Market Power

Musings by an academic economist on the power of markets and the power over markets.

Tuesday, October 26, 2004

Revenue sharing in sports part deux

I described in an earlier post how the NFL and MLB share locally-generated revenues. Teams share a constant proportion of their local revenues. In MLB, teams share 34% of their "net local revenues" - gross revenues minus actual stadium expenses. The shared revenue goes into a central pool which is then divided equally among clubs.

Suppose we have a two team league and team 1 generates $200 million of net revenue and team 2 generates $100 million of net revenue. Under this plan, team 1 shares $68 million while team 2 shares $34 million. The $102 is divided equally between the two teams giving each team $51 million. The net effect is a transfer of $17 million from team 1 to team 2.

As I mentioned in the arlier post, there is a fear that this shared revenue will just be pocketed by the teams and not spent on players. Not only will this lower overall player payrolls, it may not alter competitive balance. So there is a stipulation in the MLB Collective Bargaining Agreement stating that receiving clubs should spend their receipts on players. If not, they will have to answer to the commissioner.

What's he gonna do? Spank them? Take away their Tonka trucks (an action that really annoys my 4 and 2 year-old sons)?

In any case, asuming the threat is credible, the commissioner's office takes on the responsibility of monitoring team spending on players. I'm betting that the commissioner's office has better things to do with their resources.

I've wondered about ways to restructure revenue sharing systems to reward net revenue receiving teams with a little extra if their teams "perform better", however we want to define it. This would impose an opportunity cost on these teams if they choose to pocket the cash. This could provide an incentive to these teams to spend shared revenues on acquiring more talent.

This, of course, doesn't tell us whether competitive balance is socially desirable.