The Economics of the NCAA

The National Collegiate Athletic Association was formed in 1906 as non-profit organization with the purpose of protecting students and setting official guidelines for sports. Since the formation of the NCAA in 1906, there has always been controversy of whether sports should be associated with universities and colleges. There have been numerous arguments attacking the NCAA suggesting that student-athletes are merely moneymakers for the institutions, rather than students, by earning millions of dollars in revenue each year in this commercialized industry.

Academic enthusiasts contribute to the argument by emphasizing the importance of more money being invested into the athletic department rather then other departments throughout the school.

However, these cons of the NCAA are heavily out weighed by the pros, as it’s proven that once schools enter the big time sports of NCAA they rarely leave it. Coltfelther supports this theory as he states that of the top 100 schools playing football in 1920, only nine have given it up over the past 90 years (Clotfelter, 2010, p.

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52).

NCAA has proven to be fortunate over its existence creating a market that fits directly into the American culture, providing ample economical benefits and tremendous prosperity for the colleges and universities that are incorporated. NCAA big time sports impact on the entertainment industry in North America is enormous. In 2010, the attendance for NCAA division one football topped 50 million people for its regular season games (Clotfelter, 2010, p. 49). This excludes the hundreds of thousands who attended bowl games as well as the hundreds of millions people who watched games via television or webcast.

In 2010, the NCAA signed a 14-year deal with CBS worth $10. 8 billion dollars for them to broadcast the NCAA March Madness tournament, demonstrating the magnitude of NCAA. This contract alone generates $740 Million annually for the members of the NCAA (The Chronicle of Higher Education, 2010). These statistics and contracts show that the NCAA is not an average amateur sports league; it is in a highly competitive industry classified under entertainment, which competes with all favorite television programs. Many economic concepts are used in the NCAA when athletic departments are making decisions.

Many decisions need to be made but economically, departments focus on how to price tickets, how to capitalize on consumer surplus, making the best and most fitting recruiting decisions, how to operate as a monopolistic cartel, as well as making profit sharing techniques concrete. Subsequently schools that are in the entertainment business must treat their athletic programs as a business and use business and economic models to make decisions (Clotfelter, 2010). Ticket prices in the NCAA are correlated with the basic concept of supply and demand.

Based on the capitalization of consumer surplus, universities have created booster clubs where donations are required to be eligible to purchase tickets. Universities created the tax-exempt booster clubs to exploit consumer demand and create additional revenue to offset costs. Booster clubs work based upon the eligible individuals, as they must make a significant donation in order to purchase season tickets (Clotfelter, 2010, p. 99-102). For example, if you were to purchase season tickets in 2009 to the basketball powerhouse Duke, one would have had to agree to make an annual donation to the booster club of $7000 USD.

If one made that donation of $7000USD, that individual could then purchase season tickets, which follow in the range of $1100-2400USD. This creates the actual cost of season tickets for an individual to range between $8100-$9400USD (Clotfelter, 2010, p. 99). The booster clubs in return offer benefits to the individuals who have donated. The club may offer things such as inviting members to special award dinners or events put on by the sporting teams, or providing a parking area designated solely to members. As well, some booster programs will offer special access of members to the sporting team.

For example, a Stanford booster member who makes a donation of $50,000 can travel with the team to a selected road game (Clotfelter, 2010, p. 101). Recruiting players and how universities place value on star athletes is another operation where economics is highly involved in the decision-making process. A study was conducted by Robert Brown to determine how valuable a star athlete is in correlation to the athletic department. A star athlete in the study was classified as someone who plays professionally upon graduation.

The marginal revenue product for adding a star athlete to a NCAA D-1 football roster creates additional revenues of $539,000- $646,000 per year to the school, as well as an additional $871,000 - $1,000,000 in revenue from the addition of a star athlete for NCAA D-1 basketball (Brown, 1993, p. 679). With the value of high caliber players being so great, and the actual cost of tuition and boarding of the individual players, universities receive a high level of economic rent from these star athletes (Allmen, Leeds, 2011, p. 359).

This can also be analyzed by a supply and demand figure of recruiting, since the market-clearing price for a star athlete is set below the equilibrium, creating excess demand for high caliber players. Recruiting these star athletes can become very competitive between universities, which can lead to NCAA violations of recruitment in universities. Such violations include team operations offering to pay players under the table or give payments to family members. The process of this resembles other industries in which the market-clearing price is set below the equilibrium, which creates a black market.

This formation of a black market is similar to what happens when recruitment violations are broken (Clotfelter, 2010, p. 118). According to the economic definition of a cartel; Cartels are agreements between most or all of the major producers of a product, to either limit their production and/or fix prices. The NCAA would be classified as a cartel because the NCAA creates an entry of barriers as well as it creates their own inputs and outputs, and schools have to share profits within their respective conferences (Allmen, Leeds, 2011, p. 360).

