Academic journal article Economic Inquiry

Profit-Maximizing Gate Revenue Sharing in Sports Leagues

Academic journal article Economic Inquiry

Profit-Maximizing Gate Revenue Sharing in Sports Leagues

Article excerpt

I. INTRODUCTION

The professional team sports industry is one of the scarce industries in which coordination between competing firms (clubs) is widely accepted. Clubs in almost all sports have organized themselves in legal cartels (leagues). It seems obvious that a certain degree of coordination is needed to produce a team sports competition, for example, for scheduling games. However, leagues have introduced regulations, which clearly go beyond the purely practical issues involved in producing games. The most relevant examples include gate revenue sharing (the home team gives a part of its match-day income to the visiting team), collective sales of media rights (the league monopolizes media rights and distributes the revenues), and salary caps (the league limits the amount teams may spend on player wages). These regulations would probably be classified as restrictive practices in any other industry. Yet, the fact that sports leagues openly communicate their application provides an opportunity to examine how these cartels have used their devices to coordinate behavior and increase joint profits.

Table 1 gives an overview of gate revenue sharing arrangements in sports leagues around the world. Almost all American major leagues engage in gate revenue sharing. The National Football League (NFL), Major League Baseball (MLB), and Major League Soccer (MLS) share revenues through a central pool. Each club contributes a fixed percentage of its gate revenues to this pool, which is distributed equally among all clubs. The National Hockey League (NHL) has a more complicated arrangement, where only teams that have revenues below the median and small media markets are eligible to receive support from revenue sharing. Introducing local revenue sharing was also reported to be one of the issues on the table during the recent lockout in the National Basketball Association (NBA). (1) To the best of my knowledge, however, the details of the new NBA revenue sharing rule have not been made public yet. In contrast, European soccer clubs, along with the Australian Football League (AFL), share (almost) no gate revenues. Both the Bundesliga and the English Premier League (EPL) have arrangements to share revenues from cup games, yet these constitute a minor portion of the teams' schedules. Interestingly, both the EPL and the AFL had sizeable sharing arrangements in the past but, contrary to the U.S. leagues, chose to abolish these.

These observations raise the question why some league cartels share gate revenues while others have chosen not to. I examine this question using a theoretical model of a sports league with profit-maximizing teams. A crucial innovation in my model is that teams serve two types of consumers. In each team's local market, fans are committed and prefer to see their team win. In the nationwide market, consumers are neutral TV viewers, who like to watch a tense and high-level competition. A team's local or stadium revenue increases in its on-field performance, whereas media revenue depends on the competitive balance and overall quality of play for the league as a whole.

My results first show that local (or gate) revenue sharing decreases talent investments. (2)

Initially lower talent investments boost club profits, because total costs go down. Too little investment, however, reduces revenues, which harms profits at high levels of sharing. To find a profit-maximizing sharing rule, the league has to balance these two effects. The dampening effect of sharing on investments is weaker in leagues whose teams have homogeneous local markets. Consequently, homogeneous leagues maximize profits by setting a more extensive gate revenue sharing rule than leagues with less equal teams. This may explain the observation from Table 1 that the more unequal European soccer leagues share less local revenues than the more homogeneous U.S. major leagues. (3) A somewhat striking implication of this result is also that gate revenue sharing is more interesting for clubs who have more equal revenue potentials. …

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