UFC's 335 Million Dollar Settlement and the Game Theory of Wealth Inequality [Finance Fridays]
How this lawsuit demonstrates the dangers of extreme wealth inequality.
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The MMA sporting organization UFC recently settled two massive class-action lawsuit against them for 335 Million Dollars. The lawsuits and their conclusion are a great demonstration of important ideas in Game Theory, how wealth inequality tends to worsen if left unchecked, and what are the negative effects of said inequality. In this article, we will cover the following:
A quick background on the lawsuit and why former fighters were paying the UFC.
Why both parties (the people suing and the UFC itself) were nervous about the lawsuit.
Why the Settlement is a big deal for the cage-fighter labor market.
How this situation demonstrates the dangers of the growing wealth inequality for regular workers.
Why Tech folk should be particularly cognizant of this development.
The way forward
Even if you have no interest in UFC or MMA, it is very important for you to pay attention to these trends. Fields like Sports and Art tend to reflect the trends in labor markets before more mainstream employment markets. Ignore the implications of this settlement at your own risk.
Since 2020, the richest five men in the world have doubled their fortunes. During the same period, almost five billion people globally have become poorer. Hardship and hunger are a daily reality for many people worldwide. At current rates, it will take 230 years to end poverty, but we could have our first trillionaire in a decade.
A huge concentration of global corporate and monopoly power is exacerbating inequality economy-wide.
The Lawsuit: Fighters vs. Market Dominance
The crux of the lawsuit lay in the UFC's alleged monopolistic practices. Fighters argued that the organization's ironclad control over the MMA (Mixed Martial Arts) landscape suppressed their earning potential. This control extended to fighter contracts, limiting their ability to negotiate pay, pursue outside sponsorships, and compete under other promotions/in other sports. In short, they argued the UFC's market dominance acted as a monopsony – essentially a single buyer with the power to dictate unfairly low 'prices' (wages) for its sellers (fighters).
This was made worse by the fact that fighters were treated as contractors, not employees. Thus, they had no health insurance or other benefits that might be used for cushioning. Thus the UFC was able to force the fighters into very exploitative contracts. For a jarring statistic- the UFC only pays it’s fighters 20-30% of the revenue generated. Other major sporting organizations pay closer to 50%.
High Stakes for Both Sides
The stakes of this lawsuit were high for both the UFC and the fighters. Had the lawsuit gone to trial and the fighters won, it could have forced the UFC to make significant structural changes to its business model. This may have included altering contracts, opening up possibilities for fighters to compete outside the UFC, better revenue sharing, and facing antitrust scrutiny. The UFC, understandably, wanted to avoid a scenario that could significantly curtail their financial and operational control.
For fighters, the potential victory held the promise of a more equitable power balance and better compensation. However, a loss would have solidified the UFC's dominance and meant missing out on the life-altering payday. So the fighters involved in the lawsuit agreed to settle, instead of rolling the dice.
Why the Settlement Matters
The $335 million settlement is substantial. It will offer significant financial relief to the former fighters involved in the lawsuit. However, the lawsuit was the first real challenge to the UFC’s authority, and it could have led to better contracts for all the fighters to come. However, in trying to push for this, the fighters suing would have had to deal with significant risk. One can hardly blame them for looking out for themselves first. In this manner, this settlement is a great demonstration of one of Game Theory’s most important lessons- selfishly maximizing individual utility leads to nonoptimal outcomes for groups.
This was an idea explored by Adam Smith in The Wealth of Nations through his discussion of the pin makers and the importance of specialization + cooperation. Alone, a pin maker would have mine the iron, refine the ore, make the pins, and sell them. This limits their output. If the pinmaker can delegate the other tasks to specialists, they can focus on making pins- significantly boosting their output and increasing the wealth for all involved. This settlement is a good demostration of the inverse- if you can divide the individuals in the labor market and reduce cooperation, you can shrink the market size. The UFC has done so for decades, and profited from the market inefficiency by underpaying fighters.
The UFC is also able to avoid any large-scale damage or systematic changes, by consistently buying out their biggest threats. This allows them to keep a tight chokehold on the market.
Wealth Inequality & Lessons for Tech
The UFC case echoes a broader battle that plays out with worrying regularity across industries: the increasing imbalance of power between mega-corporations and individual workers. As corporations consolidate, workers face shrinking options. This can lead to their wages and working conditions being dictated by a small number of powerful employers.
Tech workers should be especially aware of this trend:
Monopolistic Tendencies: Tech Platforms tend to benefit from economies of scale and the network effect. Both of these lend themselves to the creation of monopolies.
Platform Dependence: Software engineers and product managers can become reliant on giant tech platforms for their livelihoods, reducing their bargaining power.
Gig economy traps: The allure of flexible work offered by the gig economy can often mask exploitative pay structures and the lack of traditional worker protections.
This has allowed Tech Companies to shut down unions and clamp down on employee protests. They know that they have the money to replace any dissident employees with others who want high compensation, perks, or prestige. All you have to do is to pay a certain section very well, which will then create positive news for you. All of this positive publicity can then be used to hide the union-busting that takes place in the background.
Of course, there’s always good ol’fashioned political lobbying, which can be used to pass favorable laws.
Politicians are very high net worth individuals (politics is one of the most lucrative career options, no matter where you are). As with most HNIs, a majority of their net worth is tied up in assets. This is the reason that they don’t stop predatory corporate practices and bail out their buddies on Wall Street. They benefit more when asset prices go up than they lose with the corresponding inflation of commodities. Keep in mind most of these politicians make high-base salaries and have many major expenses like housing taken care of, which means that they are insulated from the worst effects of the inflations.
-How Politicians make money from inflation. Economic Incentives mean that Politicians are incentivized to align with businesses (against the common folk) as opposed to regulating them.
As wealth inequality grows, we will continue to see companies unraveling worker protections. This will increase the power imbalances b/w companies and workers, which will allow companies to do this more often. This is the biggest problem with massive Wealth Inequality: money is a form of power and wealth inequality allows the few to effectively bully the many. And that’s why you have to proactively protect your interests and keep their power in check.
The Way Forward
It’s not all doom and gloom (I promise, I’m actually pretty fun at parties). The UFC settlement is a reminder that even against giant corporations, collective action can yield results. It’s also a good reminder to keep your eyes and ears open about the various economic and labor trends in our economy. We don’t exist in a bubble, and if you’re not paying attention to important developments that happen (even if they seem irrelevant to you), you will miss out on important trends in the market.
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I followed the UFC very closely from the 90s onward, and watched as the fighters were happy to be paid literally anything for fighting. This was such a rare thing back then, but of course the ability to be paid has scaled up as the underlying phenomenon (EG, the public's awareness of BJJ and MMA) has grown.
Of course, the level to which the pay has scaled up simply has not kept pace with the company's earnings, and this reminds me of a few other areas where this happens, like banking finance: the federal funds rate will change like a year before banks will even start to raise their interest rates.
Those early days were incredible, and the sport has become more and more commercial and watered down since those days, and I'm generally bored by modern MMA, but those fighters deserve to be better taken care of.