling the polders and machine-gunning the peasants trying to get out made it all worthwhile.

      The closest I come to sport is when I play tug-of-war with my sister’s dog or throw a ball for him to fetch. I like to see happy dogs, and at their level they are entitled to enjoy such simplistic activities. I have a low opinion of any humans who enjoy that sort of thing. If I were Minister for Sport, I would sabotage as many stadia as possible. The ensuing accidents would help to raise the nation’s average IQ ever so slightly. 🙂

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