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Major League Baseball: For the Love of the Game? ECON 400M Paper #2 By: Nicholas J. Donato 12/13/12 Thursday, December 13 th.

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Presentation on theme: "Major League Baseball: For the Love of the Game? ECON 400M Paper #2 By: Nicholas J. Donato 12/13/12 Thursday, December 13 th."— Presentation transcript:

1 Major League Baseball: For the Love of the Game? ECON 400M Paper #2 By: Nicholas J. Donato 12/13/12 Thursday, December 13 th

2 How does Major League Baseball operate? League Baseball is a highly successful oligopoly of 30 professional baseball teams. – Each organization has the legal right to use certain types of collusion in their efforts to maximize their respective utilities. Major League Baseball operates as a Legal Cartel. Legal Cartel is defined as a group of firms that formally agree to coordinate their production and pricing decisions in a manner that maximizes joint profits and the behavior of the firms can be seen as shared monopoly or group of firms individually operating in a way that shares one common interest.

3 EXAMPLE Each team has the right to coordinate their broadcasting schedule to what suits them best for radio and television, but ultimately the coordination set forth individually by the teams is the best utilized outcome for the league itself. However, the individual Television and Radio contracts an organization agrees to are individually agreed to and operated by each club individual with no league interference with all profits to stay put within each organization without any of the profit sharing guidelines that sales from tickets sold, food and beverages, and merchandise fall under. EX: Fox Sports 25 year TV deal with the Los Angeles Dodgers for a total of $6 Billion  The Philadelphia Phillies current television contract with Comcast Sports Net expires in 2015 and the organization will have the right to sign on the highest bidder to a new contract with out any league influence or interference.

4 Collusion Among MLB Team Owners The Owners of the teams have acted in unison from the beginning. They conspired to hold down the salaries of players with a secret reserve agreement in 1878. – This created a monopsony whereby a player could only bargain with the team that originally signed him. This massive influence on the labor market lasted almost a century. ~The Reserve Clause: In the late 1800’steam owners gathered to discuss the problem of player roster jumping ~Going to whatever team offered them a better deal. They made a secret agreement among themselves not to raid one another's rosters during the season. In addition, they agreed to this during the off-season as well so that each owner would make a list of 5 players that he wanted to keep ~By agreement, none of the owners would offer a contract to any of these "reserved" players.

5 Labor Market The Baseball Labor Market is one of extremes. Baseball players began their labor history as amateurs whose skills quickly became highly demanded. – Ultimately, all players became victims of a well-organized and obstinate cartel. – Players lost their ability to bargain and offer their services competitively for a century. Despite several attempts to organize and a few attempts to create additional demand for their services from outside sources, they failed to win the right to sell their labor to the employer of their choice.

6 Market Structure and MLBPA The Major League Baseball Players Association (MLBPA) is the union of professional major-league baseball players. The league lost some of its power in 1976 when it lost its monopsonistic control over the player labor market, but kept its monopolistic hold on the number and location of franchises. – Now the franchise owners must share a greater percentage of their revenue with the hired help, whereas prior to 1976 they controlled how much of the revenue to divert to the players. – MLBPA began with a series of small gains for players, including increases in the minimum salary, pension contributions by owners and limits to the maximum salary reduction owners could impose. The first test of the big item – the reserve clause – reached the Supreme Court in 1972

7 Current Labor Arrangements The baseball labor market today is a result of bargaining between owners and players (MLBPA). – The argument put forward was that the cost of developing players was so high, they needed a window of time when they could recoup those investments. The current situation allows the owners 6 years A player is bound to his original team for the first 6 years of his MLB contract, after which he can become a free agent-though some players bargain away that right by signing long-term contracts before the end of their 6 th year. – During that 6 year period, the minimum salary often rises and the maximum salary cut is 10% from year to year –After 2 seasons, players are eligible to have their contract decided by an independent arbitrator if they cannot come to an agreement with the team-this process is called Arbitration.

