Panel discussion: Is the UFC a Monopoly?

Jayne Russell

John S. Nash tries to answer the question with Paul Gift, a Pepperdine Professor of Economics, and David Dudley, a former FTC antitrust lawyer.

Is the UFC a monopoly? This is a question I had been hoping to answer in an article for some time. Since its also a subject I am by no means an expert in I have spent a great deal of time researching it, reading AntiTrust Law Developments and Monopsony in Law and Economics and picking the brains of Dr. James B. Dworkin of Purdue University North Central, Professor Zev J. Eigen of Northwestern University, and Professor Jeffrey L. Harrison of the University of Florida.

Nevertheless, even after such efforts I did not feel comfortable tackling a subject that others have spent years studying in comparison to my mere months. Instead of abandoning it though I decided why not pass the task of answering it to those more equipped to do so? With that in mind I contacted two members of the Bloody Elbow community, Paul Gift and David Dudley, who are more than capable, and invited them to participate in a round table. Paul, besides being an author for Bloody Elbow, is an Associate Professor of Economics at Pepperdine University and a former litigation consultant who provided expert witness support for antitrust cases, including the largest antitrust case in U.S. history at its time,  and David, perhaps better known to the readers by his moniker thuggis, is a former antitrust attorney with the Federal Trade Commission.

Hopefully they can enlighten more than a few of us on the subject.

Most people seem to hold the view that a monopoly is a binary evaluation, that either someone has complete control of a market and is a monopoly or they do not and are not. But isn't monopoly power, at least as defined under U.S. law, more like a spectrum where it does not have to be an absolute but instead is a matter of degree?

David Dudley:

You are indeed correct that under US antitrust law, monopoly power is not a binary inquiry. In the modern context, the term 'market power' is generally preferred to 'monopoly power' to avoid the very confusion you allude to in this question.

The issue of market power is considered within the context of the particular set of facts in which the question arises. For example, the UFC would not be considered to have any significant market power if it acquired a cricket team, because they're such vastly different sports. On the other hand, if the UFC bought out Bellator, it should draw a much closer look from the enforcement agencies.

Outside the merger context, the question or market power is considered alongside the particular conduct at issue. The worse the conduct, the less evidence is necessary to establish market power. Conversely, the more benign the conduct, the greater the necessary showing of market power. For example, a firm that acquires an exclusive contract on a key ingredient that all of its competitors uses, then leverages the exclusive contract to raise prices by 3,000%wouldn't require a detailed showing of the firm's market power. Also, when one can show such direct effects of an increase in price or a decrease in output, one doesn't need to conduct a full market analysis to establish market power.

It's also worth taking a moment to explain the distinction between unilateral and multi-firm conduct. Unilateral or single-firm conduct always requires a showing of market power, whereas certain multi-firm agreements, such as an agreement between competitors to increase price, decrease output, or restrict any other measure of meaningful competition. Even two hot dog stands on a busy street in Manhattan could be found in violation of the antitrust laws if they agree to fix prices, even though they obviously have very little, if any market power.

Paul Gift:

I'll be giving my answers primarily from an economic perspective.  This often, but not always, coincides with antitrust law since it is so heavily influenced by modern economic theory (although with a delay).

Monopoly power is both a matter of degree and binary.  It's a matter of degree in the sense that it's typically taken to be a substantial degree of market power.  Pretty much every business has market power.  If you can raise your prices and not lose all your customers, you've got market power.  The hallmark of monopoly power is the ability to maintain prices above competitive levels by excluding competition.  In antitrust cases, economic expert witnesses formulate arguments regarding a company's degree of market power and ability to exclude competition.  But, at the end of the day, binary determinations must be made.  Does a company have monopoly power (yes/no)?  Did they anticompetitively create it or try to maintain it?  Will a particular merger create monopoly power or help maintain it?  The thought process of monopoly power is one of degree, but clear-cut determinations have to be made regarding monopoly power in real-life antitrust cases.

