Saturday, May 19, 2007


As this is my first contribution to this blog, it may be expected that I offer some detailed manifesto outlining my personal feelings on a variety of sports issues. That isn’t going to happen. I enjoy sports and I enjoy economics. In the coming weeks (years), I hope to show how well economics can contribute to our understanding of the off-the-field actions of professional and collegiate sports. The company you work for is not like a Major League Baseball team. There was never a bond issue so that you could work in a nicer office, nor is there a single employer for every professional in your trade. The efficiency and sustainability of these anomalies are best gauged in an economic context, so let’s get started.

An overview of the landscape of professional sports worldwide will undoubtedly result in the definition of two distinct league structures; a franchise system common to nearly all North American professional sports, and a relegation system common to the various soccer leagues around the world. In reference to the relegation system, this discussion will focus primarily on The Football Association (FA), the principal governing body of all professional football (soccer) teams in England. The FA consists of a variety of leagues organized in a hierarchical structure, the most elite of which is known as the Premier League. Each season, a predetermined number of poor performing teams in the Premier League are relegated to a lower-level league, and an equivalent number of teams from the lower-level league are promoted to the Premier League. It is not uncommon however for a team to play against teams in other leagues, or countries for that matter. The FA also organizes an FA Cup each year where teams from all leagues compete in a sudden death tournament to determine an overall champion, which seems to carry with it honors akin to winning the Super Bowl or the World Series. However, unlike the North American championships, every professional team in England that qualifies for the tournament, has a shot to be crowned FA Cup champions, not just the Premier League teams.

On the basis of pure competitiveness, the relegation system seems to be far superior to the franchise model that is prevalent here in the United States. If you want to be in the best league, you must perform at an elevated level. It goes without saying that FA teams who participate in the Premier League are rewarded with higher gate revenues and more lucrative television contracts, and demotion to a lower league can carry disastrous financial consequences for the owners. So this may be an example of a perfect model for the construction of competitive athletic leagues … maybe.

In order to make that determination however, there are a few other issues that we will need to look into. Throughout most of the FA’s history, individual soccer teams basically owned the rights to players outright, not dissimilar to the system practiced in Major League Baseball until St. Louis Cardinal Kurt Flood brought his case to the U.S. Supreme Court in 1972. Until 1963, the FA granted complete discretion to a player’s current team as to whether he was allowed to move, irrespective of its decision whether or not to extend his present contract. In 1963 this discretion became contingent on the renewal of the contract, and in 1978, an out-of-contract player became entitled to move without his employer’s consent (Dobson and Goddard, 2004). Regardless of league structure, it would never be in the best interest of any team to allow even moderate talent the ability to move to a potential competitor, however, in the relegation system, everyone is a potential competitor. This is where the effects of a similar labor policy can differ drastically between league structures.

In 1902, the National Association of Professional Baseball Leagues established the groundwork for what would later evolve into the “minor leagues.” A bitter feud between the American and National Leagues had resulted in the outright theft of a number of independent league players without any sort of compensation granted to the player’s former employer. This forced many of the independent league’s team owners to make a decision between becoming a formal member of a major league team’s organization or face extinction. As a result, competition for talent between teams really only consisted of a contest between 16 teams (until the expansion era) as opposed to competing against all professional baseball teams that played in North America. Across the pond however, professional soccer teams have had to compete for talent with 92 other teams. Because of relegation, even the worst teams had a theoretical chance at competing in the Premier League someday, and possibly winning the FA Cup, so there would never be any reason to let even a marginally talented player leave for another team. This allowed for a long period of competitive balance in English soccer. If you wanted good players, you were going to have to make them yourself, whereas in baseball, they could be purchased at will from the minor leagues. Another peculiarity of the British, and European system as a whole was their restrictions on foreign players. Until 1995, all of the professional English soccer teams were limited to three foreign players. Combined with a lack of free agency, this nationalistic restriction severely limited the talent pool, and made it very difficult, even for teams who had the means, to purchase talent that would improve the club.

The introduction of free agency to the FA has changed its competitive balance significantly. Premier league teams can now use their revenue-generating advantage to purchase better talent in the free-agent market, and as a result the disparity in revenue between Premier League teams and lower league teams has grown. According to Dobson and Goddard, in 1926 the Premier League’s ticket revenue accounted for 32.8% of the ticket revenue of all professional leagues, and 1999, the Premier League’s share had grown to 43.5%. If those figures were to include revenue from television rights ad merchandise, it likely would show even more disparity. Dobson and Goddard also show that over the same time period, higher league teams have become more and more likely to win inter-league matches such as FA Cup games, and as a result, spectator interest, measured through ticket revenue, has fallen as the outcome of these matches has become more predictable.

As the labor market in English soccer has become less regulated, the competitive balance of the Football Association has fallen. Big-city teams with more money have been able to out-spend their smaller-market rivals, and as a result, been rewarded with consistently higher league positions and gate revenue. The apparent competitive balance that existed for a good portion of the Football Association’s history was more the result of an over-regulated labor market than of the relegation system. This does not imply however, that the franchise system is superior in any way, but it seems that the landscape of English soccer is looking a little more like Major League Baseball every year. In other words, some teams will become permanently relegated to the dregs of the Football Association, and simply serve to farm talent for the bigger clubs, while other teams will become perennial contenders. So basically, as the amount of regulation in English soccer has been reduced, the result has been a convergence to a Major League Baseball style arrangement. Why is this the case? Well—and this is just my opinion—for most of the Football Association’s history, team owners have lost money or just barely broken even, while nearly all of the North American sports teams have been consistently profitable. So it would obviously not be in the interest of any North American team owner to push for their league to organize itself more like the Football Association. Basically, the 1902 agreement in Major League Baseball essentially mandated what the markets would have figured out eventually, but the motive for that mandate was profit, something we would expect owners to want. For whatever reason, the British motivation for having a good soccer team was beating the team in the next town, not making any money. As the Football Association players have earned the right to demand their true market value, only the teams in larger markets can afford to pay the best players, so it may end up that the franchise system is closer to the true market equilibrium than it would otherwise seem.

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Credit where credit is due
-Dobson, Stephen and John Goddard. “Revenue Divergence and Competitive Balance in a Divisional Sports League” Scottish Journal of Political Economy, Vol. 51, No. 3, August 2004.
-Haupert, Michel J. “The Economic History of Major League Baseball”, found May 9th, 2007.

1 comment:

Scooter said...

Very interesting stuff Travis, that was enlightening.