Competition, John Madden, and Joseph Schumpeter

I was a fan of John Madden, the NFL coach and game commentator who died last week at the age of 85, like many others. He was a larger-than-life figure who helped people like me comprehend football when we wanted to watch it on TV but didn't know what to look for.

It wouldn't make sense for me, an economist, to write about Madden if the only things to say were about him as a person and an expert, and football as a game. However, Madden's career as a pundit and Fox's history as his employer illuminates certain key realities about economic competitiveness that many in the Biden administration have either forgotten or, more likely, never knew. In a few succinct phrases, the realities may be summed succinctly. To begin with, competition is a harsh plant rather than a delicate blossom. Second, just a few people can compete. Third, if you insist on measuring the level of competition based on the existence or absence of "ideal competition," you'll lose out on the majority of the competition that counts.

Competition isn't a delicate flower; it's a tough weed.

Many individuals feel that economic competition is delicate, and that government agencies should intervene to ensure that established businesses do not suppress it. Orchids require precisely the proper amount of irrigation, fertilizer, and sunlight, therefore they might be used as a metaphor for competitiveness.But a more apt metaphor for competition is, as University of Chicago economist George J. Stigler put it, a “tough weed.”

In a December 2018 article, “The Great NFL Heist: How Fox Paid for and Changed Football Forever,” Bryan Curtis illustrates this with his great discussion of the competition for televising NFL games when Fox entered the picture in the early to mid-1990s. The National Football Conference (NFC) football games were formerly shown on CBS. For two reasons, broadcasting NFC games was beneficial to whoever won the tournament. For starters, NFC clubs had dominated prior Super Bowls, which piqued fans' attention. Second, NFC clubs were more likely to be located in larger cities: Philadelphia, Chicago, Washington, Dallas, and San Francisco, to mention a few. Rupert Murdoch, the newcomer Fox's owner, was also aware of this. However, there was another aspect that made the NFC games much more crucial to him. He and several of his top advisers regarded the TV rights for NFC games as a possible cornerstone around which to construct the network and extend into a number of important markets as they tried to establish Fox as the fourth network. As a result, Murdoch was ready to pay a far higher price for the NFC rights than CBS was willing to pay. Fox was victorious.

Take note of this basic fact: a newbie successfully competed with an established company. Despite this, many pundits may claim that major business X, or large firms X, Y, and Z, have a market cornered. Reporters in the business press will even debate the percentage of an industry's output that a huge corporation "controls." They overlook the fact that newcomers frequently compete with established businesses. A current business does not have control over a specific percentage of output. It must compete against current businesses as well as new entrants throughout time. CBS had to learn the hard way.

Amazon is an example that almost all of my readers are familiar with. Jeff Bezos intended to sell books online when he founded Amazon in his basement in 1994. That was the end of it. But, over time, Amazon grew to carry thousands of different things, allowing it to compete in a variety of retail industries. Amazon created competition without the help of antitrust regulators. Lina Khan, the chair of the Federal Trade Commission, and those who want to slap the trustbusters on Amazon appear to be bothered by the fact that Amazon succeeds. Competition appears to be acceptable as long as the rivals aren't too successful.

It Only Takes a Few to Compete

Even economists will frequently claim that when there are only a few enterprises in a sector, there isn't enough competition. Their reasoning appears to be that cooperation, while prohibited, is likely with just a few corporations. However, there is substantial evidence to the contrary. When it came to competition for his services, John Madden was well aware of this reality.

According to Bryan Curtis' story in The Ringer, once Fox won the NFC game battle by paying $400 million a year, it wasn't a big deal to hire CBS commentator John Madden by paying what was then a huge sum of money. Top sportscaster wages were around $2 million per year at the time. In the race for John Madden, ABC and NBC each offered much more. Rupert Murdoch was well aware of this, and he saw that if he was serious about establishing Fox as a football player (excuse the pun), he needed to recruit the best and offer Madden even more than ABC and NBC were. Murdoch made a $8 million offer to Madden's agent, Barry Frank. That sounds high, but $8 million is not much more than a rounding error on $400 million.

