Economic Analysis of Antitrust Law and Player Restraints

Employer’s Motivation for Salary Payments If you were president of a manufacturing company looking to expand, would you rather purchase a plant expected to earn $26m in revenues and cost $25m to operate, or a plant expected to earn $3m in revenues and cost $500,000 to operate?

/2 Employer Motivations If you were President of a ball-club owned by a charitable trust (i.e. solely interested in making money for a worthy cause), would you rather have Twins C Joe Mauer (.323,.880 OPS) or Rockies C Wilin Rosario (.292,.801)?

Basic Economics of Player Salaries Player’s value to team = Marginal Revenue Product (MRP) – Salary MRP = A-B, where A = annual club revenue with X on team B = annual club revenue with club’s “next best alternative” to X

Effect of Player Restraints Do player restraints harm players? Do player restraints harm sports fans?

Justifications for Player Restraints Holds down salaries → holds down ticket prices Allows teams in small markets to compete Allows teams to recoup investment in developing young players Promotes team continuity Promotes competitive balance

Economic Analysis of the Relationship Between Ticket Prices and Player Payroll Avg Ticket Price | Concessions profits Estimated AttendanceRevenue 4565, , , , , ,

Why is Competitive Balance a Desirable Goal?

Essential Elements to Claim that Competitive Balance Enhances Fan Appeal 1) fans prefer a more balanced competition 2) player restraints actually improve competitive balance 3) player restraints necessary to facilitate the degree of balance fans prefer

Do Fans Prefer a More Balanced Competition? AAFC/Browns Empirical studies mixed Blue Ribbon Report: Reasonably Recurring Prospect of Reaching Post-season Play (RRRPP) EPL: Outcome Uncertainty Why NFL’s parity strategy is unique

Do Player Restraints Actually Improve Competitive Balance Why won’t free markets produce the level of competitive balance that fans prefer? Actual experience –MLB with Reserve Clause –MLB with free agency –NFL non-guaranteed contracts Alternatives

Details of Revenue Sharing original MLB scheme rewarded low-balling and penalizes effective use of payroll for small market teams note some teams did use revenue as spur to significant increase payroll (handout) need to judge club success based on benchmarks

Economically Irrational Owners? Why would clubs spend money on players that they did not expect to recoup in increased revenues? What sort of player restraints can prevent or deter economic irrationality?