Leverage, Indifference and the NBA Lockout
In Chapter 11, Easley and Kleinberg discuss the predicament of Buyers and Sellers in different equilibria in trading networks. As shown below, Buyers (B) and Sellers (S) are subject to a monopoly when they exclusively have access to a single Trader (T):
(0) Seller –(0)—>Trader—(1)–>Buyer (1)
In this situation, the trader retains complete leverage in both stages of the network and is able to extract all of the profit from each transaction; since the seller has no other option than the trader, the trader can drive the seller down to literally a zero payoff. We, as the modelers of this scenario, assume the seller is indifferent to a zero payoff transaction and a no-deal and ultimately makes the deal. This is the predicament the NBA players are faced with – a trading network in which the trader has complete leverage over the seller. However, this network proves that we cannot always assume that indifference will result in a deal since thus far the players have refrained from agreeing with the NBA.
Let us assign the characters in the following manner: the Sellers are the players who are selling their performance value to the Traders, the owners of the teams; lastly, let’s make the Buyers NBA fans who pay to watch and enjoy this NBA product. As demonstrated in the figure above, the owners retain complete leverage and are theoretically able to extract the entire payoff in the transaction with the players. The owners have leverage for a variety of reasons. Firstly, they have more money and lucrative alternative sources of income; the next best revenue flow for an owner is almost invariably better than that of a player’s. Secondly, and most importantly in this discussion of trading networks, the owners face literally no competition when hiring labor. You cannot create a new team without permission from the rest of the owners and playing internationally is largely considered a non-option for players who consider those leagues amateurish. However, despite this monopoly and ability to extract the complete in this transaction, we see in this real-life example that it doesn’t necessarily result in a transaction. The players have refused to agree to a transaction with the NBA owners despite the NBA being their only viable option to deal with.
http://www.grantland.com/blog/the-triangle/post/_/id/8300/two-economists-explain-the-nba-lockout