Economics of Sports Robert.Donchez@Colorado.edu 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 Cleveland Cavaliers will not pursue Kobe Bryant Already have Lebron James Bryant or other scorers will add little to wins, attendance or revenue The added cost exceeds the added benefit

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

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

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.”