Beyond the Book: Revenue Sharing and Balance in MLB

1
Beyond the Book Revenue Sharing and Balance in
MLB
OK. So, back we go to our research question and
SubQs on this important and exciting topic.
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Context

• Seligs statement was at the juncture of
  collective bargaining in 2001.
• Everyone were lamenting lack of competitive
  balance in MLB.
• This despite institution of pooled revenue
  sharing among owners in the previous collective
  bargaining outcome (1997-2000).
• Basic Agreement extended for 2001, but then
  revised for 2002-2006 Larger contributions to
  the pool and commissioner directives on spending
  net sharing receipts.

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Context Net Sharing Receipts

• 2002-2006 Basic Agreement
• Article XXIV, B(5)(a)
• Main point (earlier language the same)
• The Commissioner shall enforce this obligation by
  requiring, among other things, each Payee Club,
  no later than April 1, to report on the
  performance-related uses to which it put its
  revenue sharing receipts in the preceding revenue
  sharing year. Consistent with his authority under
  the Major League Constitution, the Commissioner
  may impose penalties on any Club that violates
  this obligation.

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Seems a conundrum?

• It isnt working.
• It is working.
• Starts to sound like
• We need some emotion-less thoughts and research
  into the issue.

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Thinking broadly

• Owners have always howled competitive balance.
• Rottenberg set out a rational argument behind the
  cautions/fears of owners.
• But there are lots of ways to get there.
• Particular choices ostensibly in the pursuit of
  balance also have wealth impacts on players and
  owners.
• How can we wade through this?

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Now, for research questions

• Q Are owners motivated by balance pursuits? Or
  are owners motivated by other wealth pursuits?

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Now, for research questions

• SubQ Was Rottenbergs premise right? Do fans
  care about competitive balance?
• SubQ Can the mechanisms chosen by owners
  actually change competitive balance?
• SubQ How do mechanism chosen by owners change
  competitive balance?
• e.g., Under pooled sharing do smaller-revenue
  market owners need to spend their net receipts on
  team quality in order to achieve the leagues
  goals?

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Now, for research questions

• SubQ Have the choices made by owners actually
  changed competitive balance?
• SubQ What are the other wealth pursuits that go
  hand-in-hand with balance interventions?
• Fun?...
• A lot has already been done and we can actually
  get pretty deep with a literature review and a
  few calculations!

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Lit Review

• SubQ Do fans care?
• A mixed bag.
• Szymanski (2003) shows very mixed results across
  lots of sports.
• Fort (2006) shows whylots of problems in the
  estimates.
• Recently. Fort and Lee (2007)fixing all of
  these problems, looks like no GU or CSU
• But PU matters.
• Problem It doesnt matter much.

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Lit Review

• SubQ Can the mechanisms chosen by owners
  actually change competitive balance?
• Lets think about the vast literature in some
  standard textbook, like Fort, Sports Economics
  2d.
• If the MR derived from local TV in one location
  is larger than in another, then sharing local TV
  revenues can increase balance.
• Must shift MR functions more in larger-revenue
  markets than in smaller revenue markets.

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Lit Review

• Draw the two-team league diagram.
• See Fort, Sports Economics 2d, p. 169, Fig. 6.3.

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Analyzing Imbalance Figure 6-1

• From the long-run consideration of total revenue
• Larger (L) and smaller (S) market owners derive
  their marginal revenue functions.
• Talent - Winning - Additional Value to Fans.
• Adding up constraint in league play WL 1
  WS

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Analyzing Imbalance Figure 6-1

• Lets do the following (youll see why soon
  enough)
• Flip MRS horizontally.
• Move MRS to the right-hand vertical axis.
• Measure right-to left for the smaller-revenue
  owner.

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Analyzing Imbalance Figure 6-3

• Equilibrium must clear the market for winning
  percent.
• MRS MRL, or else the market will move there.
• This establishes the value of a unit of talent, P.

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Analyzing Imbalance Figure 6-3

• With large- and small-revenue market owners, the
  large revenue market owner chooses more talent
  and a higher winning percent WL WS.
• Revenue imbalance means there will be
  competitive imbalance. Source Exclusive
  territories protected by leagues.

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Equilibrium Characteristics

• This competitive talent equilibrium has important
  characteristics
• Marginal revenues are equal across all teams
  MRL MRS P.
• Revenue imbalance causes competitive imbalance
  expect that typically and on average,
  larger-revenue teams win more than
  smaller-revenue teams WL WS

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Equilibrium Characteristics

• This competitive talent equilibrium has important
  characteristics
• Revenue imbalance causes payroll imbalance
  expect that typically and on average
  larger-revenue owners will pay the additional
  amount that it takes to give fans the winning
  they are willing to pay to see.
• What would Billy Beane do different in New York?

