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Abu Dhabi, UAESaturday 23 June 2018

Economics 101: Why did Mayweather earn so much more than McGregor?

The now retired boxer used savvy bargaining skills

Floyd Mayweather Jr. hits Conor McGregor in a super welterweight boxing match in Las Vegas. Eric Jamison /AP
Floyd Mayweather Jr. hits Conor McGregor in a super welterweight boxing match in Las Vegas. Eric Jamison /AP

The hugely anticipated August 2017 boxing match between the now retired boxer Floyd Mayweather and the mixed martial artist Conor McGregor captured headlines for many reasons, but the most salient was the amount of money earned by each fighter – purportedly US$300 million for the American Mayweather, compared with $100m for his Irish opponent. What accounts for the stark imbalance?

Economists have been studying bargaining and negotiation for decades, ever since the birth of “game theory” during the middle of the 20th Century. One of the most famous contributions comes from John Nash, the Nobel Laureate whose life was popularised by the film A Beautiful Mind. Today, bargaining theory is used to analyse a wide variety of scenarios, including industrial strikes, haggling in a street market and logrolling in parliamentary systems.

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Before we explore what economists have learned about the determinants of bargaining outcomes, it is worth pointing out that – contrary to popular belief – “fairness” concerns play a modest role. It might seem “unfair” for McGregor to earn a third of his adversary, when he is seemingly contributing half of the work. However, if McGregor’s negotiators had used appealing to the principle of fairness as a bargaining strategy, they would have been wasting their time. Unlike diners working out how to pay a restaurant bill, commercial bargaining does not start with both sides assuming that a 50-50 split is acceptable based on an implicit appeal to a social norm; instead, each side will seek the entire pie, and will demand justification for surrendering even the crumbs. This is especially true when the stakes are higher.

Potentially the most important factor is what is known as the “disagreement pay-off” of each bargainer, which refers to what each side will earn in the event that the negotiations fail, and the bargainers have to seek their next best alternative. Generally speaking, when you are negotiating, the higher your disagreement payoff, the stronger your bargaining hand, and the larger the slice of the pie you will be able to secure.

The intuition is simple: in a bargaining situation, the primary threat – or leverage – that you have is breaking off negotiations and going home, leaving each side with the disagreement payoff. Thus, you have to be offered in excess of that payoff in order for you to decline your option of cancelling the agreement.

As a result, in many real settings, much of the bargaining is based on posturing that your disagreement payoff is high, and convincing your opponent that their disagreement payoff is really low: “You need this much more than I do” is a common negotiating line.

In the context of Mayweather and McGregor, highly disparate disagreement payoffs is the primary reason for the “unjust” final distribution. Mayweather had a history of fights where he earned tens of millions of dollars and beyond, including two years ago against Manny Pacquiao. In contrast, McGregor’s previous purses never exceeded $10m, primarily due to the fact that there is a lot less money in his mixed martial arts than in professional boxing.

By challenging a major boxing contender, Mayweather could earn tens of millions at least, while the equivalent action for McGregor would yield something in the order of $4m. This huge disparity enabled Mayweather to bully McGregor into accepting a 75:25 split. One factor that helped McGregor to avoid an even worse deal was his fanatical, patriotic supporters; they represented a considerable economic contribution to the purse that Mayweather could not easily get from an alternative opponent.

However, disagreement payoffs are not the only factor. Patience – a bargainer’s ability to hold out – plays a role, too, especially if the pie shrinks with time. The side that is hurt less by waiting for a deal to be struck enjoys an advantage, as it can threaten the other side with stalling tactics. This is the main principle behind medieval siege warfare: the encircling force seeks a (relatively) bloodless victory by undermining the defending force’s ability to wait, by cutting off its access to critical supplies. Preemptive countermeasures include secret passages and deep wells.

In the case of Mayweather and McGregor, the Irishman probably had the advantage in this dimension, for two reasons. First: his age, as Mayweather was 40 years old, and 11 years older than his opponent. Delaying the fight would not adversely affect McGregor’s physical abilities, while the decline in Mayweather’s strength and speed was already accelerating, diminishing his likelihood of winning and his ability to entertain viewers, and therefore to convince them to pay to watch the fight.

Second, while it is possible that it was merely a publicity stunt, in the run up to the fight, media outlets reported that Mayweather was in desperate need of money to settle a multimillion-dollar tax bill. If true, McGregor’s team will surely have gestured to the looming threat of IRS legal action in an attempt to convince Mayweather to make a better offer.

We welcome economics questions from our readers via email (omar@omar.ec) or tweet (@omareconomics)