Academic journal article Contemporary Economic Policy

Governance and Vertical Integration in Team Sports

Academic journal article Contemporary Economic Policy

Governance and Vertical Integration in Team Sports

Article excerpt

1. INTRODUCTION

A fundamental characteristic of modern sports is the adherence to a fixed set of rules. Rules imply governance, and the structure of governance in modern sports implies a set of relationships between those who devise and administer the rules and those who are governed by them. These relationships can be analyzed using the methods of political science, using concepts such as power, legitimacy, constitutionality, and so on. They can also be analyzed in economic terms as a set of vertical agreements whose precise terms and conditions influence both the efficiency of sporting competition (according to some agreed welfare criterion) and the distribution of rents between the participants. The scope for economic analysis along these lines is clear if we consider the world of professional team sports, where clubs are constituted as business units with costs and revenues, so that we can talk about whether arrangements maximize joint profits and how the profits are distributed. When we consider team sports where participants may have not-for-profit objectives, economic analysis is sometimes deemed controversial. However, even if we acknowledge not-for-profit objectives, it is still possible to use economic principles to analyze vertical agreements within sporting to analyze vertical agreements with sporting organizations.

Both in the United States and in Europe, the governance of sports leagues and organizations has been a subject of public policy debate. In the United States, the debate has largely focused on the role of the antitrust law in regulating competition and whether the contractual arrangements entered into by professional clubs operated in the public interest. In Europe, the debate has tended to focus on the relationship between governing bodies and the competition law. Baseball's notorious antitrust exemption originally rested on the premise that its business was "giving exhibitions of base ball" and that "the exhibition, although made for money would not be called trade or commerce in the commonly accepted use of those words. "(1) However, as the meaning of commerce applied in the U.S. antitrust law has broadened, (2) few in America now doubt that baseball and the other major league sports are businesses and that the antitrust law applies. (The special exemption for baseball continues because of the Supreme Court's view that baseball's "unique characteristics and needs" require Congress to specifically legislate on the matter.) Moreover, it is accepted that its rule extends into commercial restraints agreed to by avowedly not-for-profit organizations such as the National Collegiate Athletic Association. In Europe, however, the governing bodies of the major sports have continued to press for distinctive treatment within the European Union's Treaty of Rome.

Antitrust law, both in Europe and in the United States, is built around a prohibition of the improper development or maintenance of monopoly power and a prohibition of cartel-like behavior. When applied to the world of sports, legal analysis has dwelt largely upon the issue of cartels. If sports leagues are textbook cartels,(3) the question has been whether horizontal agreements among the participants, such as exclusive territories, are legitimate ancillary restraints which form part of the league joint venture or means to capture economic rents from consumers and players (see, e.g., Flynn and Gilbert, 2001). However, Ross and Szymanski (2006) argue that it is important to consider the vertical aspect of sporting organizations. In both theory and practice, there is a distinction between the contest organizer, who fulfills functions such as designing the prize (which gives the contestants incentives to compete) and setting the rules, and the competitors who aim to win the prize. Given the distinction between organizing a competition and participating in a competition, Szymanski (2003) argues that the peculiar structure of professional team sports--whereby clubs have agreed to integrate the function of championship organization under their joint control--represents only one, possibly inefficient, means to run a competition. …

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