One person who understood that was Dallas Cowboys owner Jerry Jones. Jones used a colorful analogy to make the point: “If you make that kind of commitment [for the NFC rights], you’ll go after and get the best. That’s peanuts. That’s arguing about the price of the seasoning after you’ve paid a fortune for the steak.” The deal was done.

Curtis quotes Matt Millen, a former NFL player, a CBS commentator, and later the president and CEO of the Detroit Lions, asking Madden, “John, how’s it going?” Madden answered, “Matt, let me tell you one thing. If you got one person who wants you, you get a job. If you got two people who want you, you get a great deal. And if you have three or more, you get a bonanza.” Madden saw clearly that even a small number of competitors could lead to intense competition.

Of course, the bidding for Madden’s services was by well-financed firms that wanted to hire him. But the point is more general. It applies also to firms competing to sell their services and products. In an article titled “Monopoly,” economist George J. Stigler, who, as noted above, coined the “tough weed” metaphor, highlighted the work of his University of Chicago colleague, economist Reuben Kessel, showing that small numbers of producers compete intensely.

Kessel investigated the bidding process for underwriting bonds issued by the California state government. Spreads per thousand-dollar face value were used to calculate prices. So, if an underwriter received the business for a $15 spread, he was paid $15 for every thousand dollars of bonds sold. What did Kessel discover? The spread was $15.74 with only one underwriter bidding for the business. The spread was a third smaller, at $10.23, with ten underwriters bidding. However, the following are the most remarkable discoveries. The spread was $12.64 with just two underwriters bidding, which was midway between the projected monopoly level of $15.74 and the extremely competitive level of $10.23 with ten underwriters. That large of a difference might be created by adding only one more opponent. Having only six contestants, according to Kessel, reduced the spread to $10.71, almost as low as the spread with ten contenders. "Kessel's results convinced me, more than any other single research, that competition is a robust weed, not a delicate blossom," Stigler said. Stigler was concentrating on one facet of competition: the pricing war. But that's only one type.

The Most Important Competition: Schumpeter Got It Right

When I was a full-time economics professor, rather than an emeritus, and I taught my students about competition, I would start by asking them to list different types of competition. They usually came up with a lengthy list. To name five, it featured advertising, service, location, guarantees and warranties, and extra product or service characteristics that would make it more attractive to consumers. Occasionally, a student would bring up price competitiveness.

Then I'd tell them that's how I conceive of competition, too, but that if they read the chapter we're going to discuss, the textbook author would simplify rivalry down to one variable: price. Moreover, I pointed out, even that was a little strange because for economists to regard competition as “perfect,” all the competition on price had to already have happened so that each seller was producing the identical product and charging the same price. I first came across the concept of perfect competition from a textbook by Paul Samuelson when, at age nineteen, I was taking my first course in economics. As I wrote in my book The Joy of Freedom: An Economist’s Odyssey, my first reaction was: “This didn’t seem perfect to me at all. It just seemed boring.”But it's far worse than that. It misses the point of competition.

Returning to Fox. It upgraded the product in a variety of ways after obtaining the NFC deal. One was that it employed a larger number of cameras, allowing the spectator to see more views and miss less action. Another, according to Curtis, was this:

“Fox-izing” football meant the pregame show would be about laughs and relationships as much as it would be about sports. It meant the score and clock would be on the screen at all times.

That second element, I believe, is critical for many fans who wish to grasp the coaches' plans while watching football. If there are three minutes remaining in the half instead of, say, seven minutes, coaches will often pick alternate plays. Viewers would be able to comprehend the situation better if the clock is always displayed on the screen.

While far too many economics academics still spend far too much time on perfect competition, one economist from around eighty years ago got it right. His name was Joseph Schumpeter. In his 1942 classic, Capitalism, Socialism, and Democracy, Schumpeter wrote:

But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition [price competition] which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization . . . competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of existing firms but at their foundations and their very lives.

What a beautiful way of saying it.

Conclusion

The late nineteenth-century and early-twentieth-century British economist Alfred Marshall defined economics as “a study of mankind in the ordinary business of life.” Observing how individuals and businesses compete may teach us a lot about competition. Many textbooks overlook this aspect. However, John Madden, Rupert Murdoch, and other Fox executives were aware of the situation. While competition is bad for people and businesses who are outcompeted, it is good for the rest of us.

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