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Local Revenue Sharing

• Lately, pooled sharing goes like this
• All owners put in about 35 of all revenues (40
  NFL), gate and the rest. Then all owners share
  the pool roughly equally.
• Commissioner keeps a discretionary share for
  incentive payments to especially smaller-revenue
  owners.
• Logic of Commissioners discretionary account
  Smaller-revenue owners may just keep the money
  rather than invest in team quality. When will
  they do this? Is it a problem?
• Lets move on to the Impacts of local sharing.

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Local Revenue Sharing Impacts

• Adds the consideration of the impact of own
  talent choice on other owners gate and TV.
• We know the story about gate Equal sharing,
  equal impact.
• But suppose the local TV impact is smaller for
  the smaller-revenue owner.
• Changes the marginal value of talent, less so for
  smaller-revenue owners. Should influence the
  balance of competition.

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Local Revenue Sharing Balance.

• For a league of profit-maximizing owners, with
  fans who care about winning percent, with
  imbalanced TV impacts
• Local sharing improves balance! WL

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Local Revenue Sharing Other Impacts

• Part 1. Payroll falls for retained a, the
  decrease is
• P to P.
• Players lose since payroll falls. Offset? If
  demand increases over time due to better balance.

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Local Revenue Sharing Other Impacts

• Part 2. Owner savings are less than the total
  sharing amount! Sharing is the larger shaded
  area.
• Still no loss to the league as a whole since
  none of the actual payment goes to players.

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Local Revenue Sharing Other Impacts

• Part 3. Net revenues from winning change!
• Larger DdcP DgcP
• Smaller-revenue owner net revenues from winning
  percent increase Larger-revenue owners net
  revenues from winning fall.

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Local Revenue Sharing Other Impacts

• Part 3 (Continued). Both owners receive
• (1-a)/2 x (MRL MRS).
• Smaller-rev owners net revenues rise even more.
  If this amount exceeds DabP-DdcP, then
  larger-rev owners net revenues also increase.

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Local Revenue Sharing

• In MLB, research shows that TV impacts are
  smaller in smaller-rev markets. Local revenue
  sharing should enhance competitive balance.
• More evidence comes from the NFL. It shares
  nearly all of its local revenue and is the most
  competitively balanced of all leagues.

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Summary Local Revenue Sharing

• Competitive balance can improve.
• Players may lose Payrolls fall immediately, but
  future changes in demand may offset.
• Sum of sharing payments exceeds league payroll
  reduction no loss to the league.
• Profits rise for smaller-rev owners probably
  rise after sharing for larger-rev owners.
• Empirically Expect that balance can improve
  and both owners get wealthier at the expense of
  players.

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Lit Review

• Conclusions
• YES, local sharing can change balance.
• But
• Changes balance by reducing the price of talent!
• Next SubQ Doesnt have anything to do with what
  owners actually do with the net sharing receipts!
• So, why the requirement that net receipts be
  spent on improving team quality?

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Lit Review

• So, why the requirement that net receipts be
  spent on improving team quality?
• Could be that forcing them to spend it reduces
  the amount of sharing required to obtain a given
  balance improvement.
• Fairness on receipts reduces the interference in
  individual owner quality choices.
• Could just be the usual human response about
  transfer systems Dont let them spend it on
  things theyd rather have!

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Some Methodology

• SubQ Have the choices made by owners actually
  changed competitive balance?
• Theory says it can.
• Approach is suggested by comparing balance across
  episodes.
• Data RSD on balance pre-1997, 1997-2001,
  2002-on.
• Go to Rods Sports Business Data

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Some Methodology

• How nice of him ASD, ISD, RSD are all here
  already!
• Lets just make a chart out of them.

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A Bit More Methodology (Imagination)

• SubQ What are the other wealth pursuits that go
  hand-in-hand with balance interventions?
• Back to our 2-team league diagram.
• What are the distributional consequences?

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A Bit More Methodology

• 1. Price of talent falls. Redistribution from
  players to owners.
• 2. Smaller-revenue owners buy more talent, win
  more, and revenues increase.
• 3. Net sharing receipts are redistributed from
  larger-revenue owners to smaller-revenue owners.
• So, even if balance does not improve, there are
  other reasons for this policy to be enacted, eh?

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Informing the main question?

• Q Are owners motivated by balance pursuits? Or
  are owners motivated by other wealth pursuits?
• Hmmm.
• Local sharing can enhance balance.
• But fans, it appears, may not care as much about
  balance as some observers do, except for playoff
  access.
• And balance has worsened in the AL with nearly no
  change in the NL.
• So...

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Informing the main question?

• Either sharing has been enacted to redistribute
  money from players to owners, and from
  larger-revenue owners to smaller-revenue owners,
  or
• Could be that the requirements for local sharing
  to work arent in force in MLB. Or
• Could be that bad forecasts have undone the
  initial good (balance improves immediately, but
  then fades over time). Or
• Could be that the work done so far will be
  improved and well know different next time.