1. Teacher Instructions
Use with the lesson Professional Baseball—Can You Join the League?
Display slide 3 with Procedure Steps 1 and 2 in the lesson.
Display slide 4 with Procedure Step 3.
Display slide 5 with Procedure Step 10.
Display slides 6-24, which correspond to the visuals noted in the Procedure, as noted in Steps
Display slides with Procedure Step 16.

2. Professional Baseball— Can You Join the League?
Compelling Question
How does economic competition affect professional sports leagues and teams?

3. What are your preferred sports?
Name some of your favorite professional sports teams.
What are some economic decisions professional sports teams face?

4. Roleplay Options
A member of a team owner group trying to get the group’s team accepted into the Professional Baseball League
A member of the Professional Baseball League Expansion Committee deciding which new teams to accept into the league

5. Did You Get In?
How many teams were accepted into the league on the first attempt?
Why was it hard to get a team accepted?
How did the incentives of the team owner groups and League Expansion Committee differ?

6. Visual 1: League Restrictions
The payroll may not exceed $25,000,000.
No more than 2 pitchers may have an ERA less than 3.00.
No more than 4 players may have a batting average over .300.

7. Visual 2: Market Structures (slide 1 of 4)
Monopoly—A firm that is the only seller of a product that lacks close substitutes; a market structure with very few sellers, which enables each seller to affect the total supply and the price of the good or service.
Examples: Utilities such as electricity, water, and natural gas. Utilities are often given exclusive rights by the government to provide these services and must follow government regulations.

8. Visual 2: Market Structures (slide 2 of 4)
Oligopoly—A market structure with few firms and a market that is difficult to enter. The firms sell either a standardized or differentiated product, and there is usually non-price competition. Individual firms have little control over product prices because of mutual interdependence, unless cooperation or collusion occurs among firms.
Examples: Car manufacturers, cell phone providers, airlines, computer software companies, and oil producers.

9. Visual 2: Market Structures (slide 3 of 4)
Collusion—When competing firms agree to work together (collude) to fix prices, share a market through production decisions, or otherwise limit competition. Firms may agree to work together, but individual firms can produce more than the agreed- upon quantity in an attempt to increase profits.
Example: Two competing software companies agree to charge a certain price for their respective, competing products.

10. Visual 2: Market Structures (slide 4 of 4)
Cartel—A group of businesses (firms) that formally agree to coordinate their production and pricing decisions in a manner that maximizes joint profits. Such an arrangement is more formal than collusion. Like colluding oligop­olies, individual firms can produce more than the agreed-upon quantity in an attempt to increase profits.
Examples: OPEC (Organization of Petroleum Exporting Countries) and Major League Baseball.

11. Visual 3: The Case of Baseball—Why and How
(slide 1 of 4)
Why?
Professional baseball was ruled exempt from anti- trust laws in 1922.
FEDERAL BASEBALL CLUB OF BALTIMORE, INC. v. NATIONAL LEAGUE OF PROFESSIONAL BASEBALL CLUBS, ET AL. No Supreme Court of the United States. Argued April 19, Decided May 29,

12. Visual 3: The Case of Baseball—Why and How
(slide 2 of 4)
Why? (cont.)
The ruling allows the league to coordinate and cooperate to maximize joint profits, forming a cartel. A successful cartel has a similar market outcome as a monopoly.
Professional sports leagues act as cartels (or a shared monopoly).

13. Visual 3: The Case of Baseball—Why and How
(slide 3 of 4)
How?
Professional baseball’s shared-monopoly outcome is accomplished by the following:
• All teams are bound together contractually through the league office.
• The coordinated behavior among teams is much more than simple collusion.

14. Visual 3: The Case of Baseball—Why and How
(slide 4 of 4)
How? (cont.)
Teams collectively hire a commissioner to make sure everyone obeys the same set of rules.
The commissioner has enforcement power over those who misbehave and try to cheat on contractual agreements.
The formal agreements that tie the teams together result in a cartel (football, basketball, and other sports leagues are similar).

15. Visual 4: League Success (slide 1 of 10)
How do cartels succeed?
Cartels must control output—members agree to the terms of the cartel.
Cartel members must produce a similar product (e.g., sports or oil).
Cartels must divide the market and establish production quotas (e.g., a limited number of products or teams).

