1. The Economics of Sports Michael A. Leeds | Peter von Allmen
FIFTH EDITION
Chapter 5
Competitive Balance
Michael A. Leeds | Peter von Allmen

2. Competitive Balance
The term means different things to different people
Close competition every year, with the difference between the best and worst teams being relatively small
Regular turnover in the winner of the league’s championship
More generally, it means degree of parity within a league

3. Learning Objectives
Understand why owners and fans care about competitive balance
Be able to use and interpret the different measures of competitive balance
Describe and compare the tools that leagues use to promote competitive balance and the limitations of those tools.

4. 5.1 Desire for Competitive Balance
Fans and owners alike have a conflicted relationship with competitive balance
On any given day, seeing one’s team win is preferable to seeing it lose
But an uninterrupted string of wins is dull

5. The Fans’ Perspective
A game with an uncertain outcome is much more exciting than a foregone conclusion
Table 5.1 shows that from 1950 to 1958 attendance for both the Yankees and the entire American League either stagnated or fell because of Yankees dominance
Evidence suggests that in many sports, fans prefer a game where the home team has a 60-70% chance of winning

6. Table 5.1

7. The Owners’ Perspective
Competitive balance matters to owners because it matters to fans
Leagues adopt policies to promote competitive balance because they enhance fan demand
Leagues restrict team behavior if it leads to teams that are too strong or too weak (see Table 5.1)
Balance is hard to achieve if some teams maximize wins while others maximize profits

8. Effect of Market Size
There is considerable debate over the impact of market size on competitive balance
There are three primary sources of disagreement
How to measure of success
During playoffs or regular season?
How to characterize market size
Market size has become more important with the advent of broadcasting

9. Effect of Market Size (cont.)
The third point of disagreement is how to measure the impact of policies, such as revenue sharing
Profit-maximizing leagues do not want total balance – they want big-market teams to win more
At minimum, more populous locations will win the league championship more frequently
Figure 5.1 shows an additional win is more valuable in a larger market, so the optimum number of wins is greater

10. Figure 5.1

11. The Effect of Diminishing Returns
The impact of another unit of a variable input (when added to a fixed input) eventually falls
This effect limits the desire of teams to stockpile – and pay – star players
And promotes competitive balance
Drew Brees has limited value to a team that has Tom Brady
Brees adds little to wins, attendance, or revenue
The added cost exceeds the added benefit
Other teams can use him more effectively

12. Is Perfect Balance Profit Maximizing?
Winning has a bigger impact in a larger market
It adds more to gate, media, and venue revenue
MRwins higher in big cities
Profit-maximizing leagues and competitive balance may be incompatible
Big cities will win more unless MCwins is also higher
MR, MC
MRlarge
MRsmall MC
Wins

13. A History of Competitive Balance
Yankee dominance of MLB is not new
Appeared in 15 World Series between 1947 and 1964
The LA Lakers and San Antonio Spurs won 9 of 13 NBA championships between 1999 and 2011
The Montreal Canadiens won 10 Stanley Cups in the NHL between 1965 and 1979
They were succeeded by NY Islander and Edmonton Oiler dynasties in the 1980s
The NFL is more balanced, but the Browns and Lions have never been in a Super Bowl

14. Competitive Balance in Soccer from 2000-01 to 2011-12
In England’s Premier League
Manchester United, Chelsea, and Arsenal have won 11 times
In Germany’s Bundesliga
Bayern Munich and Borussia Dortmund have won 9 times
In Italy’s Serie A
AC Milan, Inter Milan, and Juventus have won 11 times
In Spain’s La Liga
FC Barcelona and Real Madrid have won 10 times

15. 5.2 Measuring Competitive Balance
Within-Season Balance (Variation)
Compares teams within a season—across a league
A low dispersion of team winning percentages means that the teams are evenly matched
Between-Season Balance (Variation)
Compares winners (champions) across time
Some leagues have the same champions year after year
Regular turnover is preferred

16. Within-Season Variation (1)
We could use the standard deviation of winning percentage
The standard deviation gives the dispersion of performance by teams
It is the square root of the average squared deviation from the mean
See formula on p. 159
The mean performance is always .5 as there are a winner and a loser in every game

