The Economics of Team sports
Rottenberg wrote the first academic analysis of the economics
of sports. On expiry of a player's first year contract, his team maintains
the option to renew for another year on the condition that the wage could
not be diminished more than 25 per cent in any year. The reserve clause, generating a
monopsony in the player's labor market, would promote competitive balance.
Professional sports differ from other businesses, where firms are successful
by diminishing competition. Each team must secure that it is not too strong relative
to competitors, by buying up all the best players. Differently, diminishing returns set in,
and profits tend to decline.
If there is a reserve clause or free agency, the distribution of talent between teams is
defined by the incentive to maximise the value of its player's services.
The Peculiar Economics of Professional Sports
Neale follows Rottenberg's view about the competitive balance for the profitability
of sports teams. He argues that sports team is a firm but not a firm in the economist's sense.
Teams cooperate with each other to generate individual matches and a league competition,
by this way a joint production exists. A sports league should be considered as proportional
to a multi-plant firm, in which the individual teams are 'plants'. Neal proposes that the
lack of competition between sports leagues results from the cost and demand features of the market
for professional team sports as they produce presuppositions of natural monopoly, inducing it to become
efficient for a single league to supply the whole market.
On the cost side, the long-run average cost is possibly horizontal. The growth in the scale of
prodution might involve less efficient playing inputs, increasing average costs. This may be set
off by an 'enthusiasm effect'. Nevertheless, if the sports act on a larger scale, then public enthusiasm helps
more people to develop playing, increasing the supply of players at the highest level. The enthusiasm effect forms
an interdependence between supply and demand. Therefore, rival leagues would split the monopsony
power of teams, as buyers of playing services, accelerating player's bargaining power in wage negotiations.
This would induce higher costs than they exist when a league works as a monopoly supplier.
On the demand side, the teams generate many streams of utility
- directly for spectators who purchase tickets, and
- indirectly for all who follow the championship race as it is developed
The peculiar economic characteristics of sports leagues and teams should be known by legislatures, courts and the public,
when decision making or other anti-competitive practices commit scrutiny.
The Football Club As An Utility Maximizer
According to Sloane the league is the relevant firm, the decision-making unit. In English football, the
governing bodies establish parameters within which clubs work freely and independently. Though total output
(the number of matches played) is determined, this only implies the clubs' common interest. In cartels, firms make
joint decision on price or production, but this does not signify a cartel has the theoretical status of a firm.
Chairmen and directors with a control in football clubs have usually created business success elsewhere.
Motives may include status, power, prestige etc., or sporting enthusiasm, but profit is unlikely to be an important
factor.
Sloane argues an objective of 'utility maximization', perhaps subject to a financial solvency constraint.
The possible arguments of the utility function are: the playing success, the attendance or revenue, the profit, the security
and the health of the league.
Although a drawback is that any type of behaviour can be rationalized by creating an appropriate utility function, the theory
lacks operational significance.
The regulation to overcome 'free market' outcomes (e.g reserve clause), may be stronger if clubs are looking for non-profit objectives.
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