What Are Collusion? Free Essay Example

Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an agreement among firms to divide the market, set prices, or limit production. It can involve wage fixing, cut backs, or misrepresenting the relationship between the colluding parties.

Collusion is largely illegal in the United States, Canada and most of the EU due to competition/antitrust law, but implicit collusion in the form of price leadership and tacit understandings still takes place.

Tacit collusion occurs in an industry where cartels are illegal or overt collusion is absent. In this situation, two firms may agree to play a certain strategy without explicitly saying so. Oligopolists usually try not to engage in price cutting, excessive advertising or other forms of competition. Therefore, there may be unwritten rules of collusive behavior such as price leadership.

A price leader will then emerge and sets the general industry price, with other firms following suit. (O’Hagen) In this essay, I aim to analyze a case in which tacit collusion has taken place, and investigate the relationship between collusion and economic theory. I have chosen to investigate the National Football League, NFL, in America. The NFL consists of 32 teams and therefore 32 owners. The NFL has legal agreements in place with the NFL players association, which is like a trade union for all the players.

Typically in professional sports, collusion refers to when two or more teams act together to deprive players of collectively bargained rights. The NFL and the NFLPA have agreed on anti-collusion laws in their collective bargaining agreement. Unlike footballers in this country, the NFL had a salary cap. The NFL’s cap was a strict cap that the teams had to stay under at all times, with penalties for violating or circumventing the cap including fines of up to $5 million, cancellation of contracts and/or loss of draft picks.

There was also a hard floor, which is the minimum payroll the teams must pay their players. Both the cap and the floor were adjusted annually based on the league’s revenues, and they increased each year. (Howard Bartee) In 2009, the final capped year under the current agreement, the cap was $128 million per team, while the floor was 87. 6% of the cap. Using the formula provided in the league’s collective bargaining agreement, the floor in 2009 was $112. 1 million. The salary floor percentage would have increased 1. 2% per year until it reached 90% of the cap in 2011. Howard Bloom) However, at the end of the 2009 season, the owners of the NFL teams decided to back out of the collective bargaining agreement. This therefore meant that the salary cap was no longer valid. It is generally expected in this situation that with complete freedom, the billionaire owners would go head to head in competition to try and build teams with the best players together which would lead salaries being driven up. In this situation where all the teams are competing for the best players, the strategy would be to offer more money to a player than a competitor.

In theory therefore, the average expenditure on salaries per team should have significantly increased for the 2010 season. However this was not the case, and instead it seemed that none of the 32 teams were offering large increases in the size of contracts to players. This is very much unusual in the sporting world and therefore suspicions of tacit collusion arose, and I will investigate what motives there could have been for this possible collusion. The NFL is comprised of 32 owners who have control over the whole market.

There is only one product, and there are no alternatives for the players of this specific sport. The owners can therefore act as a large oligopoly with very high barriers to entry. The owners benefit from perfect information and have a legitimate forum to meet without being accused of collusion. As the players have no substitute, the owners all benefit from reducing salaries, as they can keep a larger percentage of revenue for themselves. This is mutually more beneficial than allowing the market to naturally drive them towards perfect competition.

It pays off for the owners to therefore try to come to a gentlemen’s agreement to reduce wages after the collective agreement was withdrawn, rather than forcing up the amount each team spends on salaries. In this situation, the owners become the price setters. In European soccer for example, players have the choice of moving to various leagues all across Europe whereas there is only one major league in America. So even without the salary cap, the 32 owners managed to keep salaries low for the 2010 season. However, collusion in these circumstances is very difficult to prove.

The 32 owners have a legitimate forum to meet as well as having many intermediaries and sports agents to act on their behalf. There are also no formal legal agreements or contracts and hence no evidence of collusion. The owners also claim that the stagnation in salaries is naturally down to the state of the economy, which is in recession leading to NFL teams making more losses than usual. A problem is that the 32 NFL owners have been sometimes labeled as a billionaires club and they feel so powerful, that they do not fear punishment or fines if collusion is subsequently proved.