It is my understanding that the first element of a monopolization claim requires only that monopoly power exist, not that it be exercised. To determine whether monopoly power exists, it is therefore necessary to define the relevant market in which the power over price or competition is to be appraised. With regards to the question "Is the UFC a monopoly?" are we talking the sport of mixed martial arts or something narrower? In the case of the International Boxing Club of New York v. United States of America, the Supreme Court defined the relevant market in that case as being not all of boxing, or even professionally boxing, but "professional championship boxing contests". When discussing the market power of the UFC should we be focused on something equally narrow? So the question is: what is the relevant market we should be looking at?

Dudley:

As I explained in response to the first question, it actually isn't necessary to conduct a formal market definition if you can establish direct anticompetitive effects on the marketplace, such as increased price or decreased output. Also, as explained in question 1, we can only consider the question as to whether the UFC is a monopoly in the particular context in which we're considering it.

I wrote in an earlier fan post, the UFC does appear to exercise some market power over fighter contracts. In the long term, the social harm (also known as deadweight loss) would be that fewer talented athletes would choose MMA as a profession, because their earnings are being artificially depressed by the UFC.

Gift:

Having monopoly power is not illegal. In fact, we promote monopolies by granting patents and other intellectual property rights

It's first important to point out that having monopoly power is not illegal. In fact, we promote monopolies by granting patents and other intellectual property rights. The anticompetitive nature of monopoly depends on context: (1) do you have monopoly power and (2) are you abusing it in an anticompetitive way or attempting to merge so as to create or enhance it and harm consumers? The famous Supreme Court quote on monopoly is, "the offense of monopoly under [Section] 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." Notice the second part, that having monopoly power is only illegal if you acquire or maintain it by something other than having a superior product, better business acumen, or getting lucky.

A second point that needs addressing is that monopoly deals with the output market - the goods and services you're selling to your customers.  Monopsony deals with the input market - the goods and services you're buying from your suppliers. The UFC sells entertainment, ad space, and content licenses in the output market to customers who are viewers, advertisers, and television networks, respectively. In the input market, the UFC buys labor services from fighters. The relevant output market need not be the same as the relevant input market.

The idea of the UFC having monopoly power in the sale of entertainment services in the output market doesn't make economic sense to me. Another way of saying this is that I believe the relevant output market is large, including MMA, other sports, and even potentially other entertainment activities that compete for the consumer's time and money.  The issue is one of demand substitution. The idea is if the prices of certain products are increased, how will consumers react? Will they continue to purchase or will they switch to something else?

Real-world analyses of the relevant market use the Hypothetical Monopolist Test from the 2010 Horizontal Merger Guidelines from the FTC and DOJ (these are also used as the structure for determining the relevant market in non-merger situations). The basic question is when would someone who controlled the entire market profitably impose a small but significant price increase on their customers for the foreseeable future (SSNIP)? If your customers would say, "Screw you, I'm going somewhere else," the price increase won't be profitable and the relevant market needs to be expanded.

To give an intuitive idea, if the UFC raised PPV prices, how might people substitute?  They might try to watch more free MMA (Bellator, WSOF), but they also might watch a boxing match instead, an NBA game, a movie, or just go out with their friends (and the classic - try to mooch off someone else and watch the PPV for free).  How many of you substituted your demand somewhere else during the kick-ass fight card known as UFC 147: Silva vs. Franklin 2?  While they didn't explicitly raise the PPV price, it went up relative to the quality of the product being delivered.  There's also anecdotal evidence that big boxing events not only steal demand from MMA, but also can steal it on different nights (think of the Mayweather effect on neighboring MMA events). Basic charting research suggests that if a quality product isn't put out consumers will take their demand elsewhere. This all suggests that the relevant market is larger than MMA only.

