Overstated Exploitation: Monopsony versus Revenue Sharing in Sports Leagues
Rodney Fortand James Quirk
While competitive balance impacts of revenue sharing arrangements in sports leagues have been thoroughly treated, the implications for input payment have received scant theoretical attention and no empirical treatment. 1 In this paper, the theory of talent exploitation in the presence of revenue sharing is presented, and a model of exploitation is estimated. The results are that past estimates overstate talent exploitation by as much as 16%. 2
The problem we tackle can be seen as follows. In the absence of revenue sharing or input market power, let talent's competitive per-unit price be c" (in past studies, the marginal revenue product of talent). With revenue sharing but no monopsony power, we find that the theoretical equilibrium price of talent, c*, is less than c". Let c' be the actual, observed price paid to talent that includes both revenue sharing impacts and monopsony exploitation to the extent that the latter occurs. The measure of exploitation found in past studies is the excess of the competitive per-unit price over the actual observed payment to talent, relative to the competitive price, (c" - c')/c". Given c* < c", this measure can be written as follows: (c" - c')/c" = (c" - c*)/c" + (c* - c')/c". The first component on the right-hand side is the reduction below talent's marginal revenue product due to revenue sharing incentives, while the second term is the reduction due to monopsony power, if any. Thus, the traditional measure of exploitation overstates the impact of monopsony power on the price of talent. Indeed, the true measure of exploitation should be relative to the wage that would prevail in the presence of revenue sharing but absent monopsony power, namely, (c* - c')/c*.
The chapter is organized as follows. First, the theory of revenue sharing in an n-team league is developed. Revenue functions are broken out in a useful way that shows the impacts of revenue sharing on the optimal choice of talent