REVENUE SHARING IN PROFESSIONAL SPORTS LEAGUES

We employ a model of n heterogenous profit-maximizing clubs to analyze the impact of revenue sharing in professional sports leagues on competitive balance. Revenues of each club depend on absolute quality, relative quality and on competitive balance itself so that our model captures much of the preceding literature as special cases. We show that revenue sharing always increases competitive balance if clubs differ only with respect to the impact of absolute quality on revenues. On the contrary, revenue sharing reduces competitive balance if only clubs' relative qualities play a role for revenues or if only two teams are considered.     

THE EFFECT OF GATE REVENUE SHARING ON SOCIAL WELFARE

This paper provides a theoretical model of a team sports league based on contest theory and studies the welfare effect of gate revenue sharing. It derives two counterintuitive results. First, it challenges the "invariance proposition" by showing that revenue sharing reduces competitive balance and thus produces a more unbalanced league. Second, the paper concludes that a lower degree of competitive balance compared with the noncooperative league equilibrium yields a higher level of social welfare and club profits. Combining both results, it concludes that gate revenue sharing increases social welfare and club profits in our model. ( JEL L83)     

Revenue Sharing,Competitive Balance and the Contest Success Function

Abstract. This paper investigates revenue sharing in an asymmetric two‐teams contest model of a sports league with Nash behavior of team owners. The innovation of the analysis is that it focuses on the role of the contest success function (CSF). In case of an inelastic talent supply, revenue sharing turns out to worsen competitive balance regardless of the shape of the CSF. For the case of an elastic talent supply, in contrast, the effect of revenue sharing on competitive balance depends on the specification of the CSF. We fully characterize the class of CSFs for which revenue sharing leaves unaltered competitive balance and identify CSFs ensuring that revenue sharing renders the contest closer.     

THEORY OF THE BEAUTIFUL GAME: THE UNIFICATION OF EUROPEAN FOOTBALL

European football is in a spiral of intra‐league and inter‐league polarization of talent and wealth. The invariance proposition is revisited with adaptations for win‐maximizing sportsman owners facing an uncertain Champions League prize. Sportsman and champion effects have driven European football clubs to the edge of insolvency and polarized competition throughout Europe. Revenue revolutions and financial crises of the Big Five leagues are examined and estimates of competitive balance are compared. The European Super League completes the open‐market solution after Bosman. A 30‐team Super League is proposed based on the National Football League.     

Competition Among National Football Leagues. Does It Exist? Should We Regulate?

It is often supposed that the stakeholders of a national football league draw more satisfaction from their sport if the league is balanced, that is, if a large number of clubs have a reasonable chance of winning. This is the so‐called Competitive balance hypothesis. This hypothesis can be challenged, however, in the context of international competition like the European champions league. It could be that the utility of national leagues' stakeholders would be higher if the probability of victory for their nation's club at the international level were higher. If this were the case, a league's governing body intending to maximize the quality of the national league by making use of redistributive schemes would face a trade‐off between national competitive balance and international performance of the national representative club. We propose a simple microeconomic framework to model this trade‐off. If a non‐cooperative game exists among the national league governing bodies, whether it is a Nash or a Stackelberg one, this game would result in inefficient redistributive policies. We find ‘soft’ empirical evidence of such a competition among the big 5 football leagues in Europe. This result supports the idea of the creation of an international regulatory body. We derive the conditions under which the international regulatory body should ensure that the leagues' governing bodies implement redistributive schemes guaranteeing the respect of the national competitive balance. We also emphasize the risk of experiencing a drop in the quality of leagues if one of them becomes too big relatively to the others, what we call the tragedy of the wealthy.     

The Impact of Salary Caps in Professional Team Sports

In this paper we analyse the impact of a salary cap on a professional team sports league. We concentrate on the competitive balance, on the level and the distribution of player salaries, on owner profits and total league revenue. A simple model shows that a salary cap can improve the competitive balance among clubs as well as the salary distribution among players. We also investigate how the recent individual salary cap in NBA might affect the competitive balance.     

Football players’ career and wage profiles

The objective of this article is to look over football players’ career path, from lower leagues to the first league, and the associated wage profile. The information comes from a Portuguese longitudinal matched employer–employee data set defining several career events according to players’ movement across football clubs and across professional and semi-professional leagues. Our identifying strategy relies on coach changes to reduce the potential bias resulting from players’ moves between clubs. The estimated first-difference wage equations indicate that players can expect a wage premium when they get transferred to new clubs in higher leagues or a wage penalty when moving to lower leagues. Players who stay in the same club after the club being relegated can also expect a wage penalty.     