8 The Demand For Baseball The Demand for baseball extends beyond live game attendance, TV, radio and print. Many specialized industries have grown around the demand for baseball Examples: Magazines, TV & Radio Stations, equipment, memorabilia, etc… »The Demand for Baseball is currently at a record high. A live baseball game is “consumed” at the same time as the last stage of “production” of the game. – It is similar to an plane ticket or a hotel room, in that it is a highly perishable good that cannot be inventoried. – The result is that price discrimination can be employed. Since the earliest days of paid attendance teams have discriminated based on seat location, sex and age of the patron(s). Teams have recently started to exploit the full potential of price discrimination by varying ticket prices according to the expected quality, date and time of the game.

9 Labor Negotiations and The Prisoner’s Dilemma Game *The following will compare labor negotiations in Major League baseball to a repeated game of Prisoner’s Dilemma.* In Prisoner’s Dilemma there are two agents, in this case management(Owners) and labor(players). Each can pursue either of two actions. Each can either be aggressive (uncooperative) in the negotiations or each can be flexible(cooperative). The payoff received by one party depends not only on its own action, but on the action of the other. The payoffs of each party are represented in matrix form (Table 1-Next Pg.) ~ The first entry in each cell of the matrix reflects management’s payoff from a combination of actions, while the second entry reflects labor’s payoff. –For example, if management is aggressive, but labor is flexible, then management’s payoff is +10, while labor’s payoff is –10.

10 Matrix 1-Combined Payoffs Players Owners AggressiveFlexible Aggressive(-5,-5)(+10,-10) Flexible(-10,+10)(+5,+5) In the absence of any communication from its counterpart, each party in the game has a dominant strategy—to behave aggressively(uncooperative). ~ So whichever strategy one side adopts, the other party is better off taking an aggressive stance in the negotiations. However, both parties pursuing aggressive behavior leads to an outcome (–5, –5) that is suboptimal meaning that both parties would be better off if each cooperated for a payoff of (+5, +5). Ultimately each agent in the game pursuing its rational self-interest achieves a state that would be Pareto-inferior. ~ Pareto Inferiority= A move from one distribution point to another is said to be inferior when at least one party is worse off(even if all others are better off **There is one Nash Equilibria when both sides choose to be flexible**

11 Continued.. *Even if communication were allowed between the parties, there is no guarantee that a better outcome would be reached. To achieve a cooperative outcome, both parties would have to agree to be flexible. - This type of agreement wouldn’t work without some type of enforcement in place because each agent (if it believed its partner would be cooperative) would have the incentive to cheat(be aggressive) on the agreement thereby raising its payoff from +5 to +10 An assumption of the Prisoner’s Dilemma for collective bargaining is that cooperation and trust between the agents are difficult to create and to maintain.

12 Matrix 1 Continued - Each party (Labor=Players: Management= Owners) has an equal amount of bargaining power. Each agent raises its payoff by the same amount if a joint cooperative solution, instead of a joint un-cooperative solution, is reached.(Each player raises its payoff from –5 to +5.) - Further, once there is the prospect of a joint cooperative agreement, each agent has the same incentive to cheat on the agreement (thereby attempting to raise its payoff from +5 to +10). **There is One Nash Equilibria**

13 Matrix Table 2- Asymmetric Payoffs Players Owners AggressiveFlexible Aggressive(-5,-5)(+10,-10) Flexible(-10,+10)(+5,+9) Just as before, the owners can raise its payoff by +10 (from –5 to +5) if a joint cooperative agreement is established. -But if it believes that players will be flexible it can raise its payoff by an additional +5 (from +5 to +10) by being aggressive. -The difference from the last game is that now the player’s incentives have changed. The gain to labor from reaching a joint agreement with the owners is now +14 (from –5 to +9), but now once there is the possibility of joint cooperation, there is little incentive for labor to act aggressive. If the owners are flexible, the players can raise its payoff only by +1 (from +9 to +10). -This is because it has the most to gain from joint cooperation (i.e., the most to lose if negotiations break down) **In addition, because it has less to gain from going back on any agreement, the players are in a weak bargaining position. -If the payoffs of each agent are known, the owners may be able to tweak things to their advantage in view of the player’s greater incentive to reach an agreement.

