Socialism in Sports

by Russ Roberts on April 11, 2006

in Sports

(This post was inspired by a conversation with Skip Sauer of Clemson that should be posted as a podcast here some time next week.)

Baseball season is under way and I heard a radio talk show host say this morning that Pittsburgh has no chance to win the World Series this year or in the foreseeable future. He’s probably right for two reasons. One possible answer is that the Pittsburgh’s franchise is poorly run. But even if it were run brilliantly, the Pirates would have to overcome the disadvantage of being in a small market relative to the Astros, the Dodgers, the Mets or the Cardinals—teams that have bigger fan bases meaning more tickets and more (sometimes much much more) television revenue. There is not a perfect correlation between a team’s payroll and its winning percentage but small payroll teams are on average less successful than high payroll teams.

Baseball does have some revenue sharing but it is small compared to football. So baseball teams from larger cities have an advantage over teams from smaller cities. What is the argument for leveling that playing field? After all, the same logic doesn’t apply to say, manufacturing or financial services. We don’t argue that because New York has a better financial services industry than Kansas City that Kansas City’s financial services industry should get a subsidy from New York in order to level the playing field.

The difference is that sports is a zero sum game. There has to be a winner and a loser in every game. If the Yankees defeat the Royals and every team 11-0 every single game, there’s no pleasure produced. Increasing that edge to 23-0 actuall produces less value. We only watch the Harlem Globetrotters because they make us laugh.

In sports, unlike manufacturing or ordinary industries, there’s an inherent value in competitive balance to produce excitement and drama. So there’s a case to be made for giving Kansas City some of the New York’s revenue stream. One reason is that New York’s revenue stream depends on the rest of the league—it can’t just go out and play games without opponents. The second reason is that without competitive balance, the product does not produce enjoyment for the fans. Though Yankee fans certainly enjoy their 26 World Series championships, if they literally won every year or close to it, even Yankee fans would probably tire of winning.

The competitive analogy doesn’t carry over to financial services. There’s no reason to subsidize Kansas City and penalize New York. That discourages excellence and rewards mediocrity. Unlike the sports example, there is no value to competition per se but rather in what that competition produces—first rate financial services. Unlike baseball, performing twice as well as your competition produces additional benefits in financial services. If a New York financial firm falters either by charging too high a price or providing a poor product, new firms can enter the financial services market in New York and elsewhere to benefit the consumer. It doesn’t bother us at all that Lexus keeps dominating the luxury car industry or FedEx the overnight mail business.

When a New York firm "outplays" a Kansas City firm in providing investment advice or when a California firm outperforms a firm in Maryland in providing good computer software, the consumer benefits. And it’s true when a Chinese clothing manufacturer outperforms one in  South Carolina. Leveling the playing field by putting on tariffs or by subsidizing poor performers makes us poorer, not richer. It punishes success and deters innovation. It leads to higher prices and benefits producers in South Carolina and punishes consumers.

That having been said, sports socialism, especially pure egalitarianism is not a cure-all. Even if the Yankees share their revenue equally with other teams, the beneficiaries of that subsidy may decide to simply pocket it rather than making their teams more competitive.  Revenue sharing does reward mediocrity and punish excellence and as the amount of sharing grows, the potential harm from that perverse incentive gets worse.

Just because the NFL shares its revenues equally doesn’t mean that every team has an equal chance to win. Some NFL teams have no chance of winning the Super Bowl. Some teams have little chance because their coaches aren’t very good. But some have little chance because their owners are content to live off of the other teams. This tension is always present in sports leagues. For the fan, you want the owner of your team to care about more than the money and to be willing to give up profits for a higher chance of winning. A successful sports league picks needs to pick its owners wisely.

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{ 18 comments }

asg April 11, 2006 at 4:22 pm

An acquaintance of mine once suggested that teams be permitted to forfeit games, instead of share revenue. That way, when the Twins visit the Yankees, the Twins can insist upon a better share of the gate and TV revenue, and if they don't get it, they will forfeit (and thus no fans will show up, buy hot dogs, or watch TV and the associated commercials).

Mike Linksvayer April 11, 2006 at 4:22 pm

The St. Louis market is barely larger than the Pittsburgh market. The Cardinals overperform, the Pirates underperform, relative to population.

I really don't care about baseball, but it seems to me the "solution" as usual is less "socialism" not more — allow teams to freely move and change hands without territories or other oversight.

William April 11, 2006 at 4:23 pm

It's not quite a zero-sum game. A Yankees win may cause millions of fans to rejoice, while a smaller team's win doesn't bring happiness to nearly as many people.

Mike Linksvayer April 11, 2006 at 4:23 pm
doinkicarus April 11, 2006 at 4:46 pm

"I really don't care about baseball, but it seems to me the "solution" as usual is less "socialism" not more — allow teams to freely move and change hands without territories or other oversight."