Finally, think of all the substitution that advertisers and television networks can do.  Bud Light, Harley Davidson, Dynamic Fastener, and Salesforce have plenty of other outlets to market their products if the UFC were to start driving up prices.  Even the more MMA-centric products can substitute to other methods of marketing (this is about UFC sponsorships, not fighter sponsorships).  TV networks can go with other programming upon contract expiration, and the UFC is nothing like the NFL or NBA in terms of negotiating power.

The real issue is the input market.  In what market do mixed martial artists offer their services and who competes with the UFC in this market?  This is the relevant market I care about, and it should have been the market most scrutinized by the FTC during its post-merger investigation of the UFC/Strikeforce deal.

While the UFC as a monopolist in the output market doesn't hold water, the UFC as a monopsonist in the input market is very much a legitimate and fair question.  But, if you care about the welfare of fighters, you shouldn't want the relevant market narrowly defined as "professional championship MMA contests."  That includes only the elite fighters, who have pretty good negotiating power, and leaves out the low- and mid-tier guys who would really get screwed if the UFC exercised monopsony power.  It reminds me of a case I worked on where the plaintiffs defined the market very narrow - as is their interest - and ended up shooting themselves in the foot by excluding a key segment of the market which would have helped their case.

I don't see the boxing case from the 1950s as comparable to the MMA industry of today.  Plus, you have to be careful when using Supreme Court rulings as precedent for economic logic - there are a number of old school rulings that are routinely panned as bad economics today.

So what's the relevant labor market for professional mixed martial artists?  Well, the same ideas from above apply.  Who does the UFC compete with in acquiring new and undiscovered talent?  When a fighter becomes an unrestricted free agent or restricted freeagent, who competes for their services?  What are the contract terms offered?  How have these changed since the Strikeforce merger?  What, if any, impact have Bellator, WSOF, Invicta, One FC, Titan FC, and others had on the competitive landscape over the last few years?

There's one final important point to make about the relevant market since I hear it a lot.  The relevant labor market is not defined based on where people would like to work - as in every fighter's dream is to be in the UFC.  If I were a developer, my dream might be to work at Google, but the labor market for developers is much more expansive and competitive than one company.  The question is who provides competitive alternatives for free agent developers if Google started depressing wages?  A similar idea applies to MMA.

It's great that both of you reminded us of the fact that the being a monopoly in of itself is not illegal, because that's something I don't think a lot of people are aware of. Do you think perhaps the outrage often expressed at the very idea that the UFC could be a monopoly has to do with the fact that they're assuming it would also mean that they were doing something illegal and needed to be broken up?

Gift:

Absolutely.  As an example, I give my students a survey each term before classes start.  One of the questions is, "In the US, is it legal or illegal for a company to have a monopoly?"  On average about 25 percent say it's legal (the correct answer), 70 percent say it's illegal, and 5 percent say they aren't sure.  These are MBA students and even they tend to think monopolies are illegal.  In everyday life, the term "monopoly" seems to be used synonymously with "bad."  In reality, monopolies can be bad and harm consumers but they can also be beneficial.  Many people don't even consider the latter.

For instance, I'm kind of glad there's one, big Facebook where all my friends and family stay connected.  It would suck having friends and family divvied up between seven or eight smaller social media sites, all doing the same thing as Facebook.  This would technically be more competitive, but I wouldn't feel better off.  It would be annoying.

The sports version of the benefits of size is the network effect associated with having one large league.  Network effects are the main economic reason rival leagues in football, basketball, baseball, and hockey have eventually died off or been absorbed.  They're also the reason Blu-Ray killed off HD DVDs, regular DVDs killed off VHS, and VHS killed off Betamax.  The basic idea is that fighters' value being where the most people are watching and the competition is the best.  Consumer's value watching the best fighters in the same league competing against each other.

So there are very real benefits to fighters and consumers of having a large, alpha dog league.  That doesn't mean the acquisition and abuse of monopsony power aren't also real concerns.  But it does mean that large leagues aren't all bad.  There are benefits to fighters and consumers to consider as well.

