Determinants of Competitive Balance in the National Hockey League

DETERMINANTS OF COMPETITIVE BALANCE IN THE NATIONAL HOCKEY LEAGUE

Thomas Preissing Department of Economics and Business, The Colorado College

Aju J. Fenn*1 Department of Economics and Business, The Colorado College

Economics and Business

Abstract

Abstract: Previous sports studies on competitive balance have focused on the standard deviation of wins, but this paper uses a more sensitive measure of parity. This paper calculates the deviations of the Herfindahl-Hirschman Index of team points (dHHIp) for the years 1942-2002 in hopes of better understanding the determinants of competitive balance for the National Hockey League. This paper finds the three major factors affecting parity in the league are the concentration of goals scored, the concentration of goals allowed, and the major expansion of 1967-1968. Also of note, free agency was found to be insignificant in determining competitive balance using the dHHIp model.

1* Corresponding author: Aju J. Fenn, Department of Economics and Business, 14 E Cache La Poudre Street, Colorado Springs, CO 80903. Phone: 719 389 6409 (voice), E-mail: [email protected].. 2

I. Introduction

One of the major appeals of professional sports is what is referred to as the

“uncertainty of the outcome”. In other words sports fans prefer to be uncertain of who will prevail in a given game. This “uncertainty” goes hand-in-hand with competitive balance. The more unpredictable the outcome of a sporting league’s events are, the more competitively balanced that particular league is assumed to be. A perfectly competitive league would be one where every team wins exactly half their games. Recently, a concern for competitive parity in the National Hockey League has emerged. As columnist Scott Taylor wrote,

Currently, the NHL has almost a dozen teams that will never win the Stanley Cup. Because of the unworkable economic model, teams such as Nashville, Tampa, and Atlanta can only hope to have the stars align as they did for Carolina last year and, on a rare occasion, get to a final or maybe a conference championship.1

It is not in the National Hockey League’s best interest to have particular teams winning or losing a disproportionate number of games from year to year. 2

In order for the NHL to develop increased competitiveness, it is important to investigate the factors that affect the league’s parity. The purpose of this study is to examine the determinants of competitive balance for the National Hockey League.

This paper will be the first to 3explore the determinants of competitive balance in the National Hockey League using the Herfindahl-Hirschman Index (HHI). Section two will examine previous research on competitive balance. Section three will describe the data and model used, and section four will present the results of the regression analysis.

Finally, section five will discuss any conclusions that can be drawn as well as possible pitfalls of this study. 3

II. Current Research on Competitive Balance

There have been a number of studies in the recent past that have looked at the issue of competitive balance. Andrew Zimbalist (2002) recently wrote an article in the

Journal of Sports Economics that focuses not on competitive balance in any one particular sport but looks at each of the four major professional sports leagues. He asserts that the optimal level of balance in a sports league is “a function of the distribution of fan preferences, fan population base, and fan income across host cities”.4 Zimbalist (2002) discusses some of the more common ways of measuring competitive balance. The methods include the Gini coefficient, the Herfindahl-Hirschman Index, the range of winning percentages within a league, and standard deviation of winning percentage within a league. Zimbalist (2002) suggests that factors like technology, playing conditions, and playing rules are all influences on competitive balance yet almost impossible to quantify.5 One of Zimbalist’s (2002) final points was that competitive balance should be closely scrutinized due to the difficulty in assessing it.6

In the past few decades, there have been a number of more empirical studies done involving competitive balance in Major League Baseball. Balfour and Porter (1991) compare the variation of winning percentages of teams before and after free agency in hopes of finding whether the reserve clause is necessary in professional sports to achieve competitive balance.7 Their study finds that during free agency the variance of winning percentages was actually lower than before free agency. Therefore, Balfour and Porter

(1991) reject the hypothesis that “the dispersion of winning percentage is higher with free agency” and conclude that it “is indeed lower (i.e. that divisional races are closer) during the period of free agency. It appears free agency promotes competitive balance.”8 4

In response to previous articles looking at competitive balance in Major League

Baseball, Michael Butler (1995) uses a regression equation to look at the “standard deviation of a team’s winning percentage, and the season-to-season correlation of team winning percentages over the period 1946-92.”9 His aim is to pinpoint the actual cause of the increase in competitive balance by looking at free agency, a narrowing of team market sizes, and a compression of baseball talent.10 When he examines competitiveness within the season (the standard deviation of a team’s winning percentage), he finds only the rookie draft to be statistically significant.11 However in season-to-season data, all three of the factors in Butler’s equation are statistically significant.12

