Are Professional Sports Competitive?

by Russ Roberts on October 27, 2006

in Competition, Podcast, Sports

Michael Lewis’s Moneyball lays tells the story of how the Oakland A’s became successful. Part of the answer is that they appreciated the value of an undervalued asset, the ability to get on base via walk.

In this EconTalk podcast, Skip and I talk about whether this story is true and if it is true, how such an insight about the value of walks could lay undiscovered (or at least underutilized) for so long. One interesting part of the conversation is about just how competitive or uncompetitive the baseball industry is. It appears very competitive. Winners and losers are observable. Unsuccessful managers and general managers are fired all the time. Yet I argue that the costs of failure are very small. Mediocre franchises can be highly profitable because of the inherent monopoly power an owner has in the local market. Even worse, it is very hard to buy out a mediocre owner because the replacement must be approved by the other owners whose incentives in this situation are rather mixed.

The next Econtalk will be Monday with Clint Bolick talking about the virtues of judicial activism.

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{ 5 comments }

Ben Litchman October 27, 2006 at 2:33 pm

I look forward to listening later. Quick thought: a franchise has a local monopoly in the market for that particular professional sport, but they still have to compete with other sports and even with other forms of entertainment. The proof is in all those empty seats at LA Clippers games over the years.

Mike October 27, 2006 at 3:20 pm

What's worse than the inability to buy out mediocre owners is the incentive system for owners to make their teams better. The revenue sharing system, it seems to me, makes it more profitable for a small market team to stink than it would be to try and get better. Why would the owner of the Royals try and get better if by doing so he would lose the money he was previously getting from the man in Tampa?

Hudson Cashdan October 27, 2006 at 3:41 pm

A system should be put in place similar to soccer where perpetual failures like the Devil Rays will move down into a lower league and an upstart organization- perhaps from Portland- would take that spot in MLB. Additionally, teams should be allowed to move freely so a team in a small or undeserving market such as Tampa would be free to relocate to a market that can serve them, such as NY which can support more than 2 teams. However when a team leaves a city, the city keeps the name (like Cleveland with The Browns). This system is superior to a revenue sharing system which is superior to a salary cap system. The funny thing about revenue sharing is that ideally it should be based on the size of market combined with the wealth of the market and controlled for the cost of living/operating. Instead it is based on revenues generated so teams who are superior operators and generate more interest are penalized. Around the 1994 work stoppage the Seattle Mariners were considered a small market team but at the time of the next CBA negotiation they were mentioned as a large market team merely because of the success they were able to achieve in the previous years. More laughable was the fact that the same arguments in favor of a salary cap/revenue sharing scheme would refer to the Chicago Whitesox as a small market team. One thing I must mention, however, is that the first (optimal) system I discussed would require a complete reworking of the minor league/player development system. Furthermore, any plan should eliminate the Boston Red Sox and New York Mets organizations.

Russ Roberts October 27, 2006 at 4:54 pm

Ben,

You're absolutely right–their monopoly power is constrained by other forms of entertainment. But the unusual nature of sports leagues means that they do have more leeway than a firm selling a more standard product.

rvman October 31, 2006 at 2:42 pm

The Clips are a lousy example. They have a local direct competitor in the Lakers. They are like the mediocre restaurant which sits next to the really popular restaurant, and survives on the people who go to the popular one, find a 40 minute wait, and prefer halfway decent food soon over good food later.

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