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Chapter 8:
Economics of Professional Sports
Time Honored Myths
Team owners are losing money. They stay in the
game for the fun if it!
The ball park is a heaven for “ordinary” fans!
Players are under-paid!
Supreme Court’s rule in 1922 granting MLB
exemption from Anti Trust Law is justified!
Product Market
Output of this market in entertainment
Team owners form a “cartel” named the league
franchise to maximize joint profit (e.g., MLB, NFL,
NBA, NHL, MLS)
Team owners share the “monopoly” profit
Cartel as a Joint Monopoly
Price
D
MC
P=MC
80
MR=MC
70
D
MR
5
7
Quantity
Owners & League Franchise
Owners are the ultimate decision makers: hire
payers and coaches, rent stadiums, sell tickets,
monitor behavior of teams, players, and coaches
Owners hire a “commissioner” for interdependent
operation of the league: schedule games, sell
broadcasting rights, negotiate with players’ union
Owners & League Franchise
Players and coaches are under binding contracts.
They can’t change teams unless released or
traded
League franchise controls the market share by
preventing or consolidating competition (e.g.,
NBA-ABA, NFL-USFL)
Labor Market
Teams transact in the labor market
Monopsony: a market with only one buyer, but
many sellers
Draft: a parity arrangement where weaker teams
hire stronger players
Bilateral Monopsony
League franchise to hire players
Labor union to represent player rights
Exploitation: owners want to pay the “supply”
wage, workers want to make the “demand” wage
Possibility for conflict and strike
Wage Determination
Range of Negotiations=AB
Wage
D
Marginal Labor Cost
A
Labor Supply
D-Wage
S-Wage
MLC=MRP
B
MRP=Labor Demand
E
Employment
Monopsony vs. Competition
Wage
($000)
Monopsony: 4 at $600,000 each
Competition: 5 at $700,000 each
D
MLC
MLC=MRP
A
900
S
C
700
600
DW Loss=ABC
B
D=S
S
MRP=D
4
5
No. of Starting Pitchers
Free Agency
Players can find the highest paying team after
they play several years in the league (NFL: 5
years; MLB: 6 years)
Average MLB salary has gone up $21,300 in
1976 to $1,983,850 in 2000