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This paper presents a dynamic model of talent investments in a team sports league with an infinite time horizon. We show that the clubs' investment decisions and the effects of revenue sharing on competitive balance depend on the following three factors: (i) the cost function of talent investments, (ii) the clubs' market sizes, and (iii) the initial endowments of talent stock. We analyze how these factors interact in the transition to the steady state as well as in the steady state itself.
Many major sports leagues are characterized by a combination of cross-subsidization mechanisms like revenue-sharing arrangements and payroll restrictions. Up to now, the effects of these policy tools have only been analyzed separately. This article provides a theoretical model of a team sports league and analyzes the combined effect of salary restrictions (caps and floors) and revenue sharing. It shows that the effect on club profits, player salaries, and competitive balance crucially depends on the mix of these policy tools. Moreover, the invariance proposition does not hold even under Walrasian-conjectures if revenue sharing is combined with a salary cap or floor.
Fans of baseball, football, basketball, and hockey have long been exploited and oppressed by the monopolistic practices of team owners. The time has come for a revolution in the organization of major U.S. sports! Fans of the World, Unite! is a clarion call to sports fans. Appealing to anyone who is in despair due to the greed and incompetence of team owners, this book proposes a significant restructuring of sports leagues. It sets out a rational program for a revolution that will serve the best interests of the fans and of the sport itself. But Stephen F. Ross and Stefan Szymanski are no Marxists: they show how a revolution in the organization of sports might even benefit the owners. By harnessing the power of markets, sports leagues can be made both more responsive to the needs of the fans, and more efficient. Ross and Szymanski have spent many years evaluating the ways in which leagues work across the globe. Drawing on their extensive study of leagues, the authors boil down their plan to two major reforms. Borrowing from NASCAR, they propose that team owners should not own sports leagues as well. Rather, league ownership should be separate. Their second proposal is drawn from soccer: introduce competition through a promotion and relegation system. In this type of system, the worst teams in the league are kicked out at the end of the season and replaced by the best performing teams in the next division down. This gives poor performing teams incentive to step up their game, and allows fresh blood to enter the leagues if the poor performers fail to do so. The main goal of these reforms is to align the financial interest of those who own the league with the best interests of the fans and the sport. Having laid out the problem and the solution, the authors skillfully address practical implications of introducing their scheme, suggesting how leagues might at least make some changes, if not all of those suggested. The time for change has come! Armed with this book, and with fairness on their side, fans can set forth to begin a revolution.
This paper analyzes issues associated with network effects and two-sidedness in the market for professional team sports. Teams in professional sports leagues have to compete both for players (inputs) and fans (consumers). In this setting, we construct a theoretical framework where fans are more attracted to a team with a large portion of talented players from a fixed talent pool, at the same time that players want to show their ability in front of a large number of fans. We observe that either perfect imbalance or alleviated imbalance will prevail as an equilibrium. The outcome depends upon the relative magnitude of two opposite effects, the product differentiation effect and the wage reduction effect caused by externalities from the size of talented players and fans respectively. Furthermore, we incorporate asymmetric relative quality effects into consumers' utility in order to analyze its impact on competitive balance. This is shown to either exacerbate or improve the imbalanced distribution of talented players, depending on fans' sensitivity to the relative quality between teams. The policy implications of revenue sharing on competitive balance and the level of wage offers under the condition of two-sided network effects are analyzed.
In this article, I examine how sports leagues can use gate revenue sharing to coordinate talent investments and maximize club profits. Gate revenue sharing reduces incentives to invest in talent. Initially lower investments boost profits, because total costs go down, but investing less also shrinks revenues, which harms profits at higher levels of sharing. The league maximizes profits by setting a sharing rule, which balances these two effects. Gate revenue sharing decreases talent investments more strongly in leagues with heterogeneous rather than homogeneous local market sizes. As a result, the profit-maximizing level of sharing is higher for relatively homogeneous leagues. This implies that more balanced leagues are expected to share more gate revenues than less balanced leagues. It also explains why gate revenue sharing is widely used in the U.S. major leagues, while it is largely absent in European soccer.