Collusion is illegal in the NFL, therefore this would non-cooperative. (Barry Wilner) As it is a tight nit group of 32 owners, no one is brave enough to go against what everyone else is doing and try to offer higher salaries, as they know that it would lead to high competition which would not benefit the owners in term of maximizing their profits. The figures at the end of the 2010 season showed however that NFL teams’ revenue had actually increased instead of falling like the owners had projected.

It also seemed too coincidental that all teams had started to offer lower terms together and the same time. These suspicions lead to the NFL players association launching a collusion claim against the NFL owners. In a similar sporting case in America, collusion has been an issue in Major League Baseball, for example, players and owners in that sport settled allegations of possible collusion against free agents after the 2008 and 2009 seasons. As part of the agreement, with no admission of guilt by the teams, some of baseball’s free-agency rules were changed.

In the 1980s, arbitrators found baseball teams acted in concert against free agents following the 1985, 1986 and 1987 seasons, and the sides agreed to a $280 million settlement — which took until 2005 to be completely distributed to the players following claims hearings. (Al Lackner) By simply making the accusations in court is a valuable bargaining ploy when the union and league head back to the table to discuss the next Collective Bargaining Agreement. Making the other side look greedier than yours is half the battle in the war for public relations. Jon Saraceno) As I have said above, it is extremely difficult to prove especially tacit collusion like this case. The NFL players association will have to provide real evidence of collusion between the NFL owners. The NFLPA will have to provide empirical evidence. Firstly, they spoke to sports agents in the industry to see if they had acted as intermediaries between owners to facilitate collusion. In addition, they got a hold of emails and letters of communication between the owners requesting salaries to be kept down.

Also the figures showed that revenue for NFL teams had actually increased in 2010, despite the owners claiming that losses were increasing due to the recession. Furthermore numerous owners made similar comments in relation to feeling that salaries needed to be kept down. For a collusion claim to be successful, the union would have to demonstrate by a clear dominance of the evidence that teams conspired improperly in violation of the collective bargaining agreement and a player or players suffered economic harm as a result.

The NFL owners of course deny the accusations of collusion. The NFL will argue that a reduction in spending does not necessarily equate to collusion. It will likely claim that innocent circumstances, such as teams deciding independently to not sign players or to not spend as much money given the recession and the lack of a new collective bargaining agreement, explain away whatever empirical evidence the NFLPA offers. In terms of questionable communications between league or team officials, the NFL will likely insist that any such communications are not specific.

They may also argue that such communications were not made by team personnel who have the authority to determine how much teams spend and how they spend it. (Gregg Rosenthal) The 32 owners are a very powerful group of people who have a low expectation of being punished, and do not fear any fines. This power allows them to threaten the players association with a lockout, which would suspend the NFL season from starting and prevent the players from getting paid. Having said this, it is likely that NFL players association faces a tough task in proving collusion.

In conclusion, it is extremely difficult to prove that collusion has taken place when there is no hard evidence of legal agreements between the parties. In the NFL case, suspicions arose from behavior, which was not expected from the owners. If left to normal market forces, the removal of the salary cap should have led to more competition, hence driving up the prices. However this did not occur and was enough of a coincidence for the players association to file a lawsuit for collusion.

But in cases like this where the group accused of collusion is so powerful, with large barriers to entry, it is more than likely that the case will be settled outside of the court room without either party having to admit guilt and resulting in a new collective bargaining agreement being signed. It also is possible that the players could vote to decertify the union, a tactic that could prevent a lockout and potentially expose the owners to a possible antitrust lawsuit by the players.

However this type of battle is unlikely due to the massive losses that both parties would have to go through just to prove collusion. This case is still ongoing in America, and a decision is expected this month. I decided to investigate it as it is very current, and involves a number of prominent billionaires and is a perfect example of how collusion comes in to play whether it is legal or not and whether it is proved to be coincidental or something more.