Market Power

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

Tuesday, December 07, 2004

Rottenberg vs. Coase

In his Sports Economics textbook, Rod Fort (2003) describes Simon Rottenberg’s (1956) Invariance Hypothesis thusly:

“The distribution of talent in a league is invariant to who gets the revenues generated by players; talent moves to its highest valued use in the league whether players or owners receive players’ MRP’s (marginal revenue products – the amount of additional revenue a player contributes to his team).”

In their Principles of Economics textbook, Robert Frank and Ben Bernanke define the Coase Theorem (1960) as follows:

“If at no cost people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities.”

Both Rottenberg’s Invariance Hypothesis and the Coase Theorem describe the same essential principle – the distribution of property rights does not determine the distribution of resources as long as negotiation is costless. It only determines the distribution of income. I realize that the date on which an idea is published is not the date that it was developed (researchers wish the market for journal publications would work so quickly!), but the date of publication is often held to be *the date* that an idea hit the intellectual marketplace. With this interpretation, the Invariance Hypothesis beat the Coase Theorem by 4 years, but the great Ronald Coase gets the credit.

Being a loyal sports economist, I tell my students that although the principle is called the Coase Theorem, it originally hit the intellectual marketplace in an application of economic theory to the labor market in baseball.