Unit 5: Competitive Balance Economics of Sports Unit 5: Competitive Balance

Leagues Want Balance Balance helps profits Attendance and TV ratings fall if one team dominates Even the dominant team can suffer What is competitive balance? Is it a good chance of winning each game? Is it turnover among champions? What do teams do to improve balance?

Teams, Leagues, and Balance What do teams want to do? Some – like the Yankees – pursue wins at the expense of profits Others pursue profits at the expense of wins Leagues can limit behavior of teams to promote balance

Balance and Marginal Product Diminishing marginal product limits the desire of a team to acquire players The Los Angeles Lakers will not pursue Dwayne Wade Already have Kobe Bryant Wade or other shooting guards will add little to wins, attendance or revenue The added cost exceeds the added benefit

Is Perfect Balance Profit Maximizing? Winning has a bigger impact in a large city More gate revenue More media revenue More venue revenue Higher marginal revenue If costs do not vary by city size, big cities will win more

Table 6-4 Years Per League or Conference Title in Pro Sports Leagues (slide 1 of 3) MLB (11 teams) Titles Years Years/ Title NBA (14 teams) New York Yankees 39 106 2.7 Minneapolis Lakers 6 12 2.0 New York Giants 15 57 3.8 Los Angeles Lakers 24 49 Los Angeles Dodgers 9 51 5.7 Boston Celtics 20 63 3.2 Brooklyn Robins/ Dodgers 6.3 St. Louis Hawks 4 13 3.3 St. Louis Cardinals 17 108 6.4 Chicago Stags 1 4.0 Milwaukee Braves 2 6.5 Syracuse Nationals 3 14 4.7 Florida Marlins 16 8.0 Philadelphia Warriors 5.3 Oakland Athletics 48 Chicago Bulls 43 7.2 Atlanta Braves 5 8.6 Philadelphia 76ers 46 7.7 Boston Pilgrims/ Red Sox 109 9.1 San Antonio Spurs 31 7.8 Baltimore Orioles 55 9.2 New York Knicks 8 7.9 Detroit Pistons 7 61 8.7 Rochester Royals 9.0 Washington Wizards

Table 6-4 Years Per League or Conference Title in Pro Sports Leagues (slide 2 of 3) NFL (18 teams) Titles Years Years/ Title NHL (17 teams) Years+5 New York Giants 18 76 4.2 Ottawa Senators I 8 2.3 Dallas Cowboys 10 49 4.9 Montreal Canadiens 27 93 3.4 Boston Redskins 1 5 5.0 Detroit Red Wings 24 84 3.5 Cleveland Browns 11 59 5.4 Toronto Maple Leafs 22 Oakland Raiders I 2 12 6.0 Edmonton Oilers 7 31 4.4 Baltimore Colts 6.2 Montreal Maroons 3 15 Chicago Bears 6.3 Boston Bruins 17 86 5.1 Green Bay Packers Hamilton Tigers 6 Denver Broncos 39 6.5 Philadelphia Flyers 43 6.1 New England Patriots Carolina Hurricanes 13 St. Louis Rams 14 7.0 New Jersey Devils 4 28 Washington Redskins 7.6 Colorado Avalanche 7.5 Miami Dolphins 7.8 New York Islanders 38 Indianapolis Colts 8.0 Chicago Blackhawks 8.4 Cleveland Rams 9 9.0 New York Rangers Minnesota Vikings 48 9.6 Dallas Stars 8.5 Buffalo Bills 9.8 Calgary Flames 9.3 Los Angeles Rams

The Coase Theorem and Competitive Balance Coase claimed that markets direct resources to their most productive uses Property rights do not affect the flow of resources They affect only who gets paid for them The theorem is most commonly applied to externalities Applying the Coase theorem to sports LeBron James will go where he is most productive The team where he generates the greatest income

How The Coase Theorem Works Assume that LeBron James is more valuable in NY than in Cleveland Under free agency The NY Knicks pay James to move to NY If there is no free agency The NY Knicks pay the Cavaliers for the “rights” to James James moves - 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

Promoting Competitive Balance The Coase theorem breaks down if there are large costs to making transactions Owners have tried to impose transactions costs Revenue sharing Salary caps and luxury taxes Reverse order draft These restrictions also promote monopsony power

Revenue Sharing We have seen that winning means more to teams from big cities New York will naturally win more often Revenue sharing tries to reduce this source of inequality All 4 major sports leagues share revenue

Should Revenue Sharing Work? Even if teams share all revenue equally League revenue is greatest when big-market teams win The incentive to have big-market teams win does not go away Not all teams pursue winning equally Losing teams often have higher profits than winning teams The Marlins and Nationals have higher operating income than the NY Yankees

