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

2. 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?

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Table 6-12 Caps and Actual 2008 Payrolls in the NBA and NFL (slide 1 of 3)
NBA ( Season)
Cap = $58.7 million
NFL (2008 Season)
Cap = $113.0 million
NHL ( 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

21. 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

22. 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%

23. 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

24. 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

25. 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

26. 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)

27. 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.”