Dudley:

Even if a court found that the UFC had a monopoly or monopsony in the relevant market, and took actions to illegally abuse that market power, it's highly unlikely that the court would order the UFC be broken up

I think you're really on to something with this question. Every year the ABA Antirust Section puts on a mock jury trial and it's always clear it's extremely difficult to convey the distinction between monopoly power and exclusionary conduct to laypersons. Similarly, it's also difficult to explain to non-experts that a monopoly, for purposes of legal liability, simply means the ability to materially increase price or reduce output in a relevant market. It doesn't mean having overwhelming, totalitarian-like powers.

You also mention the common conception that a finding of monopoly power would entail breaking up the company. In reality, that's a very rare and extreme remedy that hasn't, to the best of my knowledge, been used since AT&T breakup in 1982. Some people proposed it as a remedy in the Microsoft trial, but even there it was hotly contested in antitrust circles and ultimately not embraced by the reviewing court. Therefore, even if a court found that the UFC had a monopoly or monopsony in the relevant market, and took actions to illegally abuse that market power, it's highly unlikely that the court would order the UFC be broken up as a consequence.

Since Paul pivoted us already to monopsonies I'll ask what criteria would you use to determine if the UFC is a monopsony? Fighters and managers often say that there's no competition out there, that it's there is really only one major promotion, while the UFC is quick to point out there is Bellator, WSOF, and numerous other promotions competing in the market pace.  So which is it?

Gift:

One of my pet peeves in any economic discussion is when someone says there's no competition.  It usually means they're exaggerating or are misusing the word competition.  Think about all the companies you deal with in your life.  It's hard (but not impossible) to come up with examples of companies who truly don't have any other competitor.  Back when Microsoft was the biggest, baddest tech company on the block in the late 90's, it was determined that they had monopoly power in operating systems, but there's no way in hell it would have been determined that they faced no other competitors.  In the vast majority of situations, "there's no other competition" is a pretty ridiculous statement.

Now that I'm done ranting, the essence of this question is interesting.  But it's difficult to credibly answer questions like these as an outsider.  I had a case once where everyone thought the main company was dominant with little to no competition, but upon getting insider access we found that almost every time they tried to close a deal there were at least two other competitors going for the same contract - something you'd never realize as an outsider.

The main point I'd make on this question is that the competitive level is determined when consumers (or fighters) make the decisions that lock them into a particular company.  Nate Diaz complaining about his contract terms and not being released has absolutely nothing to do with the UFC's monopsony power or lack thereof (please don't beat me up, Nate).  A small, puny promotion with no economic power can sign a fighter to a multi-fight contract and refuse to release him if he still has fights remaining on his deal.

The proper situations to examine are when fighters are unrestricted or restricted free agents.  Fighters are sometimes unrestricted free agents before joining the UFC or after being cut - when the UFC waives or doesn't enforce its right of first refusal.  When a UFC fighter's contract expires, they're generally a restricted free agent.  This idea is nothing new.  Think about how many times you hear of NBA or NFL players signing with new teams as a restricted free agent and then waiting to see if their team will match.  This situation isn't uncompetitive so long as there are a sufficient number of other teams able to bid for the athlete's services should they be interested.  Economists have found that bidding markets often only need two or three alternatives to make for a competitive environment, and sometimes only one.

So what's the competitive environment when fighters become free agents?  Do promotions compete with each other to find new and undiscovered talent?  Do they compete for each other's free agents?  More generally, do fighters who decide to explore their options get more than one contract offer?  Are their managers able to play organizations off each other, or threaten to do so, to get a better deal?  Gilbert Melendez just showed us that if you truly want to reap the benefits of competition, sometimes you have to be willing to leave your current employer.  A lot of fighters don't seem to take it to this level, although their managers may still be able to use this threat in negotiations.

