Market Power

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

Monday, October 25, 2004

Revenue Sharing in Sports

Revenue sharing is used in sports as a way to improve competitive balance. It is felt that teams with larger revenue streams are able to afford more talent over the long run. According to the sports economics literature, if teams maximize their own respective profits, then more talent will drift to the teams for which talent generates the highest revenue at the margin - the high revenue teams. Revenue sharing, it is generally felt, would lower the marginal value of talent and therefore keep talent from going to the high revenue teams.

In the NFL and MLB, each team shares the same proportion of its ticket revenues regardless of how much revenue each team generates. In the NFL, 40 cents of each dollar brought in through ticket sales goes to revenue sharing while in MLB, 34 cents of each dollar brought in through ticket sales goes to revenue sharing. Ignore how this money is divied up among teams and focus on what the systems do to the marginal value of talent.

With this type of revenue sharing, the value of talent at the margin decreases for every team by the same proportion. It is argued that profit maximizing teams will not alter the amount of talent that they will try to acquire - but that talent will bring less in pay for the players. In other words, relative talent is unchanged leaving no change in competitive balance.

There are two things of interest here: 1. why does each team share the same proportion? 2. where is the incentive for revenue-receiving teams to spend some of their shared revenue?

MLB has recognized that there may be a need for an incentive to entice receiving teams to spend some of their shared revenues. The most recent collective bargaining agreement signed by baseball players and owners states that "each club shall use its revenue-sharing receipts... in an effort to improve its performance on the field." "... the Commissioner", Bud Selig, " may impose penalties on any club that violates this obligation." These quotes are from page 106 of the 2003-2006 Major League Baseball Collective Bargaining Agreement.

Might there be a better way?