Are the Bulls so good they're bad for the NBA? --The Cover of Sports Illustrated, March 10, 1997
Are both absolute and relative quality important in the demand for sports contests? Is the closeness of the contest a significant factor, and if so what is the optimal degree of closeness? Alternatively, what is the optimal distribution of talent across the league from the owners' perspective?
Unlike most businesses, firms in a sports league need viable competitors. While a certain amount of domination is optimal from an individual owner's perspective, too much will result in league dissolution, and thus a lower utility for every owner. Hence, there is a limited positive production network externality. Up to a point, many successful competitors are better than none, a major exception to classical economic theory. In fact, what Neale ( 1964) termed "the peculiar economics of sports" is just the positive production network externality.
Early in the history of professional sports, owners realized that contests with an uncertain outcome were important for attracting large crowds. In fact, the first professional baseball league failed largely because of the dominance of a few teams. Fans began to grow tired of the "pre-determined" games and eventually stopped showing up ( Scully, 1989).
In response, the owners began to insert rules to create more parity throughout the league. Most of these rules (the rookie draft, the waiver rule, salary caps, revenue sharing, luxury taxes, the Rozelle rule, player only trades with no cash involved) are either new or remain intact today. However, the reserve clause has been replaced by limited free agency. The efficacy of these rules in promoting league parity is questionable. Some of them have created a monopsonistic environment keeping player