In terms of hard data, one thing that can be helpful is to look back in time to when a company clearly had no monopoly/monopsony power and see how the trend of prices or wages has progressed to the present. Is there any evidence of abuse of monopsony power? I've done some of this and what you see is the lower-tier fighters going from $2K/$2K in the early 2000s to $8K/$8K today and the UFC is pretty much always the highest paying promotion for these guys (in my sample which doesn't contain Pride). Compare this growth in 12 years or so to that over 20 years in MLB with the reserve clause. The time trends of official fighter wages and comparisons with other promotions don't seem to provide great evidence for the acquisition and subsequent exploitation of monopsony power by the UFC.

The best chance for making a credible argument for the UFC having and abusing monopsony power is in fighter sponsorships

Is $8K/$8K great pay? Not at all. From my perspective it's crappy pay and I certainly wouldn't want to earn it. But the relevant question isn't if the pay is crappy or not. It's if that pay comes from the UFC exploiting its monopsony power or from a lower-tier fighter being an easily replaceable laborer without much incremental value to the promotion. It's the same reason that tall guys who bounce a ball and shoot it through a metal ring earn way more than the people who educate our children.

Another thing to consider is that the FTC should have looked at the labor market and monopsony power issues when investigating the UFC/Strikeforce merger two years ago. They had the ability to examine a merger that had already been consummated and get inside, direct evidence about how the labor market may have changed pre- and post-merger. Did the merger help the UFC unilaterally acquire monopsony power or maintain the power it already had? The FTC investigated and refused to challenge the merger. If they didn't have sufficient competitive concern back then, Bellator, WSOF, and others have only become better competitors since, not worse. And, we haven't even discussed the role of potential competition and barriers to entry.

I don't mean for this to come off too one-sided but that's the evidence as I see it today, admittedly as an outsider. The fact is we don't know exactly how strong the competitive forces are when fighters become free agents because we aren't there and we don't have insider access to information. If anyone wants to provide this, I'd be all over it. So far, the available data don't appear to support monopsony exploitation and the FTC's actions don't help either.

To me, the best chance for making a credible argument for the UFC having and abusing monopsony power is in fighter sponsorships. Supposedly, UFC restrictions on and taxation of in-cage sponsorships have been steadily increasing over the years. Sponsorships are part of a fighter's overall compensation even though the money isn't paid by promoters. If the UFC is limiting or extracting those dollars without a pro-competitive justification, this could possibly be an area where fighters have a legitimate monopsony claim. The next major development along these lines will be the UFC's handling of uniforms and how it shares the money with fighters. An exclusive uniform deal has the potential to be lucrative for the fighters, but it could also make them worse off depending on how the UFC divides up the money. This is where I'll be keeping my eyes peeled on the monopsony power front.

Dudley:

I agree with everything Professor Gift says here. I don't have much to add other than one rule of thumb I've often found helpful in this (and other) contexts is to consider whether the firm's actions cannot be explained as rational, profit maximizing behavior absent an assumption of market power. This test comes from the influential Areeda & Hovenkamp antitrust treatise that has been cited with approval by courts and practitioners for decades.

Applied to the UFC, we'd ask whether the UFC's restrictions on a fighter's sponsorship offers would make sense as a rational, profit-maximizing conduct if it didn't have market power. I honestly don't know the answer to that question, though my hunch is that it wouldn't make sense for a firm without market power. But I'd like to examine other companies' practices--for example other MMA promotions, boxing promotions, and possibly other sports leagues--for points of comparison.

I have spoken to a lot of different managers, fighters, and promoters, both in boxing and MMA, over the last few months, and when I ask them to describe the economics of the fight biz many of them had a very similar take. Let me repeat it for you:

The fight business is centered on the champions; everything else (although there are a few exceptions) trickles down from that. Generally the heavier divisions are more valuable since they have more fan interest than the lighter weight classes, but within each weight class the champion is usually the most valuable position a fighter can hold. The next most valuable position is when you're either a contender or a former champion, followed by a ranked fighter or possible contender, then a potential top fighter or former contender, and so on moving down the line to those interchangeable guys that fill out a card.

