Bidding till Bankrupt: Destructive Competition in Professional Team Sports

Article excerpt

If we don't sign Hershiser, we'll lose him at the end of the year to an owner who is told by his manager that the club is only one pitcher away from winning it all. To win it all, some owners will do anything. God save us from those owners only one pitcher away.

Los Angeles Dodger owner Peter O'Malley (Durslag |1990~)

I. INTRODUCTION

During the labor dispute that delayed the start of the 1990 baseball season, team owners raised their usual complaint that free agency will eventually result in a two-tier league of have and have-not teams, to the detriment of league revenues and fan interest. But player representatives remained skeptical of the validity of this complaint. Donald Fehr, executive director of the Major League Baseball Players Association, repeatedly pointed out that the owners have never demonstrated a need for "radical change" in the player compensation system, arguing, "They don't have a basis for it. We're looking for the rationale" (Newhan |1990, 10~).

This paper suggests such a rationale. In the pursuit of a league championship, the talent that turns an average team into a contender makes a disproportionately large contribution to the team's success. Owners therefore tend to earn most of their quasi-rents on the last stars they sign and suffer net losses on much of their infra-marginal talent. Teams with net losses on their overall stock of talent face a shutdown situation and will opt to abandon a competitive market for star athletes, reducing the number of remaining participants.(1)

It is useful to think of athletic talent in the sports industry as a "strategic input," an input whose productivity for a given user depends on how much of the input is employed by the user's rivals. The most well established point about inputs of this type is the tendency to overemploy them; in the sports literature this was demonstrated by Canes |1974~. This paper extends the analysis of strategic inputs in the professional team sports industry to demonstrate how the objective of championship prospects confronts market participants with a persistent shutdown threat. Of particular concern from an economics perspective, the shutdown scenario can result in a credible case of "destructive competition" in the sense of a competitive process that risks driving at least some participants out of a market even though it is inefficient for them to leave.

Sections II and III provide the theoretical basis for the shutdown situation which can emerge in the competition for athletic talent in professional team sports. Evidence for major league baseball presented in section IV suggests that the theoretical analysis may be empirically relevant. Section V closes with some implications of the analysis and possible extensions to situations outside the professional sports industry. The most important of the implications is the clear potential for welfare-reducing effects associated with the shutdown scenario.

II. TEAM PERFORMANCE CRITERIA AND THE PRODUCTIVITY OF ATHLETIC TALENT

Economists have long recognized that the market for athletic talent is not trouble-free. Researchers such as El Hodiri and Quirk |1971~, Demmert |1973~, Noll |1974~ and Daly and Moore |1981~ have discussed the inherent third-party externalities of player transactions involving any pair of teams because of the league-wide interdependence of relative team performance. Noll |1974, 416~ also noted that an unrestricted market for athletic talent can threaten the viability of marginal franchises who rely on rents derived from their players to cover some of their fixed costs. And Cassing and Douglas |1980~ modeled the winner's curse phenomenon in the context of an auction market for athletic talent.

But these analyses do not generate the bleak scenario described by team owners of a free-agency environment in which league divisions split sharply into have and have-not teams. For example, the third-party externality problem is not specific to free agency; it arises regardless of whether players or owners have the marketing rights to player contracts. …