Cost performance of Brazilian soccer clubs: A Bayesian varying efficiency distribution model

This paper analyzes the cost efficiency of Brazilian first league soccer clubs using a Bayesian Varying Efficiency Distribution (VED) model. We confirm that the model fits the data well with all coefficients correctly signed and in line with the theoretical requirements. From the efficiency results, it was clear that the Brazilian soccer league operates at a lower performance in comparison to other international soccer leagues. Factors which contributed to this finding as well as other policy implications are provided.     

Performance and revenue in professional league football: evidence from Granger causality tests

Using a dataset comprising annual performance (measured by final league position) and gate revenue for 77 Football League clubs which maintained unbroken league membership between 1946 and 1994, the relationship between performance and revenue is investigated using cointegration and causality tests. A cointegrating relationship between performance and revenue is established in only 10 cases out of 77, although it is argued that some caution is required in interpreting these results, due to the low power of the relevant tests in relatively small samples. In Granger causality tests, more evidence is found of causality running from lagged revenue to current performance than of causality in the opposite direction, while the dependence of performance on revenue seems to be greater for the smaller clubs than for the larger. These results lend empirical support to the popular view that, unless checked by mechanisms for revenue redistribution within the league, the natural tendency is for success to become concentrated increasingly among a small group of elite, wealthy clubs.     

The Americanization of European football

Will European football keep leagues open, or adopt the American system of closed leagues? Would this reform be to the benefit of consumers? This paper develops a framework to analyse the consequences of the structure of competition – whether teams play in both national and international competitions or not – and the effects on performance of revenue sharing among teams within the same league. The authors argue in favour of the creation of a European Superleague and against teams playing both in the Superleague and in national leagues. They derive a number of policy conclusions and examine various regulatory issues in European football.     

SALARY CAP REGULATION IN PROFESSIONAL TEAM SPORTS

This paper analyzes the effects of a percentage‐of‐revenue salary cap in a team sports league with win‐maximizing clubs and flexible talent supply. It shows that a percentage‐of‐revenue cap produces a more balanced league and decreases aggregate salary payments. Taking into account the idiosyncrasies of European football, our paper further highlights the potential conflicts between the league and society. From the perspective of a league governing body, a percentage‐of‐revenue cap always enhances financial stability of win‐maximizing clubs. A social planner, however, will not permit the introduction of such a cap if fans and players unduly suffer. This paper shows under which conditions the social planner accepts (rejects) a salary cap proposed by the league regulator. (JEL D02, D60, L83)     

RATIONAL EXPECTATIONS AND PRO SPORTS LEAGUES

We put a new set of shoes on that old workhorse, the competitive talent market (CTM) model in sports economics. There exist unique rational expectations equilibria for both national football league (NFL‐type leagues) and major league baseball (MLB‐type leagues) under the CTM model. A cursory statistical test fails to reject the empirical implications for the NFL‐type league. The model also suggests empirical tests of whether or not talent demand (marginal revenues from talent), including induced effects, actually slopes down. But like all models, the competitive talent model should be applied in its context. It describes highly cooperative North American sports leagues that have a wealth of common information. But it may not do the same for other leagues if they lack this common information.     

GOVERNANCE AND VERTICAL INTEGRATION IN TEAM SPORTS

Antitrust law distinguishes vertical and horizontal restraints. A horizontal restraint is one which exists between competing firms supplying rival products in a market, and a vertical restraint is one which exists between firms that jointly contribute to supplying a particular product in a market. Horizontal agreements receive much closer antitrust scrutiny because they often enable firms to limit competition at the expense of consumers, while vertical restraints may be legal or illegal depending on whether they tend to enhance or reduce competition or the exploitation of market power. This paper argues that there are important vertical restraints that operate in sports leagues which have been mostly neglected in the literature but have a significant impact. We focus on intraleague restraints, where member clubs of a league agree to control the organization of league competition, and interleague restraints, where horizontal agreement such as the Reserve Clause relies on agreements not to compete for players competing in senior or junior leagues. ( JEL L83, L42, L44)     

The invariance principle in baseball: new evidence

This article considers the change in revenue sharing in Major League Baseball that occurred prior to the 2007 season and its effects on parity via its effects on marginal revenues. Based on the results from an empirical specification for team revenue, we find evidence that the reduction in revenue sharing increased marginal revenue by more for large market clubs than for small market clubs, despite holding constant other differences in how small and large market club revenues are determined. The upshot of this result is that the modest reduction in revenue sharing could have worsened league parity by 11 to 17 points in winning percentage between small and large market clubs, although other factors affect parity as well. The well-known invariance principle in the economics of sport literature does not appear to hold; however, the current consensus of theoretical models is not confirmed.     

