Lesson Background

A cartel is an explicit agreement among competing producers to control prices, marketing, or production in an industry. It may involve all of the producers or a large enough number of producers to control the market.

Perhaps the best-known example of a cartel is the Organization of Petroleum Exporting Countries (OPEC.) OPEC’s stated goal is to, “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.” Because its members are sovereign nations, OPEC is not subject to any laws prohibiting collusion or price fixing.

In the United States, certain sports organizations, such as the National Football League and Major League Baseball have been granted exemptions from anti-trust laws so that they can coordinate the competition among independent member teams. Labor unions and agricultural co-ops enjoy exemptions from some antitrust laws. Newspapers are allowed to join together for some operations such as printing. Cartel behaviors are allowed when the “collusion” provides some greater social good than limiting competition and price fixing.

In the case of the NCAA, the cartel “behaviors” have traditionally been justified by the assumed benefits to the schools. Given the growth of “big time” college sports and multi-million dollar programs, the question now asked is, “does the cartel behavior of the NCAA schools benefit those who are most critical to the sports, the student athletes?” The issue facing courts today is whether or not the athletes have the property rights to their skills, images, and income.

The lesson is about property rights, the legal ownership of resources, which include the right to own, use and sell them. Should student athletes have the property right to earn income for their skills, control the use of their images, and compete in a free labor market?

A class-action lawsuit filed in 2009 by former UCLA basketball star Ed O’Bannon, and now involving several other athletes, argues the NCAA and its partner organizations should compensate former student athletes for the use of their images and likenesses. O’Bannon claims that the NCAA has contracted to use his image from past basketball games without his permission or compensation. The trial is now set for July, 2014.

Key terms in this lesson:

Cartel: Organization of a few independent producers for the purpose of improving the profitability of the firms involved (see oligopoly). This usually involves some restriction of output, control of price, and allocation of market shares. Members of a cartel generally maintain their separate identities and financial independence while engaging in cooperative policies. (Source: Merriam-Webster Online Dictionary, http://www.merriam-webster.com/dictionary/cartel)

Property rights: Property rights refer to the legal ownership of resources, which include the right to own, use and sell them. Legal protection for the boundaries and possession of property. Assigning of property rights to individuals, collectives or governments depends on the economic system.

Human Capital: The health, education, experience, training, skills and values of people. Also known as human resources or labor resources.

NOTE: Unless otherwise cited, the definitions used in this lesson are from the Council for Economic Education’s Virtual Economics program. They are consistent with the National Voluntary Content Standards in Economics and the Ohio Academic Content Standards for Social Studies.

Lesson Objectives

The student will:

1. Define and describe the intended impact of a cartel on a market.

2. Define property rights as legal ownership of resources, which includes the right to own, use and sell them.

3. Identify the benefits and costs of protecting individual property rights.

Lesson Materials

Handout/Visual 1: Why It Matters: The Real Madness in MarchHandout/Visual 2: Metallica vs. the NCAA

Virtual Economics video, “Property Rights,” (13 min. 36 sec.) http://www.econedlink.org/interactives/index.php?iid=193

Lesson Preparation

Prepare a copy of Handout/Visual 1: Why it Matters: The Real Madness in March, for each student. Prepare to access and project the Virtual Economics video program, “Property Rights.”

Introduction

1. Tell the students that they will be taking a look at “property rights.” Ask them to generally talk about how important protection of their private property is to them. Tell them that to begin this lesson, they will watch a short video program about “property rights”. You will use the video to define “property rights.”

Procedures

2. Show Parts 1 and 2 of the Virtual Economics video “Property Rights.” Introduce the video by explaining that the examples of property rights in the video are the typical examples, ownership of productive resources, including intellectual property. One example is a Congressional Hearing with testimony from Lars Ulrich, co-founder of the heavy-metal band, “Metallica.” Do not show Part 3 of the video, yet.

Tell the students to listen carefully to the definition of “property rights” (part I) and Mr. Ulrich’s testimony (part II) to determine how his case is about property rights.