Table 6.9 MLB Revenue Sharing Comparisons, Split-Pool and Straight-Pool ($Millions) (slide 1 of 3) Team 2001 Net 2001Payroll Change 2002 Net 2002 Payroll Change 2003 Net 2003 Payroll Change 2005 Net 2005 Payroll Change Anaheim $9.6 -$6.3 -$1.3 $13.7 $1.9 $18.3 -$11.0 -$17.9 Arizona -$4.4 $7.4 -$3.3 $18.2 $1.5 -$19.1 $13.0 -$6.1 Atlanta -$10.6 $10.5 -$9.8 -$4.6 -$11.3 $4.5 -$10.0 $7.0 Baltimore -$6.8 $7.7 -$5.3 -$16.6 $0.3 $11.6 $2.0 $17.1 Boston -$16.4 $38.6 -$5.7 -$38.7 $0.0 -$52.0 -$6.9 Chicago Cubs -$6.6 $19.5 -$8.3 -$16.7 $8.4 -$32.0 -$13.6 Chicago White Sox -$4.2 $25.2 -$3.8 -$4.8 $6.2 -$18.0 $10.6 Cincinnati $13.4 $0.2 $9.8 $2.6 $6.5 $5.6 $16.0 $15.6 Cleveland -$13.3 $15.3 -$14.8 -$25.4 $6.0 -$1.1 Colorado -$6.0 -$2.8 -$5.1 -$4.3 $2.5 $10.0 -$21.3 Detroit $5.1 -$8.0 $8.3 $16.7 $0.4 $25.0 $10.3 Florida $18.6 $16.2 $20.9 $3.6 $21.0 $13.9 $31.0 $10.1 Houston -$5.2 $22.4 -$9.1 $1.2 $9.4 Kansas City $8.5 $16.6 $12.9 $19.0 -$1.8 $30.0 -$7.8 Los Angeles $31.2 -$9.3 -$25.3 -$9.5 $18.4 -$20.0 -$18.6 Milwaukee $1.7 $3.2 $24.0 Minnesota $19.1 $14.7 $8.8 $17.2 $16.8 $22.0 $1.4

Table 6.9 MLB Revenue Sharing Comparisons, Split-Pool and Straight-Pool ($Millions) (slide 2 of 3) Montreal $28.5 $3.3 $8.1 $29.5 $8.6 N.Y. Mets -$15.7 $5.1 -$17.4 $7.2 -$21.5 $18.2 -$24.0 -$1.9 N.Y. Yankees -$26.5 $25.6 -$26.6 -$52.7 $43.7 -$76.0 $20.4 Oakland $10.5 $10.9 $9.2 -$1.6 $11.8 $11.7 $19.0 -$4.9 Philadelphia $3.7 $9.8 $9.0 $13.6 $5.8 Pittsburgh $1.8 $8.0 $6.4 $0.7 $13.3 $25.0 $5.6 San Diego $8.7 -$19.6 $6.3 $6.7 $9.5 $5.7 -$2.6 San Francisco -$6.3 $24.5 -$9.6 -$13.0 -$14.0 $7.8 Seattle -$18.8 $19.1 -$19.9 $1.4 -$31.0 $15.4 -$25.0 $5.9 St. Louis -$8.2 $1.5 -$8.4 $3.5 -$9.2 -$19.0 -$0.7 Tampa Bay $12.4 -$23.1 $14.7 -$3.8 $20.5 -$6.9 $33.0 $5.3 Texas -$8.7 $22.6 $24.8 -$7.2 -$2.0 $0.0 -$23.4 Toronto $18.4 $13.7 -$14.1 $18.7 $31.0

Introduction to the Salary Cap NBA, NFL, and NHL all have salary caps Caps set upper and lower limits to payrolls 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

Hard Caps and Soft Caps The NFL has a hard cap Sets firm limit to salaries No exemptions 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 even if it is over the limit Larry Bird exception Named for former Boston Celtics great who was its first beneficiary Team can re-sign a player who is already on its roster even if it is over the limit  

The NBA And Soft Caps The salary cap has not helped competitive balance in the NBA All the exceptions have led to further rules The NBA now caps individual salaries as well as team payrolls The NBA has a luxury tax to prevent teams from abusing the exceptions Teams pay $1 for every $1 over the cap

Table 6-11 Salary Caps in the NBA, NFL, and NBA ($Millions) (slide 1 of 2) NHL Year Cap Ave. Team Payroll 1984 $3.6 1985 $4.2 $4.6 1986 $4.9 $5.7 1987 $6.2 $6.0 1988 $7.2 $6.8 1989 $9.8 $11.3 1990 $11.9 $13.7 1991 $12.5 $15.8 1992 $14.0 $18.5 1993 $15.2 $22.2 1994 $16.0 $25.0 $34.6 $36.6 1995 $23.0 $28.5 $37.1 $42.6 1996 $24.4 $32.7 $40.8 $45.7 1997 $26.9 $38.1 $41.5 $43.6 1998 $30.0 $45.1 $52.4 $61.4 1999 $34.0 $51.6 $58.4 $66.1 2000 $35.5 $53.3 $62.2 $68.1 2001 $42.5 $57.3 $67.4 $70.8 2002 $40.3 $57.2 $71.1 $66.0 2003 $43.8 $56.0 $75.0 $76.9 2004 $43.9 $55.4 $80.5 $83.8