Brad Humphreys (2002) applies a novel approach when looking at competitive balance in baseball using the Competitive Balance Ratio (CBR). He argues that, although many other measures of competitive balance (like the standard deviation of yearly win-loss records) are fine to use for specific years, the CBR is a more proficient indicator of competitive balance.13 This is because CBR is able to pick up variations in balance over time.14 Humphreys (2002) uses a ratio of average team-specific variation in won-loss ratio during a number of seasons (over) the average within-season variation in won-loss percentage during the same period. The ratio is a number between zero and one, with one being perfect competitive balance over time and zero being no competitive balance over time.15 Humphreys (2002) also finds that variations in the CBR over time offer a better explanation than previous models of the variation in the attendance for

Major League Baseball.16

Danielle Carbonneau and Paul Sommers (1997) use the Gini index, normally used for income or wealth distributions, to look at competitive balance in baseball. Their 5 findings agree with the majority of other baseball studies in that “the absences of restrictions in baseball such as the reserve clause (does not) have a disruptive effect on the evenness of the competition in Major League Baseball.”17 Martin B. Schmidt (2001) also uses the Gini index when looking at competitive balance in MLB. In contrast to a majority of the other studies on baseball, which have examined factors like the reserve clause, free agency, or the rookie draft, Schmidt (2001) chose to investigate the effect expansion has on competitive balance in Major League Baseball. 18 He concludes that the

“rise in competitive balance began with the movement toward expansion.”19

In one of the few articles focusing on the National Football League, Kevin Grier and Robert Tollison (1994) look specifically at the effect of the rookie draft on competitive balance. They find “higher draft choices raise winning percentages significantly over time”20 and concluded that the rookie draft in the National Football

League helps advocate competitive balance.21

Fort and Quirk (1995) examine the effect of revenue distribution, the reserve clause, salary caps, and the rookie draft on competitive balance for different professional sports leagues.22 They come to the conclusion that “an enforceable salary cap is the only one of the cross-subsidization schemes currently in use that can be expected to accomplish (financial viability for weak-drawing markets) while improving competitive balance in a league.”23 As with Kesenne (2000), Fort and Quirk (1995) argue that the problem with a salary cap is proper enforcement because teams are not allowed to maximize revenues with a salary cap.24 This discrepancy would naturally cause management to look for loopholes, like deferred payment, in the cap.25 6

David Richardson (2000) is the first to use the National Hockey League as a focus for exploring competitive balance. He finds the long-term trend leaned towards more competitive balance in the National Hockey League when looking at winning percentages, and he finds no significant patterns for playoff games.26 When looking at the impact the entry draft had on competitive balance in the NHL, Richardson (2000) finds some support that the draft helps maintain competitive balance in the league.27

The most relevant journal article for this paper is Craig A. Depken’s (1999) study on the competitiveness of Major League Baseball. He uses a deviation of the

Herfindahl-Hirschman Index (HHI), which has previously been used to find the market share of a firm in an industry, to account for competitive balance. 28 If the HHI measures

1/N (where N is the number of firms), then it can be assumed the league is perfectly competitive.29 On the other hand, if the HHI equals one, it can be assumed there is no competitive balance in the league.30

In Depken’s (1999) article, however, he points out that the number of firms in the industry can skew the actual HHI.31 In other words, as the number of firms in the market grows, the HHI will decline. Since there are expansion waves, the HHI will tend to decrease. To fix this problem, Depken (1999) uses the dHHI.32 He finds that the variation in parity has been decreasing over time.33 Depken (1999) also looks at the effects of free agency in baseball, finding statistical evidence that free agency has reduced equality in the American League, while having no significance in the National

League.34

In the studies on competitive balance in professional sports, the findings of the reviewed material are not consistent. The conflicting conclusions probably stem from the 7 lack of a universal system for gauging competitive balance. The literature has different findings for all sports regarding free agency, the amateur draft, and expansion of the league. The next section will describe the adaptation of Depken’s model, which this study will employ to examine the NHL.

III. The Empirical Model and Data

As its primary model, this study uses the deviation of Herfindahl-Hirschman

Index of points (dHHIp) to look at the competitiveness of the National Hockey League.

dHHIp = f(HHIgf, HHIga, Amateur Draft, Racial Integration, European Influence, Expansion, World Hockey Association, Free Agency, Special Expansion) (3.1)

The dependent variable, dHHIp, is the deviation of the Herfindahl-Hirschman

Index of team points from the ideal distribution of points in any given time period. 35

Equations 3.2-3.4 are mathematical representations of the dHHIp.