For a promoter it's the same: champions sell more than non-champions and top ranked fighters generally draw and sell more than unranked fighters. There's exceptions where fighters have been bigger draws than other fighters because of their personalities or looks or success outside of MMA but even they benefit or are hurt by their position in their division. For example Brock sold ppvs as soon as he stepped into the UFC but when he fought for and defended the title those sales doubled. So rising in the rankings and hopefully getting a title shot and winning it,  is important for a fighter because it means being a bigger draw and hopefully been able to negotiate a better deal because of that.

The problem that was expressed to me is that basically every top fighter is in the UFC. If you want to rise and make money as a heavyweight for example then you have little choice but to go to the UFC where according to Fight Matrix all ten of the top 10 heavyweights currently reside.  Of course another promoter is free to try and sign away one of the UFC's top heavyweights but the question then becomes who can he put him against to make money? All the other top fighters are still under exclusive contracts with the UFC, so there are no big fights they could make to recoup the money it would take to lure them away.

So according to them it becomes something of a catch-22. If you want to make it to the top of your division you pretty much have to sign with the UFC because you're not going to do it fighting the 22nd best fighter in your division. And when you finally do reach the top of your division and are able to become a free agent other promotions are not a viable alternative because they can't put together any big fights since every other ranked fighter of note is already signed to exclusive deals with the UFC.

Does this description sound accurate to you, and if so, could the the UFC, or anyone else, be described as having market power by having control over the majority of top fighters? Where would you draw the line between having market power and not having it?

Dudley:

Yes, this is the essential source of the UFC's monopsony power. The economic term for this phenomenon is called 'network effects,' and I believe both Professor Gift and I each alluded to this earlier in our prior answers. The idea behind network effects is that a particular good or service becomes more valuable with more people using it, either because of economies of scale (larger demand allows production in larger volumes, which may be cheaper) or the growth of complimentary goods.

The two old warhorse examples of network effects are Beta vs. VHS and the QWERTY vs. the Dvorak keyboard. As the story goes, Beta was actually the superior technology to VHS (though some dispute this), but Sony kept the IP rights held tightly for Beta, while freely licensing VHS. VHS then killed Beta in popularity, because more people bought the cheaper VCR, which led to a far greater number of available movie rentals, which in turn further stimulated demand for VHS over Beta. It's a similar story with the QWERTY keyboard--it's supposedly a less efficient design than the Dvorak for modern keyboards, but it was adopted to prevent jams on early typewriters. Even though we don't need to worry about typewriter jams nowadays, no one wants to learn to type on a keyboard that no one else uses. So, we're "locked-in" to the inefficient standard of the QWERTY keyboard, even though everyone would be collectively better off if we switched to the Dvorak (though again, some folks dispute that the Dvorak is actually the more efficient standard).

Applied here, there are network effects in having all the best fighters in one promotion, because it allows the fans to see the best matchups. Any individual fighter has more overall economic value fighting in the UFC than anywhere else, because she or he can then be matched up with the other top fighters, giving the fans what they want to see. The problem for the fighters is that the UFC only has to give a very small portion of this additional economic surplus to still be a better option for them than Bellator or WSOF. This is why Dana White can causally blow $5 million on a poker night, while encouraging his top fighters to live like grad students. It's unlikely this would situation will change until the fighters can either collectively bargain, or the UFC pushes its luck too far and a critical mass of fighters starts to migrate towards another promotion.

In the latter scenario, however, we'd likely just end up in the same situation we're in now. The new, dominant promotion would have much more economic power than the individual fighters, and would suck up the lion's share of the economic surplus. It's difficult for me to see how things could improve long term for fighters without either some kind of change in the law, whether through a statute or antitrust action, or collective bargaining.

In terms of drawing the line, that's a notoriously tricky proposition. But if a court were to find that the UFC had monoposony power, and that they abused that power, one logical step would be for them to hire an in-house antitrust counsel who could help advise them how to stay within the bounds of the law going forward. Applying the Areeda-Hovenkamp test, they should not force fighters to take any type of restrictive contractual clauses that you would only find imposed by a firm with market power.

