Natural Monopolies in Sport and Science

Sort of

I’m on holidays this week, spending some time in Cracow (Poland) and Slovakia. Today’s post is a bit off-topic compared to what I’m used to publish here, but still I hope you will enjoy it!

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Natural monopolies are generally identified as a case of market failure, along with externalities and collective goods. A natural monopoly occurs when market conditions are such that only one seller can produce and sell goods profitably. The monopolist firm then enjoys the benefits that accrue to all kinds of monopolies, setting the price above its marginal cost. This creates a social deadweight loss corresponding to the reduction in supply and the resulting increase in price compared to a situation of perfect competition.

Natural monopolies are typically observed in industries with significant economies of scale due to high fixed costs and relatively low marginal costs. As a result, average costs are high for low levels of production but decrease as production increases. In these circumstances, since market demand is not infinite, having several producers is typically inefficient or even impossible because economies of scale make it optimal to produce and sell high volumes. Examples include utilities such as electricity or gas, or public transportation (subway). In each case, production requires a massive initial investment in infrastructure, generating high fixed costs that can be covered only by selling to a large market share.

Are there other mechanisms than high fixed costs and economies of scale that can generate a natural monopoly? Formally speaking, probably not, but I can think of a few examples that approximate natural monopolies in a totally different production context. The first example I have in mind is sport and the competition between professional leagues. Consider the case of European basketball. Since 2000, the EuroLeague (officially known as the Turkish Airlines EuroLeague) is the main professional men’s basketball competition in Europe. It is a semi-closed league of 18 teams, some of them permanent members of the competition, others invited through a system of wild-card. Contrary to previous European competitions, the EuroLeague is a full-fledged championship where teams play 34 regular-season games and the best of them compete in a playoff format.[1] I think this competition is largely responsible for the significant progress of European basketball over the last two decades, as evidenced by the fact that the U.S. can no longer win a competition if it doesn’t bring its very best players.

For several years now, there have been talks of a European NBA competition, and lately, this possibility has become more concrete. Think about what that would entail. First, it is unlikely that the best NBA players would come to play in Europe. That means that the teams of this new competition would be filled with current EuroLeague players. Second, though this is not very clear, the competition could welcome teams that are currently engaged in the EuroLeague. Whether it is the case or not, we can expect that an NBA Europe league would have the effect of draining some talents from the EuroLeague. The result would be a decrease in the play level and value of the competition in the EuroLeague. For players as for fans, having two major competitions directly competing is inefficient. In general, you want the best players and teams to play against each other in the same competition, not in parallel competitions where they will never meet each other.

This is not a case of natural monopoly, formally speaking. Both leagues could be profitable, notably because their “consumption” is not mutually exclusive —though their “productive assets” (i.e., the players and the clubs) are. However, if you consider that the value of a league for players (in terms of salary and competition) and fans (in terms of willingness to pay) depends on the general level of play, any “dilution” of talent across separate leagues has a social cost. Everybody would be better off if an agreement could be found to keep one competition, eventually with more teams and a broader array of shareholders.

Another case with similar properties can be found in the scientific domain. Scientific communities tend to organize around professional associations. These associations generally hold dedicated conferences on a yearly or bi-yearly basis. If being a member of a professional association and participating in conferences have any value, this is due to network externalities. The value of membership and participation increases with the number of members and participants. Depending on the size of the community, there is an optimal number of associations at different scales (national, regional, international). For small communities, it is highly likely that this number must be fairly low, maybe close to one. A higher number of associations and conferences would have similar effects as in the sports case. It would dilute the “talents,” and more generally increase opportunity costs generated by the missed interactions with colleagues.

In Europe, something like this may well be happening in the small field of “philosophy, politics, and economics” (PPE). Until very recently, there was no dedicated PPE association or conference in Europe. The International Network of Economic Method (INEM) and the economic philosophy conferences, mostly organized in France (the last one in 2024 in Reims), partially covered the field. Two years ago, a small group of Dutch and Italian colleagues initiated the creation of a European network of PPE along with the organization of yearly conferences. In the meantime, the American PPE Society —in a move similar to the NBA— has decided to come to Europe and will organize a conference in London this year![2]

We now find ourselves with potentially two yearly PPE conferences, to which should be added regular conferences in neighboring fields. Given the size of the field, that may be too much —or maybe not if each association/network finds its niche. As for basketball competitions, a likely outcome over the long run is a winner-takes-all scenario, something that we also increasingly observe in industries like digital services where network externalities are significant.

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[1] As an aside, I cannot but mention the curiosity that the EuroLeague has kept the tradition of the “Final Four” to determine the champion. This format was making sense when teams were playing around 15 games at the maximum to reach the final. To award the title based on two games while teams have to play almost 40 games to reach the final four seems inconsistent from a pure sport perspective.

[2] Some readers may be interested to know that I will be in London. Initially, I wanted to participate in the PPE Europe network conference in Milan (to be held next May), but, for the second time in my almost 20-year-long academic career, my proposal (the same as for London) has not been accepted!