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Economic Analysis of Antitrust Law and Player Restraints

Economic Analysis of Antitrust Law and Player Restraints. Employer’s Motivation for Salary Payments.

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Economic Analysis of Antitrust Law and Player Restraints

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  1. Economic Analysis of Antitrust Law and Player Restraints

  2. 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?

  3. /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)?

  4. 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

  5. Effect of Player Restraints • Do player restraints harm players? • Do player restraints harm sports fans?

  6. 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

  7. Economic Analysis of the Relationship Between Ticket Prices and Player Payroll

  8. Why is Competitive Balance a Desirable Goal?

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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?

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