Sports

Because teams compete for better players by offering higher salaries, the quality of a team depends largely on how strong it is financially.

Exceptions to the rule that financially stronger teams are better are some small-market teams, such as Oakland and Montreal, that, for certain periods of time, develop high-quality players in their farm-team system. Of course, the exception proves the rule. Once these players win substantial salary increases through arbitration or become free agents, big-market teams often hire them away.

When the home team gets to keep more of the gate receipts, the teams in bigger cities get more of the benefit from their inherent financial advantage. When the split is more equal, the financial advantage of being in a bigger market is less. Partly for this reason, financial disparity is least in the National Football Leaque (NFL).(The gate division between home and guest is 60:40)

But in all sports, revenues from national television contracts have grown as a percentage of total revenues, and TV revenues are divided equally among the clubs. As a result, the differences in the financial strength of teams have narrowed. Big-city domination, though not completely eliminated, has diminished.

By their very nature, sports leagues are cartels that exclude competition from other companies. You cannot start a baseball team and hope to play the Yankees unless you can get Major League Baseball (the cartel) to grant you a franchise.

Owners claim that restrictions on player movement are necessary to maintain competitive balance and prevent financial powerhouses such as the old Yankees from buying up all the best talent and completely dominating the sport. Economists have always been skeptical about the owners’ motives—and about the evidence.There never was any disagreement over the fact that star players would wind up on big-city teams. But economists believe that this would happen regardless of whether or not leagues restrict moves initiated by players.

The team that pays the most is the one that expects the largest increment in revenue from that player’s performance. Since an increment in the win-loss record yields more revenue in, say, New York than in Kansas City, the best players go to New York rather than to Kansas City. For a small-city franchise, the team holding the player’s contract expects him to contribute, say, one million dollars in incremental revenue to the club. In a large city, that same player’s talents might contribute three million dollars. Because the player is worth more to the big-city team in either case (and the big-city team will pay more for him), the small-city franchise has an incentive to sell the player’s contract to the big-city team, and thereby make more money than it could by keeping him. Thus, players should wind up allocated by highest incremental revenue, with or without restrictions on player-initiated movement.

 The dramatic rise in player salaries since the mid-1970s, notably in baseball and basketball, is largely the result of the relaxation of restrictions on player-initiated transfers.