1 dHHIp  HHIp  , where (3.2) N

N 2 HHIp  MSi  , where (3.3) i1

POINTS OF TEAM i MSi  (3.4) TOTAL LEAGUE POINTS 8

th where N is the number of teams or firms in the industry. MSi is the market share of the i firm, where market share is defined as points gained by a teami divided by the total league points.

Independent Variables

Goals Scored (HHIgf) and Goals Allowed(HHIga)

HHIgf is the Herfindahl-Hirschman Index for goals scored, or the distribution of goals scored. Equations 3.5-3.6 are mathematical representations of the HHIgf.

N 2 HHIgf  MSi  (3.5) i1

GOALS SCORED BY TEAM MS  i (3.6) i TOTAL LEAGUE GOALS

On the other hand, HHIga is the Herfindahl Hirschman Index for goals allowed, or the distribution of goals allowed . Equations 3.7-3.8 are mathematical representations of the

HHIga.

N 2 HHIga  MSi  (3.7) i1

GOALS ALLOWED BY TEAM MS  i (3.8) i TOTAL LEAGUE GOALS

One would expect that the more concentrated goals scored become over time, the more evenly distributed offensive talent in the league becomes, and the lower the HHIgf value 9 should be. It is expected, then, that as the HHIgf decreases, the dHHIp will become smaller. In other words, the predicted sign of the coefficient for HHIgf is positive.

Similarly, one would expect that the more concentrated goals allowed becomes, the more evenly distributed defensive talent is in the league, and as such will cause the HHIga approach zero. Therefore, the predicted sign of the coefficient for HHIga is positive.

Amateur Draft (AD)

The dummy variable AD begins in 1963, when the inception of a rudimentary form of the current Entry Draft was introduced.36 Years 1963 and after have a value of one. Years before 1963 have a value of zero. The launch of the amateur draft in 1963 may have had a positive effect on competitive balance. Before the draft, NHL teams could sponsor entire amateur teams and could sign any player from that team to a contract.37 After the onset of the draft, teams were only allowed to pick individual players, e.g. if the two best available players played on the same amateur team, two different National Hockey League teams could draft these players (whereas in the old system both players would have ended up playing for the same team). A testable hypothesis is that the amateur draft would increase the level of competitive balance in the

National Hockey League. In other words, the expected sign of the coefficient for the amateur draft is negative.

1if year  1963 AD   (3.9) 0if year  otherwise 10

Racial Integration (RI)

In 1958, the first non-white hockey player entered the National Hockey League.38

The dummy variable RI equals one for every year after 1957 and zero for 1957 and before. With the establishment of a racially integrated league, a larger labor pool would theoretically be available for teams. Although it cannot be assumed that all teams would necessarily integrate at the same time or rate, it can be expected that integration by all teams would improve the overall quality of play. As Depken (1999) notes in his work,

“if all teams improved at the same absolute rate, then the poor quality teams (those with lower winning percentages) would improve at a greater percentage rate than the pre- integration teams of high quality.”39 Integration can therefore be expected to improve parity, or decrease the dHHIp. Consequently the predicted sign of the coefficient for racial integration is negative.

1if year  1958 RI   (3.10) 0if year  otherwise

European Influence (EURO)

The European influence on the National Hockey League has been enormous in the past few decades. The dummy variable EURO equals zero for every year through 1989, and one for every year after. In the 1940’s and 1950’s there were only a handful of

European born and trained players in the National Hockey League. Although always increasing slightly, the percentage of Europeans in the NHL stayed below 10 until 1990.

It was finally in 1990 that the percentage of Europeans in the NHL increased to over 10 percent. 31.6 percent of the National Hockey League is currently European and that 11 number continues to rise.40 The influx of Europeans has caused a major rise in the talent pool, hopefully bringing more balance to the league (in form of more top-level players).

The anticipated sign of the coefficient for EURO is negative.

