The Economics of Professional Team Sports

Paul Downward, Alistair Dawson

• Publisher: Routledge
• Year: 2000
• eBook ISBN: 9781134618484
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book is unique in that it offers the first truly rigorous application of economic principles to its subject. The authors analyse: * the economic literature on sporting leagues* the demand for professional team sports* the players' labour market.Amongst the topics discussed are the US system of franchising and draft picks and the chances of thei

1 Introduction

Why are professional team sports of interest to economists?

As members of the public, there is no especial reason why economists should be interested in professional team sports. This book is thus not simply based on the interest of the authors who happen to be economists. On the contrary, this book is based on a belief that sports, and particularly, professional team sports, lend themselves to economic analysis. Consequently, some of the topical issues in professional team sports regarding, for example, the Bosman Ruling, the rise of the Premier League in association football (soccer), the effectiveness of salary caps in sport, we argue, can be understood from an economic perspective. There are two main reasons for this. The first comprises the nature of professional team sports as opposed to sports generally. The second is the world-wide growth in the commercialisation of sport.

Professional team sports comprise leagues of clubs who compete on the sporting field by arrangement through a fixture list and according to rules of the sport, which are set by leagues. Success in sporting terms is essentially defined in terms of the rank order of clubs in the league at the end of a season after points have been allocated for their performance in the set of fixtures. This, of course, is something that applies to all team sports—whether of an amateur or professional status. The production of team sports per se is not in itself something that naturally lends itself to economic analysis. Schoolchildren can produce team sports! What matters as well is that money changes hands in the production, distribution and consumption of the sport; money, of course, being the mechanism by which key sporting resources such as athletes are obtained by, and allocated between, the various teams to use in competition against their opponents on the field. Clearly professionalism in sport is an integral aspect of this development.

The purchase and sale of players as well as payment to them to perform, for example, require financing decisions. Thus, gate revenues need to be earned to pay players’ salaries. Clubs must co-ordinate match schedules since they cannot produce in isolation, and potential spectators must be informed where and when matches are to occur. In turn, spectators need accommodation and a means by which payment can be extracted from them while restricting access to the sport to non-payers. Thus, enclosed stadia are necessary features of professional sports supply. Characteristics like these clearly indicate that, rather like the production, distribution and consumption of other goods and services, professional team sports can be viewed as an economic process. Inputs such as labour—the athletes and manager/coach—are combined with capital—the sporting field, equipment and so on—to produce, along with another team in the league, a product—the fixture— that is sold to consumers—spectators and supporters—typically in a stadium.

Of course, professionalism is not something that is confined to team sports. Golf, tennis and boxing are long-standing professional sports. Athletics is now professional as well. However, we would argue that these lack some of the above essential characteristics of professional team sports. The first is a league structure. In contrast we would argue that athletes who compete in boxing, golf and tennis do so under conditions that could be better described as tournaments. As such the regularity of contact between opponents is less and typically of a ‘one-off’ nature. Knock-out cup competitions organised by sporting leagues share these characteristics. Participants and supporters recognise their distinctiveness compared to league fixtures. Second, we would argue that these athletes essentially compete as individuals despite ‘team’ membership in such events as the Ryder cup in golf or the Davis cup in tennis. Consequently, the economic need to organise the production process through the co-ordination of labour in the team is naturally less. Thus substitutes do not appear in boxing, tennis or golf as part of the natural order of play. Moreover, athletes are not bought and sold between competitors.

Of course, there is an element of semantics in this distinction. There are similarities between professional team sports, professional sports such as golf, boxing and tennis, as well as amateur sports and sport in general. Consequently, it may well be that many of the ideas discussed in this book apply to such sports and, indeed, we would expect this to be so. However, we leave extending the analysis of these sports to the future.

The second main reason for the interest by economists in professional team sports is that the commercial nature of sports in general has radically increased over the century. For example, the TV rights for the Olympics in 1948 were £27,000. In 1996, this had risen to $900m and is forecast to rise to $3.6bn by 2008. Similarly, BSkyB will have paid over £600m to Premier league association football clubs between 1997 and 2001. Contracts for the next period are estimated to exceed £1bn. Opel sponsor A.C. Milan association football team for approximately £6m per year and Nike are currently sponsoring the Brazilian national association football team by approximately $200m over a ten-year period. In the US, approximately 94 million spectators watch the Superbowl annually and Michael Jordan earned $25m in 1996. These point to the growing economic impact of both sports generally and professional team sports. There is thus considerable impetus to study these developments.

