DIVISION OF THE HUMANITIES AND SOCIAL SCIENCES CALIFORNIA INSTITUTE OF TECHNOLOGY PASADENA, CALIFORNIA 91125 MAJOR LEAGUE TEAM SPORTS u..C, '1\lUTE OF Roger G. Noll ''"' �... /'�� � 1J � .....� 0 � Q � tit � �..-'\ Prepared for public�tion in Walter Adams, editor "ti-� -4..ii> The Structure of American Industry (Sixth Edition) "1S HALL fit\��\. SOCIAL SCIENCE WORKING PAPER 125 May 1976 Revised November 1980 MA.JOR LEAGUE TEAM SPORTS Roger G. Noll* The maj or league sports industry is an exceptionally interesting subject for economic study . Its allure for economists does not lie in its size, for by any reasonable measure the team sports industry is not big business. The total revenue of all teams in the five major team sports--baseball, basketball, football, hockey, and soccer�is less than half the revenue of such mundane endeavors as the manufacture of cardboard boxes or the canning of fruits and vegetables. Pro teams have revenues ranging approximately from those of a large gas station to tho se of a department store or large supermarket. The team sports business is interesting to economists primarily because of the complex operating rules and special legal status of the industry . Nearly every phase of the operations of a team or a league is influenced by practices and rules that limit economic competition within the industry . In mo st cases, government has either sanctioned or failed to attack effectively these anticompetitive practices. Consequently, professional team sports * Chairman of the Division of the Humanities and Social Sciences and Professor of Economics at the California Institute of Technology . 2 3 provides economists with a unique opportunity to study the operation Superficially, the structure of the player market appears and performance of an effective, well-organized cartel . competitive. In each sport, twenty-five to thirty firms all employ approximately equal numbers of athletes; concentration ratios on the THE MARKET STRU CTURE OF MAJOR LEAGUE SPORTS demand side of these markets are therefore quite low. On the supply As do most businesses, a sports team operates in several side, a tiny proportion of the population is skillful enough to play markets, some of which are local and some of which are national. The ma jor league athletics, and only a handful have the ability to become mo st important product markets are the sale of admissions and stars . Still in any year the number of, say, .300 hitters in baseball concessions at home contests and the sale of the right to broadcast or 50-yards-per-game running backs in football is sufficiently play-by-play accounts of games. The mo st important input markets are numerous that the market is likely to be reasonably competitive. the acquisition of skilled professional players and of a facility for Despite these appearances, the player market is not staging contests. The characteristics of each of these four markets competitive. Although the details differ from sport to sport, are somewhat different , so that each must be examined separately. In professional sports leagues all have some version of a "p layer general , although 122 minor league teams operated in the five sports reservation system"--a mechanism for reducing the competition for in 1980, rarely would more than a few find themselves competing in a players among teams in the league . particular market. Leagues have separate rules for regulating competition for three types of players : "rookies," players about to begin a The Player Market professional career; veterans whose present team desires to retain Although a few especially gifted athletes can play at the their services ; and veterans who are no longer wanted by their current highest professional level in more than one sport, such individuals employer . The effect of all three systems is to divide as many are extremely rare. Consequently , each sport has essentially a players as possible from the relevant pool of present and potential separate player market through which teams acquire athletes with major league players into separate submarkets--one for each team-- in skills specific to that sport. All teams conduct international which each team has an exclusive bargaining right with the players searches for players. Even the uniquely American game of football has assigned to its submarket. engaged in an international search for talent since the 1960s when it The method for allocating exclusive bargaining rights for found a productive use for European soccer players as place kickers. rookies is the free agent draft. In every sport at a specified time during the year--typically at the conclusion of the high school and 4 5 college season in the same sport�teams in each league, normally in formula that is negotiated with the players' association. The reverse order of finish during the previous season, select players compensation is the assignment of rights to draft choices, with the from among eligible amateur athletes to be added to their "reserve amount of compensation determined by the experience and playing time list." A player may then negotiate only with the team that selected of the player who plays out his option. In basketball through 1981 him, and in all sports except baseball rights to negotiate with the and hockey, the amount of compensation is determined by the player perpetually belong to the selecting team unless it trades or Commissioner of the sport. Although few cases have arisen in these sells those rights to another member of the league . In baseball, if a sports, the 1979 Bill Walton case illustrates the use of the player does not sign a contract with the team that drafted him within compensation system to punish severely teams that sign a free agent . six months his name returns to the list of athletes eligible for the NBA Commissioner Larry O'Brien awarded Walton's old team, the Portland draft. Trail Blazers, several key players from San Diego , the team that In all sports a veteran player has some freedom to change signed him, even though Walton' s ability to play, owing to a foot teams even if his current emp loyer wants to retain the rights to his injury , was highly questionable (indeed, Walton played only a few services . This is done by exercising the "option" to "play out" his games for San Diego , and his career remains in jeopardy) . contract and become a "free agent ." What this means is that a player The compensation requirement--called the "Rozelle Rule" after can gain his freedom to negotiate with another team by playing an its inventor, Commissioner Pete Rozelle of the National Football additional year in baseball, football and basketball, an additional League--reduces the amount a team is willing to pay a player who has two years in soccer, or an additional three years in hockey under played out his option, and thereby the wage that he will obtain in the terms specified in his last contract. In baseball, a player mu st also competition for his services. As of 1980 , baseball and soccer had no have six years of experience to be eligible for free agency . compensation rule; however , in collective bargaining , baseball owners After playing out his option, a player is not completely are trying to obtain it. In basketball, the compensation system ends unencumbered in his ability to negotiate a job with a different in 1981 unless the players agree to extend it as part of the employer. In football and hockey, and in basketball through 1981 , the collective bargaining agreement . In basketball, all that is scheduled team that signs the player who has played out his option mu st to remain after 1981 is the right of a player's team to keep him by indemnify the team that he left with some combination of players, matching the offer he receives from a competitor. In baseball, the draft choices and cash that compensates his old team for its loss due only factors now limiting competition for veteran free agents in to his departure. In football, compensation is determined by a baseball are that only twelve teams are allowed to compete for any 6 7 given player, and that each team is limited in the number of free The average salary for the entire team, including second line players , agents that it can sign. Both rules have proven to be too lax to be was well over $200 ,000 . All of the starting lineup of the Phillies effective in limiting significantly the salaries of players. are veteran players who either have gone through the free agent Even the limited freedom of veterans to switch teams is a process or who have been induced to stay out of the free agent process relatively recent event. In the early days of team sports, the rights by the Phillies because of lucrative contract offers. The obvious to a player were perpetual . Once a player signed his first contract , affect of the free agency system in baseball has been a dramatic the rights to negotiate with him were thereafter the exclusive increase in the pay of veteran players. The player market monopsony property of a single team as long as the terms of his contract were in baseball is now confined to players in the first few years of their satisfied. This situation changed in the mid-1 970s in all sports, careers. Of course, because the median duration of a baseball career largely because of efforts of players' unions through antitrust is about five years, it is still true that the maj ority of players actions and collective bargaining , a topic to which we will return never have the opportunity to enter a competitive player market . The later . primary beneficiaries of the free agent system are the star players The effects of baseball's relatively liberal system of free who enjoy long careers.