We left off: Thinking broadly

1
We left off Thinking broadly?

• Owners have always howled about 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 also have wealth impacts on
  players and owners.
• How can we wade through this?

2
Now, for problem ID in detail.

• Problem
• Are owners motivated by balance pursuits?
• Are owners motivated by other wealth pursuits?
• Or both?

3
Problem ID in detail

• One question always leads to another
• Q1 Was Rottenbergs premise right? Do fans
  care about competitive balance?
• Q2 Can the mechanisms chosen by owners actually
  change competitive balance?

4
Problem ID in detail

• One question always leads to another, Continued
• Q3 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?

11/20/2009
5
Problem ID in detail

• One question always leads to another, Continued
• Q4 Have the choices made by owners actually
  changed competitive balance?
• Q5 What are the other wealth pursuits that go
  hand-in-hand with balance interventions?

6
Where are we? Where to?

• Problem statement and its details.
• A set of informative research questions.
• Now we need to think about how to get insight
• Theory gt expectations gt data needs.

7
Lets not re-invent the wheel

• What has already been said and done on these five
  questions?
• We can actually get pretty deep with a
  literature review and a few calculations!

11/20/2009
8
Lit Review

• Q1 Do fans care?
• A mixed bag.
• Szymanski (2003, JEL) shows very mixed results
  across many pro sports.
• Fort (2006, Chapter) shows whylots of problems
  in the estimates.
• Recently. Lee and Fort (2008, RIO)fixing all of
  these problems, looks like no GU or CSU
• But PU matters.
• Problem It doesnt matter much.

9
Lit Review

• Q2 Can the mechanisms chosen by owners actually
  change competitive balance?
• A 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 down less in
  smaller-revenue markets than in larger-revenue
  markets for the same percentage into the pool.

10
Lit Review

• You can go back to Lecture 6
• Use the two-team league diagram to show pooled
  sharing impacts on
• Competitive balance.
• Economic values to smaller-revenue owner,
  larger-revenue owner, and players.
• And you will, for the activity. Heres a taste
  from Lecture 6

11
Local Revenue Sharing Impacts

• Start from equilibrium.

12
Model Impact of the Change

• From MLB research and casual evidence from the
  NFL
• If both put in 40, smaller-revenue MR shifts
  less.

13
Find the New Equilibrium

• Balance improves.

14
Find the New Equilibrium

• And the price of talent falls.

15
Summary

• Smaller-revenue team
• Increased quality.
• Decreased payroll.
• Net revenue from talent increases.
• Summary

16
Summary

• Larger-revenue team
• Lower quality.
• Lower payroll.
• Net value from talent decreases.
• Summary

17
Summary

• Players
• Lower price of talent.
• Lower spending by the league on talent.
• Summary

18
Local Revenue Sharing Impacts

• Kicker
• If revenue functions respond to improved balance
• Smaller-revenue owners even better off.
• Larger-revenue owners and players may more than
  make up their immediate shortfalls.

19
Local Revenue Sharing Impacts

• But why did balance improve?
• It is NOT because the smaller-revenue owner spent
  net sharing proceeds on talent.
• It IS because
• MR shifts were different.
• The price of talent fell!

20
Local Revenue Sharing Impacts

• Impact of actually distributing the shares?
• DEPENDS on what owners do with the shared
  revenues!
• Might be reinvestment in team talent, might not!

21
Local Revenue Sharing Impacts

• Suppose getting net revenue proceeds IS
  incentive-based only get it if you improve
  quality.
• BOTH owners perceive that MR talent increases.
• Net revenue sharing is now just a subsidy for
  buying more talent!
• And the subsidy is higher for the lower-revenue
  owner!

22
Find the New Equilibrium

• Play with the orange set.

23
Summary Local Revenue Sharing

• Distributing net revenue sharing proceeds becomes
  completely problematic.
• Without incentive-based approach, cant guess
  what owners will do with the money
• With incentive-based approach, outcome is
  indeterminatemust choose very carefully!

24
Lit Review

• Q2 Conclusions
• YES, local sharing can change balance.
• But
• Changes balance by reducing the price of talent!
• This actually informs our Q3
• Next Time!