3. After watching the video, ask these questions:

a. Who claimed to own the property rights in question? [Metallica]

b. What property right was claimed? [The right to use copyrighted music.]

c. What was the claimed value of the property right? [$ millions]

d. Who violated the property right claim? [Napster and individuals who downloaded

music without the band’s permission.]

e. What resolution did the band want? [Stronger legal protection for those who own intellectual and other property rights.] Generally discuss the merits of Metallica’s property rights claim.

4. Show Part 3 of the video. Ask these questions:

a. What was the court ruling? [Napster violated Metallica’s property rights.]

b. What was Napster ordered to do? [Restrict downloading of copyrighted

materials.]

c. How did the lack of property rights in the Soviet Union contribute to its downfall? [Lack of property rights restricted innovation and investment.]

5. Distribute copies of or project Handout/Visual 1, Why It Matters: The Real Madness in March. Explain that the students will read an article with another interpretation of property rights, those of college athletes. The article by Dr. Julie Heath is about “March Madness,” not the NCAA basketball tournament, but another kind of madness.

In this case, define “madness” as a public policy and system that seems to benefit others more than those who are most affected by the policies. In this case, it is about the players in major college sports and their property rights.

Read the article as a group, one paragraph at a time. At the end of each paragraph, stop reading and have the students paraphrase the points in that paragraph. Encourage them to identify the connections to property rights.

6. Distribute copies of Handout/Visual 2: Metallica vs. the NCAA. The students should work in pairs to complete the handout comparing the Metallica property rights claim and the claims of college athletes to protect their property rights.

[The answers in the “Metallica” column should be similar to those discussed in step 3.

a. The heavy-metal band Metallica.

b. The rights to use copyrighted music.

c. $ millions

d. Napster and individuals who download music without the band’s permission.

e. Legal protection for those who own intellectual and other property rights.

[Answers for the “NCAA” column:

a. College athletes

b. Their athletic skills and their images.

c. $ millions

d. The NCAA and its member universities

e. The right to receive compensation for their athletic skills and images.]

7. Ask the students: What is the difference between the two property rights issues?

[The Metallica case is about intellectual property – the music Metallica created. The NCAA case is about the students’ skills and images – their human capital. You may have to introduce the concept of human capital as “the health, education, experience, training, skills and values of people. Also known as human resources of labor.”]

8. Ask the students: What are the similarities between the two situations?

[In both cases, the issue is the right to use or sell one’s property without unfair restriction or interference. Napster and the NCAA restricted the rights of Metallica and the athletes to fully benefit from their property.]

9. Ask the students: Do you think recorded music can be defined as property? [The courts have defined recorded music as intellectual property.]

Ask the students: Is a photograph or film of a basketball game property? [The students may disagree about this question.]

10. Broaden the discussion to the lager issue of property rights. Ask the students: What is the benefit of protecting property rights to the larger society and economy? [Protection of and enforcement against violations of property rights encourage investment and risk taking by entrepreneurs and businesses. The right to use and sell

one’s property provides security and economic stability.]

Ask the students: What might happen if individuals and firms are not allowed to control their own property? [Risk taking and private investment would decrease. Economic growth would slow. Why would someone risk a million dollars to create a new idea or product if others were allowed to copy the idea or product and produce it?]

Conclusion

Repeat or have the students reread this section from Handout/Visual 1.

The NCAA restricts competition in both the labor market (limiting the number and amount of scholarships given to student-athletes) and the output market by controlling revenue through media contracts, memorabilia, concessions and other outlets. These restrictions of competition amount to collusion (a cartel) and would be illegal in the United States in any other industry. In a competitive market, “workers” are paid according to the value of the output they produce. Given the millions of dollars generated by college athletes, if the NCAA did not impose restrictions, the competitive market would result in bidding for the best players with large scholarships and gifts. The NCAA regulations limiting scholarships for athletes ensure that universities, corporations--and the NCAA itself-- make the maximum profit possible.

Ask the students: Is the “cartel” behavior of the NCAA a greater benefit to the college sports system than the loss of the property rights of the student athletes?