1if year  1990 EURO   (3.11) 0if year  otherwise

Expansion (EXPAN)

As Depken (1999) points out in his Major League Baseball paper on competitive balance,

Although the parity measure dHHI arithmetically accounts for the expansion of a league, it does not control for any statistical influences of expansion on the league’s competitive balance. Expansion teams are staffed with players drafted from existing teams which are able to protect (supposedly high-quality) players from being drafted. Thus, one may suspect expansion teams to be at a competitive disadvantage.41

The disadvantage created by expansion may have more of an effect on parity than by just calculating the dHHIp. In order to account for this, a dummy variable for expansion has been added.42 In any year that a new NHL team starts play the dummy variable EXPAN equals one; for all other years EXPAN is equal to zero. The predicted sign of the coefficient for EXPAN is positive.

1if year  1968,1971,1973,1975,1980,1992,1993,1994,1999,2000,2001 EXPAN   0if year  otherwise

(3.12) 12

World Hockey Association (WHA)

In 1972-73, the World Hockey Association (WHA) was established. It was the first and only direct competition in North America that the National Hockey League faced in the 20th century. The league lasted through the 1978-79 season before folding.43

Drawing upon the reasoning from the dummy variables for Europeans and racial integration, the WHA took away from the talent pool in the National Hockey League.

WHA equals one for seasons 1972-73 to 1978-79 and zero for all other seasons. It is expected that the inception of the World Hockey Association will cause a decrease in parity. Therefore, the predicted sign of the coefficient for the WHA variable is positive.

1if year  1973  79 WHA   (3.13) 0if year  otherwise

Special Expansion (D68)

From 1942-43 until 1967-68, there were only six teams in the National Hockey

League.44 The league experienced its largest expansion ever during the 1967-68 season, when six more teams were added to the league.45 Special consideration should be given to this expansion, as the league doubled in size in one year. The dummy variable D68 is equal to zero before the 1967-68 season and one thereafter. For reasons similar to the expected effect of other expansionary years (in which the dummy variable EXPAN is used), the expansion of 1967-1968 can be projected to have the same effect on parity. As such, it is predicted that the major expansion in the 1967-68 season will cause an increase in the dHHIp, which will make the league less competitive. Hence, the predicted sign of the coefficient of D68 is positive. 13

1if year  1968 D68   (3.14) 0if year  otherwise

In some regression equations, D68 integrated with HHIgf and HHIga. The D68 variable is multiplied by HHIgf and HHIga, respectively, to account for a gap that occurred in the two independent variables when the league expanded in 1967-68.

Combining D68 with HHIgf and HHIga allows for changes in the slope of the independent variables. Examples of the dHHIp with the integrated D68 variable are given in equation 3.15.

dHHIp   0  1HHIgf   2 HHIga  ...   1 (HHIgf * D68)   2 (HHIga * D68) (3.15)

Free Agency (FA)

The dummy variable FA controls for the system of free agency currently in use by the National Hockey League. FA equals one for years after the CBA (see footnote 14) was ratified, and zero otherwise. With increased restriction on movement, it is assumed that teams will be able to retain their top end players more easily. Hence, it will be more challenging for the better teams to lure talent away from the bottom place teams, hopefully increasing competitive balance. Therefore, the predicted sign of the coefficient for free agency is negative. 14

1if year  1995 FA   (3.16) 0if year  otherwise

1 Scott Taylor, “New CBA era is crucial,” The Hockey News, 21 February 2003, 7.

2 The Stanley Cup is awarded to the National Hockey League’s playoff champion on a yearly basis. 3 4 Andrew Zimbalist, “Competitive Balance in Sports Leagues: An Introduction,” Journal of Sports Economics 3, no. 2 (May 2002): 111.

5 Allen Sanderson, quoted in Andrew Zimbalist, “Competitive Balance in Sports Leagues: An Introduction,” Journal of Sports Economics 3, no. 2 (May 2002): 119.

6 Ibid., 120.

7 Alan Balfour and Philip K. Porter, “The Reserve Clause in Professional Sports: Legality and Effect on Competitive Balance,” Labor Law Journal 41, no. 1 (1991): 8-18. 8 Ibid., 16. 9 Michael Butler, “Competitive Balance in Major League Baseball,” American Economist 39, no. 2 (1995): 46-53. 10 Ibid. 11 Ibid., 49.

12 Ibid.

13 Brad R. Humphreys, “Alternative Measures of Competitive Balance in Sports Leagues,” Journal of Sports Economics 3, no. 2 (May 2002): 133-148. 14Ibid., 133.

15 Ibid., 147. 16 Ibid.

17 Ibid., 165. 18 Martin Schmidt, “Competition in Major League Baseball: the Impact Expansion,” Applied Economics Letters 8, no. 1 (2001): 21-27. 19 Ibid., 26.

