Leagues and competitive balance

2 downsides of exclusive territories: the possibility of rival leagues, competitive imbalance.
A league suffers from competitive imbalance if, year after year, there are very strong and very weak teams, and the mix of these strong and weak teams doesn't change. (Rottenberg's empirical research) Competitive imbalance can reduce fan interest in the league product and individual team profits.

Uncertainty-of-outcome hypothesis: fans prefer closer games to blowouts and a changing mix of teams in postseason play. 

If the hypothesis is right, competitive imbalance would drive fans of losing teams that nearly never appear in postseason play away from watching home games. The teams lose the reason of existence and the spillover effect to the remaining owners would reduce the entire league's economic well-being.

Revenue disparity drives competitive imbalance in all leagues. Exclusive territories do provide market power positions for owners, but they lead to competitive imbalance.

winning percent is the owner's long-run choice of team quality on the field.

Winning percent equilibrium: 
(1) marginal revenues are equal across teams
(2) revenue imbalance causes competitive imbalance
(3) revenue imbalance causes payroll imbalance

There is a limit on talent purchases by the larger-revenue market owner. The larger-revenue market owner will not buy all the great talent because, eventually, the marginal unit of talent is more valuable to the small-revenue owner.

The larger-revenue market team has a higher winning percent than the smaller-revenue market team. If that market will pay the most for a high-quality team, the owner buys the talent to make it so. Only then can the owner collect the high level of revenues from fans at the gate and from TV right fees.

The larger-revenue market owner spends more on talent than does the smaller-revenue market owner. The larger the revenue imbalance, the larger the competitive imbalance.

Important application of the model: when a good team leaves, the marginal revenue function for the bad team shift leftward, thus enhancing the team quality and net value from winning, the larger-revenue team is worse off, because of team quality drops and payroll rises (the price of talent increases in the inelastic portion, and net value of winning decreases)

There will be competitive imbalance and payroll imbalance as long as owners have unequal earning power and that competitive imbalance worsens, the more imbalanced revenues become.

It is actually the unequal revenue potential in different geographic locations that drives both payroll imbalance and competitive imbalance.

Joint venture remedies for competitive imbalance claimed by leagues include national TV revenue sharing, local revenue sharing, luxury tax and salary cap. Theory suggests that national TV revenue sharing, local revenue sharing, and player drafts will have no impact whatsoever on competitive balance. However, they will redistribute money from players to the owners of weaker teams.