17. Application
In 2011, the standard deviation in the American League was 0.067
The typical winning percentage varies by from the mean
The standard deviation in the National League was 0.054, about three-fourths that of the American League.
The National Leagues was more balanced

18. Within-Season Variation (cont.)
We cannot compare the standard deviation across leagues or across seasons with a different number of games
As the number of matches rises, winning percentages cluster around the mean
If teams are evenly matched, then the probability of success in any game is close to .5
We can apply the binomial distribution
In a short season, a lucky team can have all wins and an unlucky team no wins
The league can look unbalanced in a short season

19. Within-Season Variation (cont.)
We need a better measure
We compare a league’s standard deviation to the standard deviation that would result if teams were evenly matched
The “ideal” standard deviation occurs when each team has a 50% chance of winning a given game
The better measure is the ratio of the actual to the ideal standard deviation
R = sA/sI

20. Computing Within-Season Balance
The ratio of actual to ideal standard deviation
N = # Teams
G = # Games
WPCTi,t = Winning percentage of team i at time t

21. Interpreting the Ratio
The ratio R gives a standardized measure
Actual and ideal standard deviation fall as G rises
We can now compare leagues and seasons with a different number of games
The formula appears on p. 161
As a rule, R > 1
If R = 1, the league is completely balanced
Outcomes are effectively randomly determined
As R rises, balance worsens

22. How Do Leagues Compare?
English Premier League was the most balanced in
The NFL, NHL and MLB have similar balance
NBA is by far the least balanced
This has been true in most years
See Table 5.3 for the actual statistics

23. Table 5.3

24. Between-Season Balance
We can use the standard deviation of each team’s winning percentage
Unlike the within-season measure, there is no “ideal” measure
It is unclear what is a good or bad value
We can use the frequency of championships
It is hard to compare this across leagues
See Table 5.4

25. Table 5.4

26. The Herfindahl-Hirschman Index
HHI measures the concentration of championships
In industrial organization, it measures monopoly power
Let ci = #championships by team i
T = #teams; N = #Years
If HHI=1, one team always wins
If HHI=1/N and N>T, complete competitive balance
If HHI=1/T and N<T, complete competitive balance
See p. 164 for computations; What if the league had 10 teams?

27. Applying the HHI to Sports
See Table 5.4
the HHI for the Premier League is far greater than for any other league
the HHI for the NBA is also large
the HHI for the NHL, NFL, and MLB are substantially smaller
the HHI for the NHL is the smallest, indicating that the league was most balanced in the first decade of the 21st century

28. Illustrating Competitive Imbalance
The Lorenz Curve measures inequality in a population
It is typically used to measure income inequality
We use it to measure inequality in winning
Line up NBA teams by wins in (p. 164)
1230 games were played, so population = 1230
The 3 weakest teams (the lowest decile) won 58 games
58 games correspond to 4.7 % of 1230
Thus, the bottom 10% accounted for 4.7% of wins
The next 10% accounted for 5.8% and so on
The top 10% accounted for 14.7% of wins
Figure 5.2 presents the results

29. The Lorenz Curve for the NBA
Red line shows perfect balance
Adding 10% more teams adds 10% more wins
Blue line shows reality
Bottom 10% wins less than 10%
Sags below red line
As we add better teams, blue curve catches up
At 100% of teams, we account for 100% of wins
The farther the blue line sags, the greater the inequality

30. 5.3 Altering Competitive Balance
All the major North American sports leagues have developed policies to promote competitive balance
Revenue sharing
Salary caps and luxury taxes
Reverse-order draft
Players claim that the policies merely depress overall salaries
This section explores the policies’ effect on competitive balance

31. The Invariance Principle
Free agency allows a player to go to the team that offers the best employment terms
Players sell their services to the highest bidder
Owners claim that free agency is incompatible with competitive balance
Economic theory suggests otherwise
Markets direct resources to the most productive uses
Property rights do not affect the flow of resources
They affect only who gets paid for them
Simon Rottenberg (1956) first applied the principle to sports

