The European Super League — The Economics of Super Normal Profits
Boris Johnson labelled the proposed breakaway of the European Super League an attempt to form a ‘cartel’. Unlike some European countries, Cartels in Britain have always had a bad name and for decades laws have existed to prescribe them. A cartel is a formal arrangement between a few large firms to control competition in a market, by fixing prices or output, a policy usually seen as acting negatively upon the consumer. It is easy to see how the proposed Super League corresponds to the tactics of the cartel — an organisation among a few large clubs to control competition in football with a view to making more money. And the fans — the consumers — don’t like it!
The economics of collusion are well understood by economists. The basic argument is that unrestricted competition among firms leads to a tendency to produce more of a product, with the result that prices and profits are reduced. We see this in regular football, where there is, from an economic point of view, a large supply of football with the result that many teams play many matches each year and the profitability of these teams is mainly low — so low that most barely break even. Many function at a loss and require infusions of money from outside investors. In this situation there is an obvious temptation for teams to cooperate and work together in some way to set prices or output. If they do this then they can maximise the profits for the industry and so each team can be better off than if each individual team competes with the others. Such collusion is generally impossible when there are many rival firms. But in the case of football, while there are indeed many competing teams, there are also a few big clubs that dominate the game, win most of the trophies, and have the most money. Where a few big companies dominate a market we call that market an OLIGOPOLY and this is evidenced in the graphic below.
For the oligopoly teams like Liverpool, Tottenham, Manchester United and Arsenal, there are great gains to be had from collusion. This is shown in the following diagram where the total demand curve for football is the downward sloping AR line — the greater the amount of football produced the lower the price that can be charged for TV rights, tickets etc. Since to sell more football the average price of football (Average Revenue) must fall the extra revenue generated by a bit more football — the Marginal Revenue — also falls and is below the AR line. When more football is supplied the price of all tickets etc must fall and this loss of revenue must be subtracted from the additional revenue of, say, an extra match. To keep things simple we assume that there are constant returns to scale in the long run — so the Average and Marginal Cost of producing football are constant and the same. In an unregulated market the equilibrium supply of football will be Qc, where Average Revenue equals Average Costs and the average team will be just breaking even. But note that at Qc the Marginal Cost of an extra game of football exceeds the Marginal Revenue generated by playing it. For firms profit is maximised when MC=MR. So, since MC exceeds MR at Qc the football industry as a whole is not profit maximising. The profit maximising output of football, where MC=MR, is at Qm. This is where Collusion and the Super League come in. For if the dominant teams can cooperate to reduce output to Qm they will produce the profit maximising amount of football Qm, pushing up prices for tickets and TV screening to Pm, and will make Super Normal Profit equal to the shaded area.
Of course, in a competitive market, other firms (teams) will want to move in, attracted by the supernormal profits and this will increase supply again and dissolve the profits as prices fall. To be sustained a collusive oligopoly requires BARRIERS TO ENTRY to stop new firms entering. And this is exactly what the super league provides as the number of teams is fixed and none can easily join or leave. If the plan worked, the big powerful teams in the Super League can expect to make super normal Profits in the long-run. And the teams left outside? Well they will probably be in an even worse state as TV revenues and advertising is sucked away by the super league — they will find demand and prices falling and, unless they can cut costs, many will no doubt go bankrupt. Not surprisingly these smaller teams and their fans are utterly opposed to the Super League cartel.
Could the politicians have stopped the league? Possibly, since cartel arrangements are illegal in Britain and the European Union. And maybe the fans would have boycotted the games, causing demand to fall and the super normal profits disappear. But as we have seen, the fans and public pressure have brought the project to a halt.
Economics can help us to understand the rationale for the Super League and who knows — the desire to make super normal profits may see this idea come round again in some other guise.