It's not really "socialism" if all the players (teams/ownership interests) agree to the terms upon entry. There are also complicating matters of public bonds used to fund the stadium building. That being said, it's very hard for teams to move "freely" when the transaction cost will typically include a half-a-billion dollar stadium that they can't take with them, and likely can't sell to anyone else.

I imagine this fact has a bit to do with why the arrangements have developed the way that they have.

Alan Moran April 11, 2006 at 10:06 pm

It can be argued that, because sports compete, the contractual basis on which teams play against each other can allow revenue sharing. Clearly many sports codes flourish (soccer, the most popular being the best example)without such measures. Others, like Aussie rules football, also seem to perform ok with revenue sharing being extended to salary capping for each team.

It is unlikely that rewarding the poor performers encourages mediocrity but it is likely to lead to less energetic steps to seek out excellence. European soccer is probably the global benchmark for establishing the best mix of prices, expenditures onsalaries, training, facilities, promotion etc. And althoiugh there are star teams there are a dozen or more across the continent and each individual major country has at least half a dozen real contenders plus others which rise to the occasion.

The ultimate stage of revenue sharing with salary capping will deter contestants from entering the sport, deflecting them to other sports or activities which are probably sub-optimal outcomes

One issue with competitive sports teams that differs from business markets is the loyalty of the supporters. Supporters usually remain so for life and therefore are far more "stakeholders" than is the case where that term is normally applied. How are their preferneces for having some of their game entrance fees siphoned off to other teams to be guaged?

MjrMjr April 12, 2006 at 12:02 am

Russell, I agree with your second to last sentence. It's great to have an owner who's willing to sacrifice profit for winning. They can definitely do so when it comes to coaching and front office salaries, i.e. Joe Gibbs, the highest paid coach makes $5 million whereas the lowest paid earns less than $2 million. But when it comes to player salaries and the owners willingness or lack thereof to spend, I'm not sure that NFL and MLB are comparable.

In the NFL there's a salary cap, which in 2006 is going to say that no team can spend over $102 million on their total player payroll. Also, and this is less publicized but very important to note, no team can spend *less* than $67 million. MLB has no max or minimum a team must spend. The Yankees will spend $198 million this year and the Marlins about $15 million. The median is about $70 million. The Pirates, btw, are about $46 million. Just eyeballing the numbers real quick here
http://sports.espn.go.com/mlb/teams/salaries?team=nyy
it looks like the average isn't much higher than the median. I don't have the same numbers on hand for the NFL, but clearly the max/min constraints dictate that overall spending is much more clustered around the mean in the NFL.

The spending disparities between NFL and MLB aren't comparable. There's no NFL team that spends four times more than another(Yankees-Pirates) or even twice as much as their likely opponents if they make it to the championship game(Yankes spend twice what any of their potential World Series opponents do).

The stingiest NFL owner has a much, much better chance of winning a championship than his MLB counterpart does. Indeed, part of the excitement of the NFL in the era of relative payroll parity is the feeling that any year any team can make a run to the top. Conversely, the salary cap also works to prevent any one team from dominating year after year(*). A Super Bowl team will usually see its players collective salaries rise to a level such that it cannot retain all of their services, and thus has to get rid of some star players after they win the Super Bowl. The average NFL fan really does feel like his team has a shot, if not this year than maybe next year. This was definitely not the case prior to 1994 when the salary cap was implemented and is definitely not the case for MLB fans today or ever.

Whatever label one attaches to the NFL's business model the market ultimately has the final word. Witness how the NFL has done compared to MLB since 1994. It's clear which sport has done better. Paul Tagliabue will go down as one of the greatest commisioners of a major sports league of all time, imo.

(*) The one exception may be the New England Patriots, whose success may derive from the fact that their head coach holds a degree in economics.

MjrMjr April 12, 2006 at 12:26 am

Alan Moran-
You say that
"The ultimate stage of revenue sharing with salary capping will deter contestants from entering the sport, deflecting them to other sports or activities which are probably sub-optimal outcomes"

This idea applies to the vast majority of fields but I don't think it applies to pro sports that have average salaries in the millions. The skills and bodytype required to play million dollar sports at the elite level in the U.S.(read:NBA, NFL, or MLB) are specialized to such a degree that it's extremely rare for a person to even have the realistic choice to do more than one as a pro. It's relatively common to see kids who can earn a varsity letter in football, basketball, and baseball at the high school level. But of kids who are offered a full ride scholarship to play in college(the first cut to making the pros)very few get offers for more than one sport. Even for the ones who do it's usually pretty clear which sport they're best at. Given that the chances of making it as pro in any sport are vanishingly slim, most kids end up pursuing the sport that they have best chance of succeeding in. That MLB salaries are twice what they are in the NFL doesn't mean that there many MLB players who could have played pro football.

liberty April 12, 2006 at 11:30 am

The NFL regulates pay so much and has so many rules on contracts that the teams are made up of different players and different coaches each year. For me this kind of ruins the __loyalty to a team__ aspect of sport. A major reason that I prefer baseball is the team consistancy and fair fight of it.

jn April 12, 2006 at 11:56 am

I don't know this literature, but I thought some research showed that increasing parity doesn't increase revenues and that people often "prefer" (revealed preference sense) sports dynasties?

cb April 12, 2006 at 1:35 pm

I'd prefer a dynasty, if it was my team.

