1. Economics of Sports Robert.Donchez@Colorado.edu
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 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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.”