GATE REVENUE SHARING AND LUXURY TAXES IN PROFESSIONAL SPORTS

This paper examines the impact of gate revenue sharing and luxury taxes on professional sports leagues within the context of a less restrictive demand function than those used in prior models. In contrast to previous studies, the analysis finds that the increased sharing of revenues may enhance competitive balance. Consistent with other models, the analysis finds that player salaries will diminish as the percentage of shared gate receipts rises. The analysis also explores several variations of luxury taxes. All have the effect of lowering salaries. The impact on league balance depends on how the tax is implemented and on how its proceeds are distributed. As with salary caps, enforcement problems exist with the tax.     

Splitting leagues: promotion and demotion in contribution-based regrouping experiments

The paper reports an experimental study on a promotion-demotion mechanism to mitigate the free-rider problem in a voluntary contribution setting. The mechanism hierarchically splits a group in two; we refer to one subgroup as the Major league and to the other as the minor league. The most cooperative subject of the minor league is switched with the least cooperative subject in the Major league. The results reveal a significant increase of cooperation levels in both leagues relative to the standard voluntary contribution mechanism. We argue that a lack of sequentially-rational beliefs about continuation payoffs in Major and minor leagues leads to higher equilibrium contributions. The data suggest beyond that, the promotion-demotion mechanism regroups subjects deliberately according to their cooperativeness.     

MAINTAINING MARKET POSITION: TEAM PERFORMANCE,REVENUE AND WAGE EXPENDITURE IN THE ENGLISH PREMIER LEAGUE

This paper investigates the relationship between playing success and commercial success in team sports. Utilizing a data set relating to the English Premier League that combines both financial measures and indicators of playing skills and performances, our empirical analysis is based on three behavioural equations. Our analysis indicates that on‐field success can be directly related to players’ skills and abilities and that revenue is positively related to on‐field success. Wage expenditure is also shown to systematically reflect player skills and performances. One interpretation of this evidence is that investment in players’ skills and ability buys on‐field success, with richer teams becoming ever richer and able to maintain or even build upon success by spending more on players than less successful clubs. To the extent that richer clubs are successful in their objective there is a causal link between revenue earned and competitive imbalance via investments in players. The implications of this tendency within a league are discussed in our conclusion, which also considers the potentially wider implications of our study as they relate to the evolution of firm size and issues of market share.     

Competitive balance and the participation–spectatorship gap in Chinese table tennis

Excessive competitive imbalance holds the potential to render teams and, by extension, leagues inviable. The China Table Tennis Super League has languished in its attempt to catch on as a popular spectator sport in spite of the sport’s popularity as recreational activity. One of the primary reasons for the participation–spectatorship gap cited by officials is competitive imbalance. This research estimates a number of within-season balance measures, including the standard deviation of winning, concentration ratio, and Herfindahl–Hirschman Index. The results show that both the men’s and women’s leagues have been relatively balanced over time. Implications regarding competitive balance and other league policy considerations are explored.     

The Economics of American Sports Leagues

Player mobility in North American sports leagues is limited by labour market constraints designed ostensibly to allow teams to recoup player development costs and to maintain competitive balance within leagues. Theory holds that the distribution of talent will be invariant under any institutional configuration, and that while rules to constrain movement will serve to enhance monopsonistic exploitation of talent, they will have no effect on competitive balance. This paper reprises a general theory through which the effects of the labour market constraints can be comparatively analysed for American sports leagues. The economics of sports has been relegated to the realm of labour theory by the unnecessarily limiting assumption that owners of sports clubs are single‐minded profit maximisers. This paper also presents a theory that seeks to unify capital market decisions of financial leverage and ownership syndication with operational labour market decisions for athletic talent and an owner's desire to win.     

Fan welfare maximization as a club objective in a professional sports league

Motivated by aspects of European soccer club governance (members' clubs supporters' trusts), a first formal analysis of fan welfare maximization as a club objective in a sports league is provided, with comparisons to objectives studied previously (profit and win maximization). Positive comparisons focus on team qualities, ticket prices, attendances and the impact of capacity crowds; empirically observed ticket black markets and inelastic pricing are consistent only with fan welfare maximization. Normatively, social welfare (aggregate league surplus) is well-served by a league of fan welfare maximizers, or sometimes win maximizers, but not profit maximizers; leagues should not normally make profits.