John Henry April 12, 2006 at 3:51 pm

I am looking forward to the podcast. I have heard Skip Sauer on Radioeconomics and he is pretty good.

On a related subject, has anyone ever done a comparison of NASCAR vs MLB (or NBA or NFL)?

All are, more or less, "sports" yet NASCAR is self supporting and open to anyone who wants to form a team. No taxpayer funded stadiums here.

How come NASCAR is so profitable yet the other big sports need to keep dipping their hands into my pocket?

Also, what is the comparable cost of a NASCAR venue vs a football stadium? I would guess that they are significantly more expensive to build, maintain and operate but that is speculation on my part.

Has there been any work done on this?

John Henry

MjrMjr April 13, 2006 at 2:40 am

The NFL's television contract went from $1 billion per year in 1994 when the salary cap was introduced to a little over $3 billion a year now. Lack of dynasties hasn't seemed to hurt.

Ben April 13, 2006 at 1:30 pm

I'm not sure that the comparison to other markets is apt. Sports teams are league-enforced monopolies. If MLB was truly a free market, then the Pirates and any other team would be free to pick up and move to NY to compete with the Yankees for fans and revenue.

nelziq April 18, 2006 at 8:04 pm

Why the presumption pf one sports team per city? This is a product of single-entity ownership structure of American sports. In a competitive market, more teams would be established to compete for fans in a big market. For example, there are 4 London teams competing in the English Premeire League. Football (soccer) teams generally accomplish revenue sharing by jointly selling TV rights, although revenue is distributed based on position in the league rankings, thus encouraging competitiveness even when winning the leauge isnt possible/likely. Just as people are generally skeptical of market solutions to problems that have been historically address by government because they can't easily conceive of an unfamiliar process, generally I find that fans of american (socialized) sports incredulous that desentralized and competative solutions will work because they have never seen them operate. The fact is soccer leagues the world over function just fine without drafts, salary caps, revenue sharing, the franchise model, amatuer college athletics, etc.

Ken April 19, 2006 at 1:02 am

Ref: NFL vs NASCAR, I found this link.

http://lawprofessors.typepad.com/antitrustprof_blog/2005/06/the_economic_be.html

The author does suggest that the NFL and other sports leagues take on the attributes of NASCAR as a sanctioning body and business formation.

Charley April 19, 2006 at 1:43 pm

One of the major differences I noticed in the European football setup is that teams are not automatically allowed to remain the in the top level league – and continue to enjoy that revenue sharing. Generally, the bottom two teams are relegated to the next lower level league – with two from that lower league promoted. It does finally penalize those who are poor managers – and reward the better managers. The system also allows the fans in Moline to dream that one day they can be a major league city, without having to pay a politician to get it done for them.

Dan April 20, 2006 at 9:48 pm

NASCAR actually has many aspects of revenue sharing that are somewhat disguised, but tend to favor the larger teams. First of all, the "prize" money awarded to even the 43rd place finisher is in the high five figures, and doesn't vary much between 20th and 43rd. The season points fund also tends to reward those teams that can afford to race in all of the races each season. finally, a new rule change ths year guarantees the top 35 cars in the season standings a spot in the field each week, guaranteeing that they will recieve at least the last place money.

In no other sport is the competitive balance so rigidly enforced. Rules are constantly tweaked so that one team or car manufacturer cannot gain a permanent advantage over the field. Some of these changes are analogous to making Braves or Yankees pitchers throw from lower mounds, farther from the plate than Brewers or Twins Pitchers.
The sport is different also in that the competitors do not own the facilities in which they race. Thus there is no true home team to collect a larger share of the gate, parking, or concession revenue.
Franchises in NASCAR are not awarded to the race teams, but to track owners. There is only one Nextel Cup race held each week, at a location governed by the Bill France family, which in a rather interesting conflict of interest, also owns or controls several of the tracks at which they race. This is why there are two races each year in Daytona, and only one in the Los Angeles, New York (Watkin's Glen) and Chicago markets. Recieving one of the coveted race dates virtually guarantees a track owner will be profitable for a year, while withholding the date can bankrupt a track virtually overnight.

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