The need for a textbook

Having made these comments, we should be quite clear that there is nothing absolutely new in these sentiments. As the reader will become aware, there has been some long-standing interest in the economics of professional team sports in the US and a number of very readable volumes exist. Those particularly worthy of mention are the contributions by Quirk and Fort (1992) and Scully (1989; 1995). These academics can, in many respects, be seen as the pioneers of the economic analysis of professional team sports, particularly in the US. We strongly encourage readers of this book to read these volumes. As the reader will see, their work is referred to extensively in this book.

In the UK there are no comparable volumes. The work of individuals, such as Peter Sloane, has been influential through journal papers. Other than this, texts such as Gratton and Taylor (1985) and Cooke (1994) are seminal manifestations of attempts to apply economic analysis to sports, recreation and leisure generally.

The literature on professional team sports, however, has tended to follow two disparate trends. On the one hand, the number of periodical articles has increased. The American Economic Review, Applied Economics, Applied Economics Letters, the Bulletin of Economic Research, Economic Issues, the Journal of Economic Literature, the Scottish Journal of Political Economy and the Southern Economic Journal are some of the economics journals that have published papers on the economics of professional team sports. Indeed, to help meet a growing demand a new periodical—the Journal of Sports Economics—of which one of the authors of this volume is a founding member of the board of editors—has been launched. Other journals that have published papers on the economics of professional team sports include: AREA, a geographical journal and, naturally enough, sports and leisure journals such as the Journal of Sports History, the Journal of Sports Management, Sports History Review, and the Journal of the Philosophy of Sport and Leisure Studies.

This said, the technical content of the economic journal papers is usually high, which limits their readership to economic specialists. In contrast, recent texts, for example, in the UK, though eminently accessible and well written have adopted a business strategy perspective and have tended to focus on association football. Szymanski and Kuypers (1999) and Hamil et al. (1999) are examples. Without debating the relative importance of economics versus business strategy, which is a meaningless debate, suffice it to say that many of the concepts and literature referred to in these books draw upon the economics literature. Necessarily, however, their business strategy approach makes some of their treatment of the issues superficial in an economics sense. As will become apparent, for example, we argue in this book that the uncertainty of outcome hypothesis that is widely cited in such literature, as an integral component of the success of sporting leagues, has been somewhat overworked. Examination of the details of the economic research on this matter reveals this to be the case.

This said there is, of course, a compelling reason for the approach adopted in these texts. Without question, economics as a single-honours discipline is contracting radically in the UK, coupled with a tremendous growth of interest in business and management courses. To be somewhat crude, one can argue that students are interested increasingly in discussing economic issues but not necessarily exploring the underlying economics. Nonetheless it remains that there is a need to explore these economic issues robustly.

Taking all of these considerations into account, therefore, we perceive there to be a gap in the market for a text that presents economic issues in economic language and approach but in an accessible manner. Moreover it is clear that there is a need for a text that helps to link developments between US professional team sports and the variety of UK sports. Importantly, our experience of teaching identifies this gap.

It is also reflected in the pedagogic approach adopted in the book. The book is based on a set of final-year undergraduate lectures to students at Staffordshire University. The lectures have been developed over the last ten years as part of a broader package of study in sports and leisure economics provided by the Division of Economics. This package of study is undertaken by students of Economics, Business Studies and particularly Sports and Leisure Management. Consequently, it has the explicit intention of engaging with the logical rigour of economics but in an accessible way. Accordingly, it is fully intended that the book will be of use to students who have only an elementary knowledge of microeconomics but will also be useful to students with a more formal economic training. Primary exposition is verbal reasoning with support from diagrammatic apparatus. All concepts are both developed and discussed in the context of professional team sports. We do, however, also present some details of key statistical methods when it is deemed necessary in order to understand the details of an aspect of the literature or why we criticise it as we do. Our experience is that providing these methods are introduced in situ, and through focusing on the interpretation of results in studies of professional team sports, students without technical backgrounds very quickly make good sense of many of the journal articles on the economics of professional team sports.

Also, students with more technical training get the opportunity to think about the application of the concepts they are familiar with both generally and in an area that is, perhaps, unusual for them but of general interest. For such students we also include among the appendices to the chapters some more technical discussion of techniques and concepts used in the analysis of professional team sports. Some of the appendices, moreover, are simply extensions of discussions in the chapters. It remains that the book is designed without the need to access these appendices. Thus, led by the tutor, a judicious combination of the textual material, the appendices and further readings based on the bibliography we feel offers a flexible study resource. Some discussion questions that we have used in the past are included with each chapter.