Table 6-11 Salary Caps in the NBA, NFL, and NBA ($Millions) (slide 2 of 2) 2005 $49.5 $55.1 $85.5 $82.0 $39.0 $34.3 2006 $53.1 $60.6 $102.5 $100.0 $44.0 $40.3 2007 $55.6 $66.0 $109.0 $100.9 $50.6 $44.4 2008 $58.7 $72.0 $116.0 $113.3 $56.7 $51.4 2009 $123.0 $56.8

Table 6-12 Caps and Actual 2008 Payrolls in the NBA and NFL (slide 1 of 3) NBA (2008-09 Season) Cap = $58.7 million NFL (2008 Season) Cap = $113.0 million NHL (2008-09 Season) Cap = $56.7 million Team Payroll New York $97,085,751 Oakland $152,389,371 NY Rangers $66,064,200 Toronto $95,358,923 Dallas $146,401,600 Calgary $63,100,000 $93,215,017 Minnesota $133,354,045 Philadelphia $60,472,500 Cleveland $90,794,387 $131,916,300 Ottawa $59,778,117 LA Lakers $80,745,793 New Orleans $131,531,820 Montreal $58,908,000 Boston $78,738,973 Pittsburgh $128,815,061 Washington $58,522,500 Detroit $77,046,985 Tennessee $126,017,443 $56,589,460 Memphis $75,819,691 Arizona $122,110,110 $56,400,000 Phoenix $75,449,279 Jacksonville $122,109,207 San Jose $55,811,667

Table 6-12 Caps and Actual 2008 Payrolls in the NBA and NFL (slide 2 of 3) Orlando $74,863,198 Chicago $120,065,819 New Jersey $55,654,200 Philadelphia $74,434,445 San Francisco $118,766,239 Dallas93-4 $55,625,000 Sacramento $71,517,217 New York Jets $116,910,097 Edmonton $54,067,381 $71,487,984 St. Louis $116,677,660 Vancouver $53,144,000 Washington $70,558,149 New York Giants $115,816,180 Minnesota $52,861,000 Milwaukee $70,220,238 Miami $114,649,660 Columbus $52,342,500 Indiana $69,623,798 Buffalo $113,364,927 $52,225,700 Houston $68,761,285 Carolina $112,114,711 Colorado95-6 $51,940,000 San Antonio $68,403,480 $111,963,684 $51,548,557 Atlanta $68,165,839 San Diego $111,813,340 Boston $51,535,000 Charlotte $68,004,277 Cincinnati $109,727,880 Florida $51,392,500

Table 6-12 Caps and Actual 2008 Payrolls in the NBA and NFL (slide 3 of 3) Denver $67,068,631 Philadelphia $109,557,398 Anaheim $49,838,000 New Orleans $67,017,804 Houston $108,445,418 Carolina97-8 $49,075,000 Utah $66,266,407 Tampa Bay $104,329,311 Toronto $48,835,000 Minnesota $63,527,135 Seattle $102,985,710 St.Louis $45,483,333 Golden State $63,287,110 Atlanta $96,391,525 Nashville $44,155,000 New Jersey $61,983,445 Detroit $95,827,117 $43,501,666 LA Clippers $61,883,344 $95,599,778 Phoenix96-7 $39,102,500 Oklahoma City $61,534,722 Green Bay $94,018,300 Los Angeles $36,112,500 Portland $56,154,803 Indianapolis $93,373,915 $34,262,500 Miami $50,031,123 New England $92,734,120 NY Islanders $33,267,500 Baltimore $90,713,965 Kansas City $83,623,776 Average $71,968,308 $113,253,609 $51,387,176 % Teams Over Cap 93% 50% 20%

MLB’s Luxury Tax Takes the place of a salary cap Team pays a tax for exceeding a target payroll Tax rises with the number of abuses Detroit Tigers paid a 22.5% tax in 2008 as first-time violators NY Yankees paid a 40% tax for sixth consecutive violation

The Reverse Order Draft Ideally levels out talent Weakest teams get first choice of new talent Strongest teams get last choice Works only if teams can identify talent Can promote “tanking” to improve draft position That is why the NBA has a draft “lottery” Lottery means that weakest team might not choose first

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

A History of the Reverse-Order Draft Introduced by NFL in 1936 Caused by bidding war for Stan Kostka Star running back for the University of Minnesota Philadelphia Eagles & Brooklyn Dodgers competed to sign him Drove salary offers to that of Bronko Nagurski – the top star of the day ($5000)

What Was The Point of the Draft? Did teams just want to keep salaries low? Was is a cynical move by weak teams? Bert Bell, the Eagles’ owner 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.”