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Market Power and Media Revenue Allocation in Professional Sports: The Case of Formula One

 |  July 3, 2016

Posted by Social Science Research Network

Market Power and Media Revenue Allocation in Professional Sports: The Case of Formula One

Oliver Budzinski & Anika Müller (Ilmenau University of Technology)

Abstract:      Recent allegations from participants of the FIA Formula One World Championship (F1) suggest that the promoter of F1 (possibly together with the sports association) violates European competition law in two ways. First, it allegedly abuses its market power by deducting an inappropriate high share from the revenues of the collective sale of media rights in order to boost the profits of its private equity parent company (vertical allocation of media revenue). Second, it allegedly forms a cartel with selected top teams at the detriment of smaller teams by providing both unjustified extra payments to these teams and enforcing a heavily biased horizontal allocation of media revenues, benefitting the cartel teams. Professional sports championships typically receive common revenue, for instance, from trademark rights and marketing, but often also from the sale of broadcasting and other media rights. This common revenue needs to be allocated in two ways: (i) vertical allocation between the sports authority and the participants, and (ii) horizontal allocation among the participants. Different professional sports championships employ vastly differing schemes for both types of allocation. In this paper, we present an empirical assessment whether the current antitrust allegations against F1 may be valid. We employ concentration measures from empirical economics, like the Hirshman-Herfindahl-Index (HHI), the concentration ratio and the standard deviation in order to assess different allocation schemes from different commercial sports. With the help of these indices we show that the allocation scheme employed in F1 considerably differs from such used in other professional sports championships. We find the empirical picture to be consistent with an anticompetitive interpretation of F1 media revenue structures and policies. We conclude that there is merit in starting an in-depth antitrust investigation of Formula One motor racing, which would also represent an opportunity for the European Commission to correct earlier mistakes.