Monitoring cartel behavior and stability: evidence from NCAA football.

• Author: Humphreys, Brad R.
• Position: National Collegiate Athletic Association

1. Introduction and Motivation

   Many economists view the intercollegiate athletic programs that make up the National Collegiate Athletic Association (NCAA) as a cartel. If the cartel model of industry behavior applies to NCAA members, then this setting represents a unique opportunity to test economic theories of cartel behavior because the NCAA has operated for over 100 years, and a considerable amount of data about member organizations exist for much of this period. Very few other examples of cartel behavior can be found in such a visible setting. (1)

   In this paper, we develop a model of the behavior of members of the NCAA football cartel under incomplete information and reaction lags. This paper extends the research of Fleisher et al. (1988) and Fleisher, Goff, and Tollison (1992) on the enforcement of the NCAA football cartel to explicitly include the dynamic aspect of monitoring behavior among cartel members both in the model and in the empirical work. The model permits analysis of the enforcement mechanism when signals about rivals' behavior contain a random component and are observed with a lag. This dynamic stochastic approach has not been applied to the NCAA football cartel in previous research. Empirical estimation of this model reveals that past on-field performance is significantly linked to enforcement of the cartel agreement.

   The incentive for individual members to cheat on a cartel agreement represents the basic problem faced by any cartel. In the case of the NCAA, reducing competition for inputs, in this case student-athletes, by controlling input prices, constitutes a key component of the cartel agreement. According to NCAA regulations, each prospective student-athlete can be offered an identical compensation package from each institution, the "full-ride" grant-in-aid package consisting of tuition and fees, room and board, books, and a small stipend, often called "laundry money." In addition, the number of football scholarships that institutions can provide is currently limited to 85; from 1977 to 1992 the limit was 95 scholarships. Requiring each institution to offer recruits the same compensation package and limiting the number of scholarships clearly restricts competition in the input market. Absent this restriction, institutions could offer highly regarded recruits other inducements to attend an institution; in a competitive market, each student-athlete would be offered up to the expected value of his value of marginal product by institutions.

   Cartel implications in the output market in college football have also been empirically investigated. Most of this research has focused on the distribution of wins in college football, in the context of competitive balance. Eckard (1998) found that NCAA enforcement of the cartel agreement improved competitive balance in five out of seven Division I football conferences. Depken and Wilson (2004) found that institutional changes in the NCAA related to enforcement of the cartel agreement offset a secular decrease in competitive balance in Division I football. Depken and Wilson (2006), in a closely related paper, investigated the effects of enforcement of the NCAA cartel agreement on competitive balance in college football. Depken and Wilson (2006) find that the greater the level of enforcement in a conference, the better the competitive balance, but the more severe the punishment, the worse the competitive balance. This research suggests that cartel enforcement has an effect on output and underscores the importance of understanding the monitoring process in the NCAA football cartel.

   As in any cartel, the payoff to an individual school for cheating on the agreement can be considerable. By attracting star-quality athletes, institutions can improve their performance on the playing field and draw more fans, make more appearances on television, increase opportunities for merchandise licensing and corporate sponsorship, and make lucrative postseason appearances, all of which increase revenues directly and indirectly by increasing the prestige of the institution. Brown (1993) estimates the marginal revenue product of a premium college football player to be over $500,000 annually. NCAA regulations restrict the effective player wage to an amount considerably below this marginal revenue product estimate.

   In the NCAA, the incentive to cheat on the cartel agreement also extends to coaches. Relatively successful coaches earn more than unsuccessful coaches in all NCAA-sponsored sports, even in non-revenue-generating sports such as women's basketball (Humphreys 2000); this is in part because of the ability of coaches to extract rents from teams. Higher winning percentages also signal higher quality coaching ability and raise coaches' opportunity wage in the labor market.