Even though the NCAA demonstrates the characteristics of an economic cartel, the fact is that when the NCAA was formed in 1906, its main objective was to create standardized rules and protect the well being of students playing the sports (National Collegiate Athletic Association, 2012). It was not created to maximize profit and is still not used today maximize profit. Economists today classify the NCAA as an incidental cartel, meaning that it shows the traits of a cartel, but its main goal is not generating profit (Allmen, Leeds, 2011, p. 113). Until 1984, the NCAA acted as an illegal monopoly controlling all television and media rights.

In 1984, a case between the National Collegiate Athletic Association and the Board of Regents of the University ruled that the NCAA was an illegal monopoly. Today, the NCAA still operates as a monopoly with the conferences within it, as it controls both the inputs and outputs. The NCAA also controls who may enter the industry. The product does have close but imperfect substitution with professional sports, but since NCAA athletes are not paid it does differentiate the product from professional leagues (Clotfelter, 2010, p. 53). The athletic conferences within the NCAA all conduct a profit sharing technique to allow for a competitive balance.

The stronger that the year is, the conference teams have a better opportunity over all teams. For example, the Fiesta Bowl guarantees a pay out to both teams of $17 million dollars, which would be distributed throughout the teams in the conference (Clotfelter, 2010, p. 86). The more bowl games teams in a conference play, the more money distributed to the universities. The same type of profit distribution is also done with March Madness. This works depending on the standings achieved by the team, and the higher the team makes it in the conference standings, the more money available to all schools within that conference.

An example of this is the team at Florida Gulf Coast University (FGCU), whom are categorized in the NCAA conference of Atlantic Sun. Since FGCU advanced to the final 16 this year in the NCAA March Madness tournament, they created $740,000 for their conference. In addition, the Atlantic Sun conference will receive a total of $4. 8 Million through 2018 from FGCU’s success this year (Smith, 2013). It is not just the success in post-season events that generate profit for the conferences; the television rights are also distributed throughout the conferences for non-bowl games and non March Madness games.

Currently, the South East Conference (SEC) has a 15-year television contract with ESPN and CBS worth $3 billion dollars equaling a payment of 17 million a year to all SEC schools (Clotfelter, 2010, p. 187). The way these conferences are set up with profit-sharing formulas creates competition with wanting to be apart of a successful conference. Certain conferences are also granted a certain number of bowl games a year, resulting in more revenue for the schools associated with that conference.

There has always been a great debate as to why should schools spend millions of dollars on athletic departments when only a handful of universities ever mange to break even. There are plenty of benefits that universities receive from a successful athletic department. University of Connecticut president Philip E. Austin was asked the question “How does athletics help? ” Austin responded with, “It helps us recruit students, enhances our ability to sell our program to the state legislature, and energizes alumni and others who might be called on for philanthropic support” (Allen, 1993).

This is just one of many examples of university presidents praising the importance and significance of their athletic department. One benefit that schools have is known as the “Flutie Effect”. This is when schools have success on the national stage, which causes increased number of applicants. This is caused due to the national exposure that the school receives from television and newspapers, and other media. The Flutie Effect was coined in 1984, when Doug Flutie, a NCAA player at Boston College, threw up a hail-mary pass at the end of the game that was caught by his teammate.

This game was broadcasted on national television exposing the shocking upset for the defending team, University of Miami. The next year, Boston College student applications rose by 12% (Clotfelter, 2010, p. 146). A more recent event that occurred in 2010 was when Northern Iowa went on a Cinderella run in the NCAA March Madness tournament. The following year they observed a 30% increase of applications (Clotfelter, 2010, p. 135). Florida Gulf Coast University is expected to see this “Flutie Effect” this upcoming year after their Cinderella story in this year’s tournament (Smith, 2013).

The ability to help fund and build infrastructure on a university campus is another benefit for schools involved in big time NCAA sports. With successful basketball and football teams, alumni of that university are more likely to make donations to their school as they feel a sense of satisfaction when their team is winning. It is not just alumni that help fund university projects due to their teams’ success, as state officials become more inclined to approve state funding to universities (Clotfelter, 2010, p. 129). Universities peruse state officials by offering them free seats to games.

In 2007, Alabama and Auburn gave away a total of $100,000 worth of free tickets to Alabama state officials (State lawmaker controls football tickets through marketing deal, 2008). NCAA big time sports have also been known throughout many universities to increase school sprit and enhance student experience. Sports can unite a whole university together by giving all students a common interest as well as a sense of belonging to their school. An article from Chronicle of Higher Educated stated, “Sports teams can foster a deep sense of community and social solidarity, even when those teams lose more often than they win” (Clotfelter, 2010, p. 55). As you can see with these examples economics plays a tremendous role in how the NCAA operates and functions on a daily basis. It does not just affect the business side of the NCAA but as well as recruitment and the schools infrastructure. The NCAA provides financial benefits and an overall betterment for students and the schools involved. It is unlikely this will change in the near future as the market demand continues to increase on a yearly basis for their product NCAA sports.