32. How the Invariance Theorem Works
In 2012 Albert Pujols was more valuable to the LA Angels than to the St. Louis Cardinals in terms of revenue
With free agency
The Angels paid Pujols to move to LA
Without free agency
The Angels would pay the Cardinals for the “rights” to Pujols
Pujols moves in both cases—the use of the resource is unaffected
The only difference is who gets paid
The reserve clause did not prevent player movement
In 1920 Red Sox sold Babe Ruth to Yankees
Connie Mack twice sold off championship teams in Philadelphia

33. With Transaction Costs…
The Invariance principle breaks down if there are large costs to making transactions
Benefits that do not exceed transaction costs are not realized
Transactions costs could have prevented the Angels from pursuing Pujols

34. Revenue Sharing
MLB, NBA, NFL, and NHL share network TV revenue equally
NFL extensively shares all sources of revenue
Teams keep only 60% of home gate revenue
Huge TV package dwarfs other sources
MLB shares 31% of local revenue (minus “expenses”)
Central (non-local) revenue also goes disproportionately to teams in 15 smallest markets
They will have to spend this revenue on players

35. Revenue Sharing (cont.)
The NBA is expected to vastly increase sharing
Teams will share up to 50% of local revenue (minus “expenses”)
The NHL transfers income to teams
In bottom 15 smallest media markets
If the market has a base population under 2 million

36. Revenue Sharing (cont.)
Revenue sharing equalizes revenue across teams
Goal is to reduce incentive of big teams to pursue talent
This will not work if
Sharing shifts down MR of a win for all teams equally – big-market teams still have higher MR
Teams that receive revenue do not spend their added revenue on talent
Some teams might pursue profit over wins

37. Salary Caps NBA, NFL, and NHL all have salary caps (not MLB)
Salary caps are neither a salary limit nor a cap
They set a band on salaries: both upper and lower limits to payrolls (not individual salaries)
Take qualifying revenue (QR) of league
Not all revenue “qualifies”
Definition varies from league to league
Players get a defined share of the QR
Divide total player share by # of teams
Add & subtract a fudge factor (5-20%) to get the bounds

38. NFL Example Players receive
55% of national broadcast revenue
45% of NFL Ventures (merchandising) revenue
40% of aggregate local revenues
Each team must spend at least 89% of the cap
Overall, players must receive at least 95%

39. Hard Caps and Soft Caps The NFL has a hard cap
Sets a firm limit on salaries without exceptions
The NBA has a soft cap with many exceptions
Mid-level exception
Team can sign 1 player to the league average salary
Even if it is over the limit
Rookie exception
Team can sign a rookie to his first contract
Larry Bird exception
Named for former Celtics great who was its first beneficiary
Team can re-sign a player who is already on its roster

40. The NBA and Soft Caps All the exceptions have undermined the cap
This has led to further rules
The NBA now caps individual salaries as well
The NBA has a luxury tax to prevent teams from abusing the exceptions
This has nothing to do with luxury boxes
Teams pay a tax that increases for every $5 million over the cap
A team $15 million over the cap must pay a $37.5 million tax

41. MLB’s Luxury Tax Tax starts at 17.5% for first-time offenders
Threshold is $178 million in
Rises to $189 million in 2014
Tax rises with the number of abuses
NY Yankees have paid the tax every year

42. The Reverse-Order Entry Draft
Ideally, it levels out talent over time
Teams select new players according to their order of finish in the previous season
Weakest teams get the first choice of new talent
Strongest teams get the last choice

43. What Was the Point of the Draft?
Did teams just want to keep salaries low?
Was is a cynical move by weak teams?
Eagles’ owner Bert Bell proposed the draft
The Eagles happened to have the NFL’s worst record
Was it an idealistic move?
The NY Giants & Chicago Bears agreed to the draft
They were the dominant teams & had the most to lose
Tim Mara (Giants owner): “People come to see competition…. We could give [it to] them only if the teams had some sort of equality.”

44. Weaknesses of the Draft
It can lead to “tanking”
Teams lose intentionally to improve draft position
That is why the NBA has a draft “lottery”
Under a lottery
The weakest team has the best chance of choosing first
But it might not
It works only if teams can identify talent

45. Identifying Talent: Moneyball
Billy Beane, the Oakland A’s general manager, found underrated players
He saw that teams
Overrated physical skills
Underrated on-base percentage
Using different criteria in player selection kept his small market team competitive
Other teams eventually caught on
A’s have fallen on hard times as a result