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The Law & Economics of Optimal Sports League Design
Abstract
Rejecting the conventional wisdom that sports leagues must be run by the clubs that participate in the competition, we adopt the approach of Australian courts and view sports leagues as products created by the vertical integration of upstream "competition organizing services" and downstream "clubs participating in the competition." We detail the concern that, assuming that a league does not face reasonable substitutes (i.e., a rival league), a club-run structure leads to inefficiencies in the determination of the number and location of franchises, the sale of broadcast, marketing, and sponsorship rights, the effective oversight of club management, and the efficient allocation of players among teams. Specifically, we identify transactions costs as a significant impediment to efficient agreement in club-run leagues. We next identify the core function of a league as the organization of competition, and explain why key decisions relating to the identity, number, and location of participating clubs should be made by an economic entity independent of the participating clubs. We argue that a vertical separation between leagues and clubs, with responsibilities assigned in franchise agreements between the league and each club, provides the best way to facilitate the efficient organization and marketing of the competition. We illustrate this thesis with some predictions as to how a league organizing a sporting competition independent from its clubs might allocate responsibilities more efficiently, and identify some of the legal benefits to the league that would follow from such a restructuring. We predict that these efficiencies should result in an increase in the combined value of an independent competition-organizing entity (perhaps "NFL, Incorporated") and club-franchisees compared to the combined current value of the franchises in a club-run league. Although investment bankers and outside investors should find it profitable to seek to purchase the assets and rights necessary to become the competition organizer, the same transactions costs that preclude efficiencies among club-run leagues also operate to inhibit a voluntary restructuring resulting in a more efficient league. Thus, we address antitrust and eminent domain theories that might bring about the involuntary restructuring of sports leagues along the lines discussed in this Article.
... The critical dimension of governance is the degree to which there is vertical integration between the organization of a sporting competition and the operation of clubs within that competition. Ross and Szymanski (2003) provide a thorough review of determinants of an optimal governance structure. Their study emphasises the concern that vertical integration will be a major source of inefficiency in sporting competitions by allowing relaxation of 'downstream' competition between teams. ...
... Yet it is certainly not immediately obvious that this is the case. In levels of fan interest, the dynamic adaption of competition structure to fan preferences, and revenue from media broadcast rights, there is an arguable case for the dominance of some European competitions (for example, Ross and Szymanski, 2003). ...
The basic building block of professional team sport is a contest between two teams. Almost universally this contest will be part of an organised competition – as Scully (1995, p.22) notes "Sports fans appear most interested in organised championships…". Noll (2003, p.532) provides a summary of the benefits of an organised competition: "Leagues create the opportunity to market a game as both the contest itself and one of a series that leads to a championship. Because the quest for a championship generates fan interest, league matches leading to a championship are covered more exclusively by the media, which thereby provide free promotion. Leagues also reduce transactions costs by enabling teams to coordinate scheduling, rather than relying on a series of bilateral contests." Production of a sporting contest, and more generally a sporting competition, will require four main components. A first component is the set of players able to be chosen to participate in the sporting contest. A second component is the clubs that will organise players into teams to participate in the sporting contest or competition. A third component is sporting league that will have responsibility for design and management of the sporting competition. A fourth component is the stadium or set of stadia where contests between competing teams will occur, together with any equipment required for the contest. A sporting contest consisting of these components, is available to be 'consumed' by spectators who attend the stadium as an audience.
... According to this view uncertainty of outcome is an essential feature of sport and this requires a degree of equality between the teams in a league. Consequently, it is argued that measures to ensure an even distribution of revenue among league members provides teams with equal opportunities to hire the best players thereby improving 3 Ross and Szymanski (2005) argue that the US model of a vertically integrated league run by its member clubs leads to inefficient outcomes in the absence of rival leagues and argue that a league which is separate from its member clubs has greater incentives to operate efficiently. 4 National Collegiate Athletic Association v. Board of Regents of University of Oklahoma, 468 US 85, 101 (1984). ...
... 4 National Collegiate Athletic Association v. Board of Regents of University of Oklahoma, 468 US 85, 101 (1984). Ross and Szymanski (2005), point out that the Australian courts have taken a different view seeing the key function of leagues as being to provide "competing organizing services." Despite the recognition that no team acting alone can produce a single game, the US courts have rejected the argument that sports leagues constitute an essential facility. ...