Gift:

Yes, I agree with that general description.  To some extent, it describes the economics of tournaments, where top performers in rank-order competition receive the lion's share of earnings.  The available data on UFC viewership and fighter show money also appear consistent with this.  Champions earn the most, then former champions, then contenders and so on, with exceptions for the Chael Sonnen's of the world.

As Mr. Dudley points out, what you've described is the network effect of sports leagues.  But you focused on only one aspect - they lead to fewer and larger companies operating in an industry.  Mr. Dudley mentions the other side, the effect on fans, and I'd also throw in a similar effect on advertisers who will pay more for larger viewership.

Throughout modern U.S. sports history, competitors have popped up to challenge the incumbent leagues (AFL, WFL, USFL, XFL, ABA, WHA, etc.).  Competition lasts for a while and then they're usually driven out of business or absorbed.  This is the network effect in action, VHS vs. Betamax but among sports leagues.  If the new league/promotion attempts to be a direct competitor, history suggests the situation won't likely be sustainable over the long term.  But sustainability isn't the issue for monopsony power in MMA.  The question is if new entrants will continue to pop up and what competitive effect they have in the labor market?

For the second question, pretty much every company in the world has market power, so monopsony power is the appropriate measure to discuss.  Network effects have an important tradeoff.  They lead to fewer players in an industry while also creating exponentially more value (e.g., you're on Facebook because all your friends are on Facebook).  The more top fighters that are part of a promotion, the more value is created on the revenue side from fans and advertisers.  So while negotiating leverage may be reduced, fighter representatives are negotiating over a bigger pie.

Monopsony power doesn't necessarily derive from having the top fighters under contract. 

Mr. Dudley points out that the UFC may only give just enough of this economic surplus to fighters to make them a better option than Bellator or WSOF.  I'd add that upstart companies often have to pay fully-competitive wages, even though their revenues are low, because they're trying to grow and compete with the established brands.  Anyone who's worked at a start-up has likely seen this in action as employees receive market wages while the company bleeds money every quarter.  Regardless, his point is one of the reasons my concern is for the lower-tier fighters.  Top-tier fighters have bargaining power of their own.  Their negotiations with the UFC are closer to that of a bilateral monopoly so they can better capture value when new contracts are signed.  Lower-tier fighters have no such power.

As weird as it may seem, monopsony power doesn't necessarily derive from having the top fighters under contract.  I once worked on a case where the primary company had 100 percent market share in many local markets across the country (not an exaggeration) and was still deemed to be operating in a competitive environment.  Sounds crazy, right?  It turns out that at least two other companies vied for every single contract that came up for bid.  The two companies competed, but lost most of the bids because their products were of lower quality.

The point is that the defining characteristic of monopsony power is the ability to depress wages below competitive levels, and this is determined by the competitive environment when fighters are free agents or restricted free agents.  There's a lot we don't know as outsiders about the competitive environment during contract negotiations.  Do Bellator and others provide a competitive bidding force - even though they have very few top fighters in their organization - because they're upstarts trying to grow in the industry?  If they go the way of EliteXC, Affliction, the IFL and other defunct MMA promotions, will new entrants pop up in the future?  To me, these are the key issues with monopsony power, not the percent of top fighters under contract.

The last question is difficult to answer because it seems to suggest there's a legal/illegal line to cross for monopsony power.  Having monopsony power is not illegal.  What can be illegal is the behavior used to acquire or maintain such power.  General musings about power don't mean much unless they're directed towards a particular behavior (merger, contract provision, etc.).

This type of topic generally leads to a discussion of fighter unionization and collective bargaining.  What I'm about to say is probably going to be unpopular, but as an economist I'm used to it.  I'm not a big fan of cartels.  That statement seems pretty innocuous until we consider that a union is a cartel.  However, of all the cartels in the world, sports labor unions are among the least concerning.

