Market Power

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

Friday, January 07, 2005

Big Unit

The Econoclast has some comments on the Yankees' acquisition of the Big Unit, Randy Johnson. He notes that even if the Yankees are losing money on such big-name acquisitions, the team owners may still be making a rational decision because the difference between the marginal costs and the marginal revenues generated by a player may be made up by consumption value received by the owner: the owners gets satisfaction from revenue and from winning.

I'm not sure if I buy the utility maximization argument, especially as an operational hypothesis. I think you can find some owners who are utility maximizers (Steinbrenner comes to mind). You can also find some owners who seem to run teams partly out of a philanthropic interest (Ewing Kaufmann and, perhaps, Glen Taylor, come to mind). But when I think of the accounting chicanery team owners play to hide the profits, the way they play cities off of one another, and all the empirical research with findings consistent with the profit maximizing hypothesis, I think profit maximization is the most reasonable objective to use in an analysis of a professional sports team (and a collegiate athletic department).