   Monitoring all institutions' actions in the input market would be prohibitively expensive. Thousands of high school seniors are recruited by NCAA member institutions each year. Each NCAA institution has thousands of alumni, many of whom are interested in promoting the athletic success of the institution and are organized into well-financed athletic booster clubs. To avoid these high monitoring costs, cartels typically turn to indirect and probabilistic methods to detect cheating on the cartel agreement (Stigler 1964). Fleisher et al. (1988) and Fleisher, Goff, and Tollison (1992) posit that NCAA member institutions and the NCAA Committee on Infractions, the body charged with enforcing the NCAA recruiting regulations, monitor outputs (on-field performance) rather than inputs to determine if an institution has cheated on the cartel agreement. Further, because the staff of the NCAA Committee on Infractions is relatively small (in 1988 it consisted of 28 employees), much of the monitoring must be done by individual institutions.

   Monitoring of the cartel agreement creates a rich environment for strategic interaction among the members of the NCAA cartel and provides an interesting setting for the analysis of cartel behavior. Consider two possible scenarios: A perennial .500 team begins to consistently attract high-quality recruits and enjoys several years of winning records, conference championships, etc. This team's rivals infer that the school has been violating the cartel agreement by offering cash payments to recruits in exchange for enrolling. The rivals request an investigation by the NCAA Committee on Infractions into the school's recruiting practices. As a second example, consider two institutions that are both violating the cartel agreement by bidding for the services of an athlete. The loser knows it was outbid by the other school and can turn in its rival to the NCAA.

   The NCAA Committee on Infractions can impose severe penalties on institutions found to be cheating on the cartel agreement. These penalties include bans on television and postseason appearances, reductions in the number of scholarships that could be offered, and even the "death penalty," a complete shutdown of an athletic program. The "death penalty" is not imposed frequently but it was imposed on Southern Methodist University in the mid-1980s. All of these penalties carry potentially large economic consequences, given the average size of the payment for an appearance on television or in a bowl game. (2)

   Evidence exists suggesting that sanctions imposed for violations of recruiting rules are used to enforce the NCAA cartel agreement. Fleisher et al. (1988) and Fleisher, Goff, and Tollison (1992) studied 85 big-time football programs over the period 1953-1983 and found that the probability of a school receiving sanctions to be positively correlated with the variability of an institution's on-field performance in football. However, these studies did not examine the dynamic interaction among NCAA member institutions.

2. Model

   We adapt the model developed by Spence (1978) to examine the effects of imperfect information on tacit coordination in the NCAA football cartel. The principal proposition of this model is that randomness and imperfect monitoring interact to make collusion difficult. We believe this setting offers an appropriate framework within which to develop our model because it focuses on the detection of cheating on the cartel agreement. We analyze monitoring of the enforcement mechanism in a cartel, not the collusive and competitive strategies played by member schools. Models in which noisy signals serve as triggers for cartel members to play both monopolistic and Cournot strategies at certain points in time--for example, Green and Porter (1984)--focus on the equilibrium strategies. The model developed by Spence (1978) focuses on monitoring the cartel agreement, detection of cheating, and sustainability.

   The NCAA cartel members play a game in which each school must choose the level of commitment to athletic and nonathletic activity in each period. School i's commitment to athletics is denoted by [[theta].sub.i] and commitment to nonathletic activities is denoted by [x.sub.i]. Although [[theta].sub.i] can be interpreted in several ways, we find it natural to think of commitment to athletics as representing the quality of athletic programs or the prestige generated by high-quality athletic programs. Schools can increase [[theta].sub.i] with investment in time, money, and cheating. Returns from successful football programs could be revenue from ticket sales, television contracts, postseason bowl game appearances, licensed merchandize sales, increased donations from alumni, and for public institutions, increased state appropriations. (3)

   Cartels are difficult to sustain because there are incentives to cheat on the cartel agreement. If members could directly observe their competitors' behavior, then detecting cheating and enforcing the cartel agreement would be relatively easy. However, schools have imperfect information to the extent that they cannot directly or immediately monitor each other's strategies. In...