Economic Subterfuge and the NBA Lockout
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Economic Subterfuge and the NBA Lockout Author: Parin Shah Persistent link: http://hdl.handle.net/2345/2641 This work is posted on eScholarship@BC, Boston College University Libraries. Boston College Electronic Thesis or Dissertation, 2012 Copyright is held by the author, with all rights reserved, unless otherwise noted. ECONOMIC SUBTERFUGE AND THE NBA LOCKOUT The Competitive Balance and Payroll Equality Myth Submitted in partial fulfillment of the requirements for graduation from the Carroll School of Management Honors Program at Boston College Parin Shah Boston College May 2012 Richard McGowan, S.J., Adviser © 2012 Parin Vijay Shah All Rights Reserved ABSTRACT At the very core of the National Basketball Association’s labor negotiations between the owners and the players during the 2011 lockout was the league’s argument that its economic structure was broken. Owners contended that the NBA’s soft salary cap system, and the resulting payroll disparity, has put small-market franchises at a talent disadvantage and produced a league of haves and have-nots. To remedy this purported competitive balance problem, the owners demanded severe policy measures to decrease the pay dispersion among teams. However, the players union cautioned that these hardline provisions were merely an attempt to transfer wealth from players to owners. This charge warranted further analysis. Existing literature on this topic is either outdated or insufficient in scope. As such, using regression analysis, this thesis evaluated the league’s argument and determined to what extent the league’s soft salary cap system has contributed to its competitive imbalance. The empirical analysis of this thesis produced several meaningful conclusions. While the NBA has relative imbalance, it does not affect consumer demand for the regular season product. Moreover, while pay dispersion exists, additional salary expenditures only marginally add to a team’s winning percentage. There is no significant relationship between payroll disparity and competitive balance. Finally, with the escalating importance of media rights contracts and the historical appreciation of franchise valuation, the league overstated the financial distress of most of its small-market owners. Overall, the NBA and its owners used deceptive rhetoric and misleading economic policies to decrease player salaries, not to increase competitive balance, in a collusive effort to maximize profits and reassert its diminishing monopsony power in an increasingly star-driven league. Economic Subterfuge and the NBA Lockout iii ACKNOWLEDGMENTS Though only one name appears on the cover, several people have made significant contributions to the production of this thesis project. I owe tremendous credit to the countless number of individuals who have not only made this thesis possible, but also made my undergraduate experience memorable. Fr. Richard McGowan For your tireless energy, thorough guidance, and considerable patience, not only during the course of the entire thesis project, but also throughout my collegiate career. For this, I am eternally thankful. Prof. Christopher Maxwell For your continued encouragement, advice, and willingness to listen in our numerous informal meetings during my final semester at Boston College. My sincerest gratitude. Mom; Dad; Pooja For providing me with an endless source of inspiration, strength, love, and support throughout my entire life. Everything that I am and everything I hope to be, I owe to my family. Economic Subterfuge and the NBA Lockout iv TABLE OF CONTENTS Abstract ………………...................………………………...............…………….....………………………….................. iii Acknowledgements ………………………………………...............…………….....…………………………................... iv List of Tables ……………………………………………...............…………….....…………………………....................... vi List of Figures ………….…..……………………………...............…………….....…………………………..................... vii List of Abbreviations ….……………………………………...............…………….....…………………………............... viii Chapter 1. Introduction I. Rationale and Objectives …….………………………………………………………….................... 1 II. Roadmap ……..........................………………………………………………………….................... 4 2. Background I. Collective Bargaining and the NBA ………………...……………………………....………..…..... 6 II. 2011 CBA Negotiations ……………..………………...................…………………..………..…..... 10 III. The 2011 Lockout ……………...........………………...................…………………..………..…..... 15 3. Literature Review I. Competitive Balance in Theory ……………………………………………………….…….........… 18 II. Measures of Optimal Balance ………………………………………………………….……........... 20 III. The NBA’s Competitive Imbalance …………………………………………………….……...