The problem, of course, is trying to organize against UFC owners who've fought tooth-and-nail against unionization in their other businesses and seem to outright despise them (e.g., Culinary 226 drama).  The other problem is that while collective bargaining doesn't necessarily require a salary cap (e.g., MLB), I can't imagine the Fertittas and Dana White coming to an agreement with a fighters' union without some sort of cap on pay.  So top fighters would need to lead the charge for unionization and then possibly sacrifice money because of it - similar to how LeBron James currently makes $19 million when he should be making $30 million or more.

This is a tough, but not impossible, incentive to overcome.  It happened in the NBA in 1999, although top players were grandfathered in so the Shaq's and Kobe's of the world could continue to exceed max contract values for years to come.  I wouldn't hold my breath on that one for the UFC.

We could go on forever with this discussion, but then we'd lose whatever few readers we had left. Before we end it though, I'll give each of you a chance to sum up what you think people should take from this discussion.

Paul Gift

UFC has zero monopoly concerns in the output market but has legitimate monopsony concerns in the labor market.

People are absolutely justified in being skeptical of the decisions sports leagues make towards their athletes.  U.S. sports have a long history of athlete exploitation, with the reserve clause and the NCAA serving as particularly nasty examples.  The NCAA continues its exploitation to this day under the guise of amateurism, which is just a fancy word for "you work hard while we keep the money."  Meanwhile MLB had a full antitrust exemption all the way up until 1998 and only lost the reserve clause in the 70's because Marvin Miller tricked the owners (not Curt Flood as many believe).  The rich were economically "stealing" from the less fortunate, and they still are in the case of the NCAA.  People should be absolutely disgusted by these things.

It's a different story if the free market is doing its thing and yet wages are low.  The UFC isn't a cartel like the NCAA, but it also isn't a league with 30 teams to compete for unrestricted and restricted free agents.  It's a hybrid that has zero monopoly concerns in the output market but has legitimate monopsony concerns in the labor market.  It definitely has competitors for its fighters, and anyone who says otherwise isn't helping in the face of government agencies and economic expert witnesses who know better.

Bidding markets usually only need two or three players to make for a competitive environment.  The $64,000 questions are how strong the competitive environment is when negotiation takes place, what the UFC may or may not be doing to influence the competitive environment and whether it has a legitimate business justification for its decisions beyond mere monopsonistic exploitation. These are easy to opine on with outsider information or little antitrust training, but are truly difficult questions when it comes to real-life economic inquiry.

David Dudley:

Building off of Professor Gift's statement, even fans of the UFC and those who want to see all the best fighters under one umbrella to allow for the best match ups  should be concerned about the UFC's monopsony power. In the short run, it can be heartbreaking to see a guy like Ben Askren shut out for no good reason, or someone like Okami discarded the second he's no longer at the top of the card. But these are short term distortions in the market and really not of long term consequence to the sport as a whole. What they signify, however, is much more disturbing. These actions show that the UFC runs MMA like a company town, and if you don't play by the rules--sign away your image rights, agree to the restrictions on endorsements, and 'just bleed' instead of fighting strategically--you'll be unceremoniously kicked to the curb the second you're no longer needed.

The long term consequence is that fewer top athletes will choose MMA as a profession going forward, when the see how little control they'll have over their careers. This is  what economists refer to as the 'deadweight loss' or 'social cost' of monopsony power. It's a standard microeconomic scenario. When a firm with market power in the buying market squeezes the supplier, the supplier will eventually produce less of the factor input and divert its resources to doing something else.

Some might argue that wrestlers, BJJ guys, and Sambo artists have few other opportunities in professional sports. But if the UFC really wants to grow MMA as a sport, it need transcendental figures like Brock Lesnar who have other, sometimes many other, lucrative options besides MMA. Everyone who loves this sport, as I'm sure nearly all Bloody Elbow readers do, should be disturbed by the UFC's actions.

Thanks gentlemen.  While we answered the monopoly question, we left the monopsony question up in the air for another time. Hopefully some of the readers found this discussion informative, because I know I did.

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