Market Power

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

Tuesday, April 12, 2005

So What is the Problem?

Skip Sauer, my co-blogger over at The Sports Economist has this take on the business of baseball. One of the biggest problems in baseball is the salaries of baseball, right? Wrong:

The story in the LA Times focuses on the steroid issue, which is understandable - thank your congressman for that. But the steroid issue is likely in the sport's rear view mirror. High salaries for workers and rising prices for the product (they are reportedly up 6.3 per cent) reflect a healthy business, with high and growing demand. They are problems any business would like to have.
The demand for any resource is said to be a "derived demand" - it is derived from the product/service made by the resource. When a product/service is in high demand, the demand for its resource will also be in high demand - leading to higher salaries. According to this article in the Chicago Tribune, this year's average baseball player will earn $2.63 million, an increase of almost 6%. That number is skewed because of a few very lucrative contracts (such as Alex Rodriguez's $25.7 million salary). The median salary (the figure with 50% of salaries above it and 50% of salaries below it) this year in baseball went from $800,000 in 2004 to $850,000, a little over 6% - in 2005.

Is this a sign of a worsening problem in baseball? No - it's just the opposite.