…… 23 4. Research Design I. Data Sources and Variables ………………………………………………………...............……… 26 II. Statistical Relationships ………………………………………….....................…….……..……… 28 III. Hypothesis ………………………………………………………............................................….… 30 5. Empirical Analysis I. Competitive Balance ...………………………………………………………….……………..…......... 31 II. Consumer Demand ...………………………………………………………………………...….......... 34 III Pay Dispersion ...…………………………………………………………………….…...…................. 37 IV. Team Performance ...…………………………………………………………….…………................ 43 V. The Soft Salary Cap System ...……………………………………………….…………………..…... 47 6. Discussion I. Misleading Economics .....………………………………………………………………………...…… 49 II. Profitability and NBA Ownership .....…....…………………………………………………...…… 52 7. Conclusion I. Policy Recommendations ...……………………………………………………………………….….. 53 Appendix ..……………………………………………………………………………...……………………….…………............ 55 References ..……………………….......…………………………………....………………………………….…………........... 62 Economic Subterfuge and the NBA Lockout v LIST OF TABLES Table 1. NBA Salary Cap Exceptions (2005 CBA) ……………………….................................................. 9 2. NAPSL Competitive Balance (RSD) 1992 to 2011 ……………………............................…........ 31 3. Multiple Regression of NBA Competitive Balance (RSD) 1992 to 2011 ……………………..... 33 4. Multiple Regression of NBA Per Game Gate Receipts 1992 to 2011 …….....……………........ 35 5. Regression of NBA Team Revenue to Winning Percentage 1999 to 2011 ………......…........ 37 6. Intervention Analysis of Payroll Disparity Time Series 1992 to 2011 ………………...…........ 39 7. Regression of Team Payroll Spend to Team Revenue 1999 to 2011 ………………………........ 42 8. Regression of Team Winning Percentage against Payroll Spend 1992 to 2011 ………........ 44 9. Regression of NBA Annual RSD to Gini Coefficient 1992 to 2011 …................................... 48 Economic Subterfuge and the NBA Lockout vi LIST OF FIGURES Figure 1. NAPSL Competitive Balance (RSD) 1992 to 2011 .............................................................. 21 2. NAPSL Competitive Balance (Gini Coefficient) 1992 to 2011 ............................................ 22 3. NBA Competitive Balance (RSD) 1992 to 2011 .................................................................. 32 4. Regression of NBA Team Revenue to Winning Percentage 1999 to 2011 ......................... 36 5. NAPSL Pay Dispersion (Gini Coefficient) 1992 to 2011 ..................................................... 38 6. NBA Pay Dispersion (Gini Coefficient) 1992 to 2011 ......................................................... 39 7. NBA Pay Dispersion by Market Size Classification 1992 to 2011 ...................................... 40 8. NBA Pay Dispersion by Revenue Classification 1992 to 2011 ........................................... 41 9. Regression of Team Payroll Spend to Team Revenue 1999 to 2011 .................................. 42 10. NBA Profit Maximization by Market Size Classification 1992 to 2011 .............................. 43 11. Regression of Team Winning Percentage against Payroll Spend 1992 to 2011 ................. 44 12. NBA Winning Percentage by Payroll Spend Classification 1992 to 2011 .......................... 45 13. NBA Winning Percentage by Market Size Classification 1992 to 2011 .............................. 46 14. Regression of NBA Annual RSD to Gini Coefficient 1992 to 2011 ….................................. 47 Economic Subterfuge and the NBA Lockout vii LIST OF ABBREVIATIONS ASD Actual Standard Deviation BAA Basketball Association of America BLS Bureau of Labor Statistics BRI Basketball Related Income CBA Collective Bargaining Agreement CBR Competitive Balance Ratio CPI Consumer Price Index ISD Ideal Standard Deviation MLB Major League Baseball MLE Mid-Level Exception NAPSL North American Professional Sports Leagues NBA National Basketball Association NBPA National Basketball Players Association NFL National Football League NHL National Hockey League RSD Ratio of Standard Deviation RSN Regional Sports Network TMR Team Marketing Report UOH Uncertainty of Outcome Hypothesis Economic Subterfuge and the NBA Lockout viii INTRODUCTION Overview On June 12, 2011, the National Basketball Association completed one of its most successful seasons in league history. The 2010-2011 season was replete with storylines: Phil Jackson’s quest for his fourth three-peat, the rise of young stars like Blake Griffin, Derrick Rose, and Kevin Durant, and especially the arrival of Miami’s new ‘Big Three’ in LeBron James, Dwyane Wade, and Chris Bosh. The 2010- 2011 season culminated in one of the most memorable Finals, in which twenty-four million Americans tuned in to watch the Dirk Nowitzki and the Dallas Mavericks defeat the Miami Heat in the decisive Game Six.1 Only eighteen days later, the league’s owners