The Economics of Why the BCS Doesn't Want Change

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The BCS is going to get vilified in Congress again today, but the folks in charge of it don't want change. There's a litany of reasons why they want to keep the current system, but today I'm going to focus on the economic reason. It's partly because I was a business major and partly because I think this particular issue gets the most uninformed commentary. A lot of this is simplified immensely but it will give you an idea of the forces at work.

The background of the title image is a classic supply and demand chart. It reflects a normal market for goods. The x-axis is the quantity of the good that will be produced, and the y-axis is the price of that good. The supply curve is green, and the demand curve is red. The supply and demand curves simply reflect market conditions; the supplier's choice for the quantity (Q) determines the price (P) for that good based on those conditions.

The supplier will generally try to produce the right quantity so that supply matches demand. When that occurs, the market is said to be at equilibrium and the supplier maximizes its income. Produce too little, and you leave money on the table. Produce too much, and your prices get driven down to the point that your profitability is threatened. If the market is fair and the supply and demand curves don't change (or change in a predictable fashion), then over time the market will find its equilibrium.

So to bring this back to college football, imagine that Q is the number of BCS games and P is the amount of money the BCS can get per game from its TV contract. The demand curve would represent the amount of collective interest in the BCS games. Interest in college football has been growing over the past couple decades, so the demand curve itself has been moving to the right, like this:

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via Wikipedia

If the market for BCS games worked like the classic example market did, then over time we would see both the number of games and the ad revenue per game increase as is displayed by the above graph. We know that's not the case though.

One key assumption for the classic example market is that the good being offered can be replaced by another one. When the good can't be replaced, the market changes entirely. That's the bad news for playoff economists: BCS games don't have a replacement. It gets even worse though.

The BCS is basically a cartel, as it is the only supplier of the best college football postseason games and the games have no substitute. Accordingly, the BCS acts like a cartel by instituting artificial scarcity. Instead of being a diagonal line, the supply curve is a vertical line. That indicates that the quantity of games played is not going to change no matter what demand does. In graph form, this is where we are today:

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The supply of games is frozen at five: Rose, Sugar, Fiesta, Orange, and BCSCG. That's not going to change. As interest in the sport increases, so too does the amount of money the BCS can get per game from TV networks. Even though the contracts don't get renegotiated every year, they project demand to rise and the revenue from Fox and ABC rises throughout the length of the deals accordingly. Every few years they sit down to redo them based on new demand data.

Let's imagine that the BCS made a plus one, so now there's six total games. Here's what that would look like with the same three demand curves. For simplicity's sake, let's ditch the years and label the demand curves low, medium, and high to demonstrate what the BCS could get out of the TV networks at varying levels of interest. The purple dashes are the price levels from the chart above, and again, to keep things easy, I labeled the six price levels at increments of $10 million.

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The amount of money the BCS could get per game would be less with a sixth contest added, but it would also have one more game to make money off of. Here's what the BCS would get in total at each demand level for five and six games:

Demand Five Games Six Games
Low $100 million $60 million
Medium $200 million $180 million
High $300 million $300 million

As it turns out in this scenario, the BCS would not make any more money at the highest level of demand with six games than with five. However, the BCS would make more at the lower demand levels with five games than with six.

The people who run the BCS know about this kind of information. That's why they run things like a cartel; when times aren't booming, acting like a cartel gets them more money than acting like a market would (by adding and subtracting games according to demand). In addition, it's practically impossible to take away BCS games once they're deployed. If they added games as demand rises, they wouldn't be able to take them away again if demand were to subside (due to a bad economy, a couple seasons without marquee teams at the top, etc.).

That second point is really the killer. Even if the data showed that demand would increase enough with a sixth event so that the BCS would make more money than with just five games, there's no way to get rid of it if things take a turn for the worse. University presidents, who are the ones that the conference commissioners ultimately answer to, are extremely sensitive to budget cuts. They're likely more concerned about maximizing profits when times are bad than chasing every last cent when times are good.

This is also why tradition still does matter too. There are plenty of people in this country who will still watch the Rose Bowl because it's the Grandaddy of Them All. They will watch USC destroy Big Ten teams year after year because it's the Rose Bowl, but they won't tune in for an equally unwatchable ACC/Big East contest in the Orange. Again, it maximizes money when times (or in this case, match ups) are bad.

This piece of course was a very, very simplified rendition of the actual economic situation for the BCS. I used a sixth game as an example; it very well could be that six BCS games net more money than five do in the same way we found out that five games net more than four do. No one knows where the inflection point is though. Regardless, a lower number of games maximizes the amount per contest the BCS can get from TV networks whenever college football's explosive growth inevitably plateaus.

Believe me when I tell you that I'd love to see a playoff in college football. Go look at my archives if you don't believe me. However, I hope this little illustration shows you what David Frohnmayer, the BCS presidential oversight committee chairman, means when he says that playoff proposals, "utterly lack a business plan." You somehow have to convince a cartel that not acting like a cartel is in its best interests.

Good luck with that.

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