Rugby union only went professional in 1995, much later than other major team sports. League structures and arrangements regarding revenue sharing and salary caps differ between the three main European leagues. We consider the impact of these differences on competitive balance. In addition, unlike soccer, rugby does not require leagues to be organised along national lines, which has enabled the smaller rugby playing countries to establish a joint league. This has prevented a migration of all the best players to larger country leagues as has happened in soccer and resulted in a greater degree of competitive balance in European rugby competitions.
... Notes 5. For more information, on the optimal design of sporting contests, see, for example, Ehrenberg and Bognanno (1990), Taylor and Trogdon (2002), Ross and Szymanski (2003), Szymanski (2003b), Dietl, Grossmann, and Lang (2011), or Fort (2015). 6. Harbring and Irlenbusch (2008) use a similar performance function, in which productive effort and sabotage activity affect the overall performance linearly. ...
This article models the role of a referee in a contest, in which players can invest into both productive and sabotage effort. The model shows that (1) a referee significantly influences the equilibrium strategies of the contestants, (2) whether or not the referee improves the quality of a contest depends on his refereeing performance and the marginal penalty awardable subject to the rules of the game, (3) the value of the referee is independent of asymmetries between players, as long as the asymmetric attribute does not affect the referee’s errors, (4) corrupt referees pose a serious economic threat to the sports industry, and (5) a referee reduces the competitive imbalance between the contestants in an asymmetric contest.
... Throughout the paper rugby is used to refer to Rugby Union. 2 National Collegiate Athletic Association v. Board of Regents of University of Oklahoma, 468 US 85, 101 (1984). Ross and Szymanski (2005), point out that the Australian courts have taken a different view seeing the key function of leagues as being to provide "competing organising services." this requires a degree of equality between the teams in a league. ...
The paper analyses factors influencing match attendance in the three main European rugby union leagues using data for over 4,000 fixtures over 15 seasons. The effect of competitive balance on attendance at sports events has received considerable attention in the literature. We find that (short-and medium-term) competitive balance have a large and statistically significant effect. However, this effect is smaller in magnitude than the effect brought about by the other aspects of the fixture with the strength of the home team being the single most important influence on attendances.
A primary prediction of the theory of sports leagues is that teams with higher revenues will have higher league positions or winning percentages than teams with smaller revenues. Behind this prediction lies the key influence of market size, yet this has been underexplored in the empirical literature on sports leagues. This paper combines detailed census of population data with panel data on team performance for an open sports league, the English Football League, to test the hypothesis that market size matters for team performance. We find a particularly important role for population close to the team's location. The impact of local population is reduced but not eliminated when allowance is made for entry in the form of competition from neighboring clubs. We assess implications of these findings for both European and North American sports league structures.
What is the optimal number of entrants in a race, or the optimal number of teams in a baseball league? What is the optimal structure of prizes for a golf tournament, or degree of revenue sharing for a football championship? How evenly balanced should the competing teams be in the NASCAR or Formula One championships? What is the maximum number of entrants per nation to the Olympic Games that should be permitted? What quota of qualifying teams to the soccer World Cup should be allocated to the developing nations?
An important issue in many antitrust lawsuits involving professional sports leagues and their member teams is the extent to which franchises within the same, and across different, professional sports leagues compete with one another for fans and advertisers. Complicating the issue is the fact that some sports franchises also cooperate with other franchises in the same or different leagues by, for example, participating in a joint venture to build and operate the stadium in which they will play their games or a regional sports network joint venture to televise their games. An extreme form of cooperation is common ownership: some franchises in different sports leagues have common ownership. This study investigates the impact of competition and cooperation among the franchises of the four major professional sports leagues (i.e., the National Football League, National Basketball Association, National Hockey League, and Major League Baseball) on ticket prices for the 2008 season. The regression results suggest that the existence of one or more rival sports franchises in the same metropolitan area does not have a statistically significant impact on ticket prices. On the other hand, there is at best weak evidence that cooperation between sports franchises impacts ticket prices. These findings are consistent with a number of alternative hypotheses.
The study of sports economics has expanded rapidly in recent years in response to significantly increased demand--for sport itself, for economic analysis relevant to commercial litigation in sport, for lively teaching material in schools and universities, and for research into the incentive properties of sporting contests. While much of the literature has focused on the issue of competitive balance and how to achieve it, there have still been relatively few studies that apply the lessons of the economic theory of contests to the analysis of sports. There remain huge opportunities both to develop our theoretical understanding of incentive mechanisms in sport and to conduct empirical research in the operation of incentives in sporting contests. Copyright 2003, Oxford University Press.
