Academic journal article Economic Inquiry

Structural Change in MLB Competitive Balance: The Depression, Team Location, and Integration

Academic journal article Economic Inquiry

Structural Change in MLB Competitive Balance: The Depression, Team Location, and Integration

Article excerpt

I. INTRODUCTION

Competitive balance is the object of significant attention in the analysis of pro sports leagues. Recent examples include Depken (1999), Eckard (2001), and Humphreys (2002). Under the uncertainty of outcome hypothesis, imbalance of a sufficient level may actually drive the demand for pro sports down and league revenues with it. We join Scully (1995) in adding to the time-series analysis of sports league outcomes. In our particular case, the object of analysis is within-season competitive balance in Major League Baseball (MLB) 1901-99.

In MLB, a number of structural changes have been hypothesized to dramatically alter competitive balance among teams over time-the draft (1965), the end of the reserve clause (1975), and the fundamental alteration in local revenue brought on by increases in the value of local TV broadcast rights (early 1980s). In addition, it is commonly thought that expansion should water down talent and reduce competitive balance while relocation of smaller-revenue market clubs should enhance balance as teams move to improve revenues. The impact of racial integration on competitive balance remains a relatively less-explored area.

In past works, short-term "cross-section type" approaches have been used to address structural change in competitive balance. Originally, Noll (1988), Scully (1989), Quirk and Fort (1992), and Fort and Quirk (1995) compared average measures of competitive balance for a specific number of years before and after the draft, free agency, and salary caps occurred. Fort and Maxcy (2003) provide a complete literature review of the work that followed. La Croix and Kawaura (1999) add ad hoc structural change dummy variables to competitive balance regressions. Adding to the insights gained by these approaches is one that relies on statistically detecting changes in competitive balance. Our work doesn't replace these others, but we hope it adds to their findings.

To that aim, we apply break point detection techniques developed by Andrews (1993), Bai (1997, 1999), and Bai and Perron (1998, 2003) to within-season MLB competitive balance measures, 1901-99. That technique uses regression with a constant and a time trend. If break points are detected, their technique then adds a dummy variable for the year of the break point to the regression to estimate the significance and direction of structural changes.

The method employed detects no break points for the National League (NL) after 1937, and the same goes for the American League (AL) after 1962. Thus the draft, free agency, recent MLB expansion, and the growth in local TV revenue disparity do not coincide with shifts in competitive balance. Instead, we find statistically significant trends in improved competitive balance in each league over these time periods. This leads us to conclude that more gradual occurrences over time (more, and more geographically dispersed, population centers; diffusion of games through TV; and globalization of the talent pool) have played the dominant role in the behavior of competitive balance. But we hasten to point out the following for very recent occurrences. The technique employed cannot tell us whether this improvement trend is because of or in spite of MLB efforts intended to enhance balance, such as the increase in local revenue sharing in the collective bargaining agreements effective in 1996 and 2001.

In the periods where structural changes are detected, break points usually coincide in believable ways with the economics of larger-revenue markets during the Great Depression in both leagues. But the AL emerged from the Depression much more unbalanced than the NL. Team movement and league expansion also have expected impacts on competitive balance. We also find that discriminatory preferences were stronger in larger-revenue markets than in smaller-revenue markets in both leagues.

The article proceeds as follows. First, we specify the time-series approach. …

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