Finally, we would like to remark that as active researchers in the economics of sport and leisure, it is hoped that other academics will find the book useful and interesting. For those unfamiliar with the study of sport from an economic perspective, we hope the book will provoke their interest. Moreover, at all times in the book we adopt a critical perspective on the literature and raise research issues where necessary—some of which we are currently addressing. We hope that academics also researching into the economics of sport will find the book stimulates their research. It remains that we are pleased to receive any feedback from academics and students alike.

Economic methodology

Because of the wide variety of intended readership for this text, we feel that it is incumbent upon us to outline some of the main characteristics of economic methodology. These are important in understanding how economists research issues and are implicit in discussions throughout the book. Those readers who are familiar with this approach could well skip this section.

The economic approach to understanding the world—and consequently professional team sports—is somewhat different from many academic disciplines. Thus, unlike the anthropologist, sociologist or historian who might focus on the context and detail of particular issues, economics, in the main, adopts a very different perspective. Indeed this is implied in the above discussion in which it was remarked that one aspiration of this book was to draw parallels between a variety of professional team sports both within and across countries. Economic epistemology—that is, theory of knowledge—is based on the use of simple models to produce predictions about general relationships covering events. Consequently, it is entirely ‘natural’ for the economist to try to generalise about developments in professional team sports and to look for simple ways to generalise on this behaviour.

The main characteristics of this approach, which the reader will see employed throughout the book, are perhaps best argued in an influential essay written by Milton Friedman in 1953. Although this is a complicated essay, and has been subject to much discussion, it does illustrate the main emphases of conventional economic methodology. The first of these emphases is that economic theories should be viewed, first and foremost, as instruments of prediction. Consequently, the assumptions used to construct or structure a theory, and upon which predictions are based need not be realistic nor have descriptive relevance. What matters in judging the theory, thus, is the correspondence of the theory’s predictions with actual events.

Moreover, Friedman argues that theories that are ‘fruitful’ or exhibit ‘simplicity’ would be best. Somewhat ironically this is really an argument about efficiency— which as shown in the text is of paramount importance to economists. This efficiency argument for theories has become known as ‘parsimony’. It suggests that the best model is the simplest model that can accommodate most predictions.

Friedman’s arguments have been referred to as ‘instrumentalist’. However, an instrumentalist position essentially does not hinge on referring to notions of truth or falsehood. In this respect, in methodological terms instrumentalism lies in contrast to realism. Comprising a variety of philosophical doctrines, realism maintains that there is a real entity that is referred to by the theory though not necessarily in a realistic way. Consequently, this ‘ontological’ commitment—that is, theory of the nature or essence of things—suggests that the world is at least partially independent of human knowledge and as such has objective elements. Friedman does not necessarily suggest that his theories do not refer to real things or that he is not interested in truth or falsehood per se despite his comments on the role of assumptions in theory. On these bases it is clear, moreover, that economists eschew postmodernism which suggests that the world we theorise about is essentially subjectively constructed. Further justification for this argument comes in the second major characteristic of economic theorising.

The mainstream approach to economic theorising has an implicit ontology that comprises the constant conjunction of events. Theories and empirical claims thus essentially comprise statements of the form ‘if event X occurs then event Y follows’. This is, of course, a necessary if not sufficient condition for the aspiration of offering theories that predict events. Postulating the existence of a law and observing it are two different tasks! More generally, the economic approach appeals to ‘covering laws’. These are relationships that transcend particular contexts in time or space. It is in this respect that economics looks to reduce a variety of economic behaviours in a variety of contexts to the same basic theoretical explanation.

It is worth noting that this emphasis has not always been the case and there is disagreement about economic methodology. Nagel (1963) provides a critique of Friedman. More generally, for the interested reader Mair and Miller (1992) is an excellent introduction to such debates between ‘schools of thought’ in economics. The reader should be aware that it uses a particular methodological framework, due to Imre Lakatos, to characterise the various schools.

We would also like to note that we share some of these concerns. Consequently, we do feel that the insights generated by this book should be thought of as open to debate between different disciplinary traditions. Indeed we sincerely hope that debate is encouraged by the book.

Summary of chapters

In Section A of the book, which comprises the first three chapters, we discuss the main economic characterisation of sporting leagues. In Chapter 2, we begin our analysis of the economics of professional team sports by outlining some of the key economic theories and concepts that are referred to throughout the book. In discussing the...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Acknowledgements
• 1. Introduction
• Section A: The Market, Industry and Firm In Professional Team Sports
• Section B: The Demand for Professional Team Sports
• Section C: The Labour Market In Professional Team Sports