Academic journal article Contemporary Economic Policy

The Effect of Gate Revenue Sharing on Social Welfare

Academic journal article Contemporary Economic Policy

The Effect of Gate Revenue Sharing on Social Welfare

Article excerpt

1. INTRODUCTION

According to the "uncertainty of outcome" hypothesis, a certain degree of (competitive) balance is necessary to maintain a successful sporting contest. One of the most common means of improving competitive balance within a professional sports league is gate revenue sharing. In its simplest form, gate revenue sharing allows the visiting club to retain a share of the home club's gate revenues.

The current revenue-sharing arrangements differ widely among professional leagues all over the world. In 1876, the Major League Baseball introduced a 50-50 split of gate receipts that was reduced over time. Since 2003, all clubs in the American League have put 34% of their locally generated revenue (gate, concession, television, etc.) into a central pool, which is then divided equally among clubs. The current revenue-sharing arrangement of the National Football League secures the visiting team 40% of the gate receipts (revenues from luxury boxes, parking, and concessions are excluded from this sharing arrangement). In the Australian Football League, gate receipts were split evenly between the home and the visiting team. This 50-50 split was finally abolished in 2000. In Europe, there is less gate revenue sharing. The soccer leagues have adopted various forms of gate revenue sharing in their history. In England, until the early 1980s, up to 20% of the gate receipts were given to the visiting teams in league matches. In the German soccer league (DFL), the home team receives 94% of the gate receipts, with the other 6% going to the league. Gate revenue sharing is quite common in most Cup competitions with a knockout system. In addition, some leagues have adopted other means of increasing competitive balance, such as salary caps, rookie draft systems, and luxury taxes.

The effect of gate revenue sharing on competitive balance has been challenged by the so-called invariance proposition, which states that revenue sharing does not affect the distribution of talent between clubs. The invariance proposition has remained highly controversial even up until today, and no consensus has emerged so far. Most of the existing controversy on the effect of revenue sharing on competitive balance stems from the different approaches, the different models, and the different methodology used in the literature.

El-Hodiri and Quirk (1971), Fort and Quirk (1995), and Rascher (1997) conclude that revenue sharing will not affect the distribution of talent between profit-maximizing clubs on the assumption that only the win percentage of the home team affects club revenue. (1) Vrooman (1995) shows that the sharing of winning-elastic revenue does not affect competitive balance, whereas the sharing of winning-inelastic revenue improves competitive balance. Atkinson, Stanley, and Tschirhart (1988) challenge the invariance proposition by showing that revenue sharing can improve competitive balance if clubs maximize profits. In their model, Atkinson, Stanley, and Tschirhart adopt a pool sharing arrangement and a club revenue function that depends on a team's own performance and on the performance of all other teams. Their result is supported by Marburger (1997) and Kesenne (2000), who build their models on the assumption that fans care about the relative and absolute quality of teams, and Rascher (1997) and Kesenne (2000), who both consider an objective function that includes the maximization of wins ("utility maximization").

The most counterintuitive result is presented by Szymanski and Kesenne (2004). From a model of two profit-maximizing clubs and a club revenue function that depends on the relative quality of the home team, they show that gate revenue sharing decreases competitive balance. This result is driven by the so-called dulling effect. The dulling effect describes the well-known result in sports economics that revenue sharing reduces the incentive to invest in playing talent. This dulling effect is stronger for the small-market club than for the large-market club. …

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