I need help with an Economics question regarding NHL payroll caps and their implications. Please see detail.?

Question

In 2004 the National Hockey League locked out the hockey players in an effort to negotiate a salary cap with the players' union. A cap would limit the payroll of each team. League officials acknowledged that the teams have brought the problem on themselves by overspending and overpaying some players in an effort to compete for the best players. Why would the teams cause this problem?

A) They have used explicit collusion instead of implicit collusion.

B) They have tried to create a contestable market and now suffer because there are no barriers to entry.

C) They are caught in the logic of the prisoner's dilemma in which individual interest does not serve group interest.

D) They have tried to create a cartel and have suffered the consequences of too much collusion.

I am totally stuck. Can you help?

Answer 1

For starters, it CAN'T be "D" because all the teams aren't working together to get one player. A cartel is a group of two or more factions that seek to benefit from something. Like the oil cartel from the late 70's-80's that held back oil production and forced American consumers to spend upwards of $50 dollars a barrel.

I would say the answer is "B" because the highest spender gets the "best" players just like how supposedly (even though not right now) the Yankees are supposed to be the best team in baseball, but we all had seen the Red Sox take it this past year.

The teams "tried" to make it a contestable market, but it got out of hand when they had found a "price ceiling" for how much they can allocate for player's salarys.

This answer could also be used for "C" as every player has his own individual interest for his own salary as opposed to caring about how much the next one makes. If you have a salary cap of $80 million with 54 players wanting $2 million dollars each; there's some that will have to take the lesser offer due to the cap space. If every player holds out then they are acting in their "own" individual interest which would fit "C"

I hope this helps!

Answer 2

Its C.

Every team has tried to get an advantage by spending more on players, but each team will only have that advantage if other teams do not follow the same strategy. If they all do it, then no team benefits. Like standing at a rock concert, you get a better view only if everyone else stays seated. The NHL team's interest in spending more forces everyone to spend more...it is against the best interest of the group

Therefore, teams agree to take away that option from every team, so no one will be able to use that strategy for gain.

The prisoner's dilemma is whether or not to confess to a crime. He is better off confessing if an accomplice refuses,but if both confess, each will receive punishment.