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Hold Up in the NBA

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conley.jpg With the first pick in the NBA draft, the Portland TrailBlazers earn the right to negotiate with Greg Oden. However, as we've learned in the last few days, there is some pressure for the Blazers to also draft Mike Conley, Jr. The problem is that Conley is top ten talent, meaning Portland will need to trade some real value to get a top ten pick. But top ten might not be enough; Milwaukee selects at number six and is in need of a point guard, so maybe Portland needs to trade into the top five. In fact, recent rumors (see link above) have Atlanta asking for Roy or Aldridge from Portland in exchange for the number three pick. This situation points out the power that star athletes have over the teams that own their rights.

This concept is not new to professional sports. Every summer in the NFL top players hold out for better contracts, and sometimes even refuse to play for the team that holds their rights. Of course, similar examples exist in the NBA: Jon Barry refused to play for the Boston Celtics who selected him with the 21st draft pick in 1992. Economists appropriately name these types of situations as "hold ups". The idea is that one party has a specific asset that another party needs to use. The owner of the specific asset is able to "hold up" and extract more economic rent from the user of the asset.

Solutions to the hold up problem include merger or long term contracts. Paul Joskow, an economist at MIT, has studied power plants that are located adjacent to coal mines. The coal mine has an asset (coal) that the power plant needs, and so is able to hold up the power plant. Of course, there are limits to what types of economic rents the coal mine can extract: if it demands too high a price for coal, the power plant could ship in coal from another location or switch over to a different type of combustion (e.g.: it could become a nuclear plant instead of a coal-fired plant). Joskow finds that often coal mines and power plants enter into long term contracts to solve the hold up problem.

Coming back to the Blazers, Oden has a specific asset the Blazers need (his skills as a center). Oden and his agent (Conley Sr.) know this and so are trying to hold up the Blazers to get Conley Jr. to Portland. Now, at some point, Portland will say enough is enough -- they won't pay any price in order to select Conley. Like the power plant in the example above, if Oden and Conley's demands are too high Portland will go with an alternative (e.g.: pick Durant instead or pick Oden and tell him to deal with it). How does this relate to the Celtics? Some fans are hoping that the Celtics, knowing of Oden's desire to be reunited with Conley in Portland, will select Conley at pick number five (if he is still available) and then try to "sell" the rights to Portland for a high price. But it would be naive to think that Portland will "do anything" to get Conley. They may overpay for him a bit, but not by much because there are alternatives. The Celtics would be better served by focusing energy elsewhere, such as deciding which of the remaining players after Oden and Durant would be the best fit for the Celtics in the short and long term.