The Idea Shop

Interesting class in intermediate microecon today where after singing along to a 60's song and dressing up in school colors for chocolate, the class talked about monopsonies (yes, not monopolies who control output, but monopsonies, who control input). Everybody hates monopolies, not just because of the income/luxury tax associated with it and not being able to pass Go, but also because it is socially inefficient. Why? Monopolies essentially attempt to maximize profits by reducing output so that they can raise outputs. Imagine a rectangle where one side is quantity sold and the other is (Price - the cost to make it) so profit. By selling one less good, these monopolies can jack up the price on all the other ones sold, thus maximizing profits. So basically, society loses when they do that since less people get the good and the ones who do are paying more for it.

But have you ever heard of monopsonies? Doubtful unless you're an econ major, but they are the evil twin of monopolies. Instead of reducing output to increase the prices of their output, monopsonies decrease the amount of an input they hire in order to lower the price. This is the law of supply and demand where if the supply stays the same and demand drops, then the price of that object drops. Let's say the world's sole hirer of people with a particular skill: we'll say computer gaming for this example, is the executive team of Ford. Now, if 100 people are professional computer gamers then, they would turn to Ford for employment. Let's say Ford hires all 100 and gives them the ridiculous salaries that they hand out: $3million/person/year. But now that they're bankrupt, they must get rid of some of these professional minesweepers and solitaire specialists, so they hire only 10 people. This makes 100 people compete for 10 jobs, which means that the workers will bid down the wages in order to get a job. This also causes social inefficiencies since the people who the company are hiring at $50,000/person/year now bring we'll say $200,000/person/year to the company. So the company is EXPLOITING these workers. In a competitive market, these employees would receive how much they are worth to the company, but in a monopsony, they can deliberately reduce the amount of inputs they take so that they can exploit the workers who they do hire. Who would do such a dastardly thing? Turns out it's your very own NCAA.

The NCAA started as a regulation method for college football, where some players were actually dying from playing each year. However, they not only revised the rules on how the game was to be played and how hard a coach could push his players...they also changed the payments that players could receive for their talents. Players like Patrick Ewing were supposed to have brought $5million to Georgia when he played there for college. What did he receive? A free tuition. The NCAA mandates that players cannot be paid to play, which means that these highly valuable resources for the schools are giving up all the profits that they bring to the school...to the NCAA and the school. Who actually gets the money? Ever noticed the high paychecks of the coaches? Millions of dollars are spent on coaches, why? Because if you get a coach who can attract the best talent when everybody is offering next to nothing in payments, then your school's profits are greatly increased. Essentially, the players' contributions to the team are transferred to the coach.

But, it is not yet completely fair for the NCAA to be smite for their barbarous economic schemes. Many sports programs fail to bring in enough revenue to support their continuation. One example is swimming, where the maintenance of the pool and team is probably higher than the quantity of admissions (a lot) multiplied by the price of admission (nothing). The excess profits that the football coaches don't take go into programs such as this and keep it alive. But is this enough to justify the monopsony of NCAA's? Or should these college players be paid for their efforts, just as any other worker is for their valuable time and labor? And of course the biggest question: is it fair that swimmers make nothing...that pool is cold!?