20 Ibid., 298. 21 Ibid.

22 Rodney Fort and James Quirk, “Cross-Subsidization, Incentives, and Outcomes in Professional Team Sports Leagues,” Journal of Economic Literature 33, no. 3 (1995): 1265-1300. 23 Ibid., 1282.

24 Ibid., 1266

25 Ibid. 26 Ibid., 405. 27 Ibid. 28 David Richardson, “Pay, Performance, and Competitive Balance in the National Hockey League,” Eastern Economic Journal 26, no. 4 (Fall 2000): 393-418. 29 Ibid., 208. 30 Ibid. 31 David R. Kamerschen and Nelson Lam, “A Survey of Measures of Market Power,” Rivista Internazionale di Scienze Economiche e Commerciali 22 (1975): 1131-1156, quoted in Craig A. Depken. II, “Free- Agency and the Competitiveness of Major League Baseball,” Review of Industrial Organization 14 (1999): 205- 217. 32 dHHI = HHI – 1/N, where N is the number of firms (or teams) in the industry. This, he says, measures the deviation from the ideal distribution of wins in any given time period.

33 Craig A. Depken II, “Free-Agency and the Competitiveness of Major League Baseball,” Review of Industrial Organization 14 (1999): 209. 34 Ibid., 215.

35 As referred to in Chapter II, the dHHIp is used (as opposed to the HHIp) because as a measure of concentration, the HHI will always decrease as the number of firms in the market increase. It is therefore necessary to account for the influence of a change in the number of firms. As such, the dHHIp = HHI – 1/N where n is equal to the number of NHL teams in the league. 36 Prior to 1963, NHL teams acquired player by sponsoring amateur players or teams. In 1963 the amateur draft was introduced to replace this system. Teams could select any amateur player who would reach his 17th birthday between August 1st, 1963 and July 31st, 1964. Players would then remain on the team reserve list until their 18th birthday, when contract negotiations would begin. The name of the draft was changed to the NHL Entry Draft in 1979, and has retained the name since. Under the current draft rules, a player must be 18 years of age by September 15th of his draft year to be eligible. 37 An NHL team would pay an amateur team to become the amateur team’s sponsor. The NHL team would then have the right to sign any player they wanted to off of that particular team. 38 Willie O'Ree became the first black player in the history of the NHL when he played for the Boston Bruins on January 18, 1958. 39 Craig A. Depken II, “Free-Agency and the Competitiveness of Major League Baseball,” Review of Industrial Organization 14 (1999): 212. 40 Steve Hirdt, “Do the Math,” ESPN The Magazine, 17 February 2003, 16. 41 Craig A. Depken II, “Free-Agency and the Competitiveness of Major League Baseball,” Review of Industrial Organization 14 (1999): 212.

42 Other than the original expansion in 1967-68, there have been 9 years of expansion. In 1970-71 franchises were established in Buffalo and Vancouver. In 1972-1973 franchises in Atlanta (which moved to Calgary in 1980-1981) and New York (Islanders) were started. In 1974-1975 Washington and Kansas City (which moved to Colorado in 1976-1977 then to New Jersey in 1982-1983) were established. In 1991-1992 San Jose was established. In 1992-1993 franchises in Ottawa and Tampa Bay were started. In 1993-1994 Anaheim and Florida were established. In 1998-1999 the Nashville Predators entered the league. In 1999-2000 a franchise in Atlanta was started. The last expansion took place in 2000-2001, when franchises in Minnesota and Columbus were established. 43 Upon the folding of the WHA in 1978-79, four franchises moved to the National Hockey League, which was considered another year of expansion. Edmonton, Winnipeg (who moved to Phoenix in the 1996- 97 season), Quebec (who moved to Denver, Colorado in the 1995-96 season), and Hartford (who moved to North Carolina in the 1997-98 season) are all now members of the National Hockey League. 44 The ‘original six’ as they are commonly called, are the Boston Bruins, Detroit Red Wings, Montreal Canadians, Toronto Maple Leafs, New York Rangers, and Chicago Blackhawks. 45 Franchises were awarded for the 1967-68 season in Los Angeles, Philadelphia, Pittsburgh, Saint Louis, Minnesota (who moved to Dallas in 1993-94), and Oakland (which became defunct prior to the 1978- 79 season, when they merged with the Minnesota franchise).