Team cost, profit and winning

Under the profit maximization hypothesis, owners make decisions about their venues, players, and media contracts in order to maximize the difference between total revenues and total costs.

In the short run, elements of the team production are fixed. This includes anything covered by contractual obligation in force during production. For sports teams, the primary fixed inputs are talent, on and off the field, and the facility in which team plays. To clarify, if any of the resources used to produce winning are fixed, the owner is in short-run situation. Whenever all elements of the process are variable, then the long run is under consideration.

The essence of the short run is that some decisions about putting winning in front of fans have already made.

Short run total costs= total fixed costs + total variable costs

Better teams will have a higher total fixed costs because they will choose to put together a more expensive set of player during a given season. Total variable costs might rise at a decreasing rate over some low range of output, but once diminishing returns set in, total variable costs must begin to increase at an increasing rate.

Long-run total cost is the relationship between winning percent and the cost of obtaining it.

Long-run total costs are simply the sum of the player costs(salaries) as more stars are added and winning percent increases. It is the cost of winning percent that the team owner seeks to find.

As teams choose higher winning percents, in the long run total costs rise. Tension between winning and costs. The more an owner wants to win, the more it is going to cost.

In the long run, if costs eventually rise faster than revenues, then profit maximization constrains owners in their pursuit of winning.

Profit variation can harm balance.

The competitive imbalance doesn't necessarily mean that small market teams are not profitable.

Profit-maximizing owners will beef up on talent if they believe that doing so will raise revenues at a greater rate than the costs of making it happen. Only if the last owner made horrible mistakes or has the same vision as the new ownership but no money should we expect the new owner to alter the level of team quality.