[This may create a heated discussion among the students. Some will argue that the students are being treated unfairly. Others may argue that because they have signed contracts to play a sport and receive a (almost) free college education, they have voluntarily given-up their property rights.]

Conclude the discussion by asking: Are there situations when the government has the right to take private property? [Eminent domain for building roads, etc. Restricting potentially harmful actions by individuals – gun registration, licensing drivers, building codes, etc.]

Ask the students to generalize their conclusions about the importance of protecting property rights in a free society and economy.

Assessment

Assign your students to write a brief rationale for some situation where individual property rights should be restricted. What are the potential costs and benefits of this kind of policy?

Handout/Visual 1

The Real Madness in March

March Madness is upon us. The school pride, the underdog victories, the last-second, winning shots—it’s all here. What is also here is a lot of money being made by participating colleges and universities and their coaches. What is not here is any sharing of that windfall with the student-athletes who play the game.

The issue of whether to pay college athletes is an emotionally charged one, with strong opinions on both sides. It is also an economic issue. In the center of the issue are the NCAA (National Collegiate Athletic Association) and the role of competition.

The NCAA restricts competition in both the labor market (limiting the number and amount of scholarships given to student-athletes) and the output market by controlling revenue through media contracts, memorabilia, concessions and other outlets. These restrictions of competition amount to collusion (a cartel) and would be illegal in the United States in any other industry. In a competitive market, “workers” are paid according to the value of the output they produce. Given the millions of dollars generated by college athletes, if the NCAA did not impose restrictions, the competitive market would result in bidding for the best players with large scholarships and gifts. The NCAA regulations limiting scholarships for athletes ensure that universities, corporations--and the NCAA itself-- make the maximum profit possible.

The traditional argument for not paying student-athletes is two-fold. First, they are already getting paid in the form of the education they receive. Given the very big business that college football and basketball has become, a college education is not commensurate with the revenue these players generate for their universities or their coaches. Even after paying for coaches, the big-revenue football programs net between $40 and $80 million per year. In addition, according to a study by the National College Players Association and Drexel University, the all-expenses-paid scholarship doesn’t really cover all expenses. The average football or basketball player faces a shortfall of about $3,200 per year. Since only 1 percent of college basketball players get drafted by

the NBA and 2 percent of football players by the NFL, this represents a real expense for the others, particularly those who use up their eligibility before graduating.

The second argument for not paying student athletes is the belief that commercialism will spoil the integrity of the competition. College sports is already commercialized, with television revenue almost $2 billion per year and merchandise licensing revenue estimated to be $4.6 billion in 2012. Interestingly, the term, “student-athlete”, connoting this competitive purity, was coined in response to a worker’s compensation claim brought against a university after the death of a football player. If the athlete was thought to be an employee of the university, then the survivors would be eligible for compensation. The NCAA crafted the term, “student-athlete” to counter the basis of the claim. The courts agreed that the university was not in the football business, and it has stuck ever since.

The NCAA’s hold on college athletics is starting to crack. In 1984, the courts ruled it was guilty of restraint of trade in its television contracts with big football programs. The president of the NCAA is advocating for paying athletes a stipend to cover the expenses their scholarships do not. The move to a national playoff system in football could leave the NCAA out in the cold if enough football programs could coordinate it without NCAA assistance. If that happens, basketball is likely close behind. A pending lawsuit will determine if student-athletes have the right to control their own property—their likeness and signature, for example—after their college playing days are over.

The problems of coordination and control the NCAA is facing are typical of a cartel. It remains to be seen how the organization evolves to deal with the market’s push toward competition. The Olympics faced similar market pressures with similar emotional arguments around amateurism, but survived the transition to increased competition.

Ha

Handout/Visual 2

Metallica vs. the NCAA Question Metallica College Athletes

a. Who claimed to own the

property rights in

question?

b. What property right

was claimed?

c. What was the claimed

value of the property

right?

d. Who violated the

property right claim?

e. What resolution did the

claimer want?