Economic Analysis of Antitrust Law and Player Restraints

Employer’s Motivation for Salary Payments

• If you were president of a manufacturing company looking to expand, would you rather purchase a plant expected to earn $26m in revenues and cost $25m to operate, or a plant expected to earn $3m in revenues and cost $500,000 to operate?

/2 Employer Motivations

• If you were President of a ball-club owned by a charitable trust (i.e. solely interested in making money for a worthy cause), would you rather have Twins C Joe Mauer (.323, .880 OPS) or Rockies C Wilin Rosario (.292, .801)?

Basic Economics of Player Salaries

Player’s value to team = Marginal Revenue Product (MRP) – Salary

MRP = A-B, where

A = annual club revenue with X on team

B = annual club revenue with club’s “next best alternative” to X

Effect of Player Restraints

• Do player restraints harm players?

• Do player restraints harm sports fans?

Justifications for Player Restraints

• Holds down salaries → holds down ticket prices

• Allows teams in small markets to compete

• Allows teams to recoup investment in developing young players

• Promotes team continuity

• Promotes competitive balance

Economic Analysis of the Relationship Between Ticket Prices and Player Payroll

Avg Ticket Price | Concessions profits

Estimated Attendance Revenue

45 65,000 2925000

75 65,000 4875000

100 55,000 5500000

125 50,000 6250000

150 45,000 6750000

200 30,000 6000000

Why is Competitive Balance a Desirable Goal?

Essential Elements to Claim that Competitive Balance Enhances

Fan Appeal

1) fans prefer a more balanced competition

2) player restraints actually improve competitive balance

3) player restraints necessary to facilitate the degree of balance fans prefer

Do Fans Prefer a More Balanced Competition?

• AAFC/Browns

• Empirical studies mixed

• Blue Ribbon Report: Reasonably Recurring Prospect of Reaching Post-season Play (RRRPP)

• EPL: Outcome Uncertainty

• Why NFL’s parity strategy is unique

Do Player Restraints Actually Improve Competitive Balance

• Why won’t free markets produce the level of competitive balance that fans prefer?

• Actual experience– MLB 1949-62 with Reserve Clause– MLB 1976-92 with free agency– NFL non-guaranteed contracts

• Alternatives

Details of Revenue Sharing

• original MLB scheme rewarded low-balling and penalizes effective use of payroll for small market teams

• note some teams did use revenue as spur to significant increase payroll (handout)

• need to judge club success based on benchmarks

Economically Irrational Owners?

• Why would clubs spend money on players that they did not expect to recoup in increased revenues? What sort of player restraints can prevent or deter economic irrationality?