Question

1. Explain how sports teams can prevent another league from entering the market using product differentiation based on location in the US.

Answer 1

One type of constraint that limits or eliminates monopoly power is demand substitutability - the alternatives available to buyers. These alternatives operate in the following manner: Suppose the company or group of companies being examined attempted to raise prices above competitive levels and earn excess profits. They could not profitably raise prices if buyers could readily substitute the products of other companies. A second type of constraint that can serve to constrain or eliminate monopoly power is supply substitutability - the ability of suppliers who do not currently make demand-substitutable products to enter quickly and make such products in the event of an attempt by the alleged monopolist to charge supranormal prices. Obviously, supply substitutability differs from ease of entry in degree rather than in kind. When defining a market and considering monopoly power, one must be careful in analyzing product differentiation and differences in quality. Markets which include products that differ in aspects other than price are called differentiated-product markets to highlight the fact that even though the products are not exactly the same, they still compete against each other for consumers' time and dollars. Prices in differentiated product markets say nothing about monopoly unless differences in quality levels have been accounted for. For example, suppose that a Chrysler Jeep Grand Cherokee costs'more than a Ford Explorer, but the Jeep has lots of features that the Ford is missing. If that is the case, then it would be a mistake to conclude on this basis that the higher price of the Jeep necessarily reflects monopoly power. The point here is that the ability to charge a high price can be the reward for producing a high-quality product that is attractive to consumers. This ability is not monopoly power. Monopoly power in an output market involves the ability to charge high prices without offering superior products. It involves the power to charge high prices by restricting output, not by offering what, in terms of enhanced quality, is a larger output than would be the case if a lower quality product were offered.

The product, NFL football is sold in two ways. It is sold to fans attending games in person (this includes the "gate" and other stadium revenues), and it is sold for exhibition on television. The latter sale is a very important one: In 1994, average media revenues were nearly twice that of gate and stadium revenues. 31 In both types of sale, the NFL competes with many other entertainment products. The products in this entertainment market are not all the same. Rather, they have different characteristics and quality levels. The market is a differentiated-product market. Consumers of NFL football have many ways to spend their leisure time; they do not have to watch an NFL football game. For instance, a television viewer may elect to watch professional basketball, hockey, baseball, or NCAA football or basketball or attend a concert, see a movie, etcetera. Attendees at games also have a variety of choices as to how to spend their time. Indeed, when NFL fans were asked what they did in their spare time, they indicated that they participate in a vast array of leisure activities. The NFL competes with these other forms of entertainment for the attention of consumers. The relevant output market must therefore be considered as the national market for entertainment products. The League competes in this market by offering its product, a season of NFL football, for live consumption and national media telecasts and radio broadcasts. The League has no monopoly power in this differentiated-product market, and must compete aggressively to be successful. The League's control of its product is critical for that product's success in the highly competitive output market in which it competes. That competition is especially strong in regard to television licensing. When considering issues involving the production and sale of television programming, it is important to recognize that the vast majority of television programming is advertiser-supported. This means that advertisers, not viewers are the buyers of television programming. Advertisers purchase time during NFL telecasts in an effort to reach customers who might be interested in buying their product. The value of NFL programming reflects its demographics, reach, and cachet value for advertisers. Advertisers choose to advertise on the NFL because they believe that viewers who see their advertisements on the NFL football programs may be convinced to buy their products.

While the NFL is good at attracting audiences with a significant amount of male viewers (particularly, those aged 18-49), many other television programs (including other sports programs, news and prime-time programming) also reach audiences with Similar demographics. Each of these programs competes with NFL telecasts for advertising revenues and constrains the NFL from being able to raise its price above the competitive level. Were the NFL to attempt to do so, its advertisers would stop purchasing NFL spots and would instead purchase advertising spots on these other programs.33 In the absence of monopoly power, there is no anticompetitive reason to restrict output. In any event, the NFL does not restrict output in this market. To the contrary, all NFL games are televised. Further, there is a history of product innovation, including, for example, the development of Monday Night Football or Sunday night cable packages, to raise product quality