14 Game of Chicken In a hypothetical situation, similar to past collective bargaining situations regarding MLB contract talks, both parties are very adamant in their initial positions that a settlement of the differences cannot be reached. As an example in the 90’s an agreement could not be reached resulting in a work stoppage/strike. Attendance and fan interest took several years to return to prestrike l evels. Although the players gained the negotiating advantage at the time, there was overall damage done to the game and to the joint interests of both the players and the owners Looking ahead to the next collective bargaining after the one that caused the work stoppage, if the result of a strike were to happen again then whatever advantage one side could gain over the other would be greatly exceeded by the losses taken on by each side from the decrease of demand. The incentive created in this event can be represented as the game called Chicken

15 A Game of Chicken-Table 3 Players Owners AggressiveFlexible Aggressive(-25,-25)(+10,-10) Flexible(-10,+10)(+5,+5) In this game, the incentives for each party are different from those in Prisoner’s Dilemma. Neither party has a dominant strategy. -Pursuing its own self-interest, a party’s optimal strategy is dependent on what it thinks the strategy of the other party will be If the owners believes that the players will be flexible then like before, the better strategy will be to be aggressive in bargaining (raising management’s payoff from +5 to +10) *On the other side of things, if the owners believes that the players will be aggressive in bargaining, then the better option for management is to be flexible (receiving a payoff of –10, but avoiding a payoff of –25 if it were aggressive). The players are faced with the same set of choices and with exactly the same incentives and payoffs ** The outcome of the game will largely be based on the perception that each party has of the game’s payoff. **Worst possible outcome is when both players do not concede to each other and are both aggressive.

16 Continued…(Table 4 & 5) Players Owners AggressiveFlexible Aggressive (100, -15)(+10,-10) Flexible (-10, +35)(+9,+5) Players Owners AggressiveFlexible Aggressive (-15,-100)(+35,-10) Flexible (-10, +10)(+5,+9) Table 5: Owners’ Expected Payoff Table 4: Players’ Expected Payoff In Table 4, if this is what the players believe the payoffs are then by being aggressive they could could gain 30 if owners were flexible (from +5 to +35), but would lose only 5 (from –10 to –15) if the owners were also aggressive.

17 Continued.. On the flip side, the players would believe that by being aggressive, management would only gain 1 (from +9 to +10) if labor were flexible, but would lose 90 (from –10 to –100) if the players were aggressive. –This is because the players would have far less to lose than the owners if no agreement were reached (if both parties bargained aggressively) and far more to gain by being aggressive, labor might try to take control of negotiations. Example: The players could operate under the assumption that by threatening the owners with a strike, it could force concessions. Players would believe that it had the greater bargaining power. Moving on to Table 5, if the owners believe these to be the payoffs, the incentives of players and owners are reversed from Table 4. One could reasonably assume that owners would believe that it had more to gain and less to lose from aggressive, non-cooperative bargaining than the players. – So both parties could have an incentive to bargain aggressively and not cooperate, even in the face of a mutual threat. In both Tables 4 & 5 the strong emphasis on one sides perceptions of the bargaining strength that both parties have are important in determining the stance that they will take in the contract talks. Because of this, it is very important that both the owners and the players are motivated to disguise their own expectations in an attempt to mislead their opponents » Each side wants the other to think that’s holding a better hand than it actually is.

18 Overall Conclusion After examining the negotiations in the context of a repeated Prisoner’s Dilemma game we can come to the conclusion that cooperative bargaining relations are difficult to achieve in view of perverse incentives. – The probability of cooperative relationships is increased when each side of the negotiations exercises enough restraint to allow the other party to develop a sense of trust. This can occur when either every possible advantage or every slight difference from normal behavior that might be misrepresented is met with an aggressive(un-cooperative) response. – On the other hand, when threats or competitive moves are to be made, the underlying logic of the move and the potential force behind them must be clear. Idle threats can destroy the credibility and the reliability of a negotiator.

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