16. Visual 4: League Success (slide 2 of 10)
How do cartels succeed? (cont.)
Example: Major League Baseball (MLB)
MLB keeps expansion minimal—it limits the number and locations of teams. Economists say 50 locations could support professional baseball teams.2 There are currently 30 MLB teams3; thus, there is a shortage of teams.

17. Visual 4: League Success (slide 3 of 10)
How do cartels succeed?
Example: Major League Baseball (MLB) (cont.)
Limited teams create an incentive for teams to move. Tax-paying fans are willing to build new stadiums under the threat of their team leaving. From 2000 to 2010, $10 billion was spent on new stadiums. Half of the funding came from public sources.4

18. Visual 4: League Success (slide 4 of 10)
How do cartels succeed? (cont.)
Cartels must prevent cheating through rules (e.g., MLB rules control most aspects of the league, including payroll, drafting, and trading of players).

19. Visual 4: League Success (slide 5 of 10)
How do cartels succeed? (cont.)
Example: MLB Competitive Balance Tax5
Each year, clubs that exceed a predetermined payroll threshold are subject to a competitive balance tax, commonly called a “luxury tax.” Those who carry payrolls above that threshold are taxed on each dollar above the threshold, with the tax rate increasing based on the number of consecutive years a club has exceeded the threshold.

20. Visual 4: League Success (slide 6 of 10)
How do cartels succeed?
Example: MLB Competitive Balance Tax (cont.)
The threshold was $189 million from , but the following increases were put into place per the Collective Bargaining Agreement:
2017: $195 million 2020: $208 million
2018: $197 million 2021: $210 million
2019: $206 million

21. Visual 4: League Success (slide 7 of 10)
How do cartels succeed?
Example: MLB Competitive Balance Tax (cont.)
Exceeding the threshold is subject to the following taxes:
First time, 20 percent tax on all overages
Second consecutive season, 30 percent tax on all overages
Third and any additional consecutive seasons, 50 percent tax on all overages

22. Visual 4: League Success (slide 8 of 10)
How do cartels succeed?
Example: MLB Competitive Balance Tax (cont.)
If a club dips below the luxury tax threshold for a season, the penalty level is reset.

23. Visual 4: League Success (slide 9 of 10)
How do cartels succeed?
Example: MLB Competitive Balance Tax (cont.)
Clubs that exceed the threshold are also subject to the following surtaxes:
$20 million to $40 million over, 12 percent surtax
$40 million or more over, 42.5 percent surtax the first time
$40 million or more over again the following year(s), 45 percent surtax

24. Visual 4: League Success (slide 10 of 10)
How do cartels succeed?
Example: MLB Competitive Balance Tax (cont.)
Beginning in 2018, clubs that are $40 million or more above the threshold will have their draft pick moved back as well.

25. Review
In which market structure does Major League Baseball operate?
A cartel or shared monopoly
Why is professional baseball allowed to operate as a cartel or monopoly?
Professional baseball was ruled exempt from anti-trust laws in 1922.

26. Review (cont.)
How do sports cartels succeed?
Cartels control output—members agree to the terms of the cartel.
Cartel members produce a similar product.
Cartels divide the market and limit the number of teams.
Cartels prevent cheating with rules (salary caps, luxury taxes, etc.).

27. Review (cont.)
How does maintaining a shortage and minimum expansion help a sports league and its teams?
Possible answer: Shortages can keep ticket and merchandise prices higher. For teams, there may be an incentive to move if tax-paying fans are willing to build new stadiums under the threat of their team leaving. From 2000 to 2010, $10 billion was spent on new stadiums. Half of the funding came from public sources.

28. Endnotes
1 JUSTIA US Supreme Court. Federal Baseball Club v. National League, 259 U.S. 200 (1922); accessed November 15, 2017.
2 Register, Charles and Grimes, Paul. Economics of Social Issues. 21st Edition. New York: McGraw Hill Education, 2016, p
3 MLB.com. Team-by-Team Information; accessed December 1, 2017.
4 Register and Grimes. Economics of Social Issues. p. 238.
5 MLB.com. Glossary: accessed September 20, 2017.