Bloque de función PID en DeltaV

All major professional team and individual sports are organized into leagues.

Leagues provide so many vital organizational and financial services to individual teams that forming a league appears to be a prerequisite for the financial stability

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Q (b) Downstream firm

D p_up MC

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MR

MC = p_up

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fIgure 3.5 Vertical Integration with Competitive Pricing Upstream

When the upstream and downstream firms are vertically integrated, the downstream firm can purchase output at the competitive price (MC ∙ P_up).

of a sport, yet the arrival of leagues did not coincide with the advent of profes-sional teams.³⁹ In this section, we assume that teams share the goal of profit-maximization and that leagues exist to help them meet this goal.⁴⁰ We focus on how leagues set rules, limit entry, promote competitive balance, share revenue, and market their product.

the origin of leagues in american sports

Baseball’s National League, the oldest existing professional league in the United States, did not appear until 1876, seven years after the Cincinnati Red Stockings, the first openly professional team, began to play in 1869. It took another 20 years for the National League to establish a stable set of teams. The NFL formed in 1920, two generations after William Heffelfinger became the first professional football player in 1876, and it did not field a stable set of teams until 1936.⁴¹ The same pat-tern held in Europe, as a formal league structure for soccer arose in 1888, at least 12 years after the appearance of professional players, 25 years after the codifica-tion of the sport by the Football Associacodifica-tion (FA), and decades after teams began playing the sport.⁴² Despite these delays, professional team sports could not have survived without the formation of stable leagues.

Prior to the appearance of leagues, teams played each other on an infor-mal, ad hoc basis. Until the latter part of the 19th century, most games involved teams from the same town. As transportation improved, matches were arranged between teams from increasingly distant towns.⁴³ Informal trips to play teams in other towns, a practice known as barnstorming, became popular, but there was no guarantee that the opposition would show up or that the game would draw a sizable crowd. The experiences of the old Cincinnati Red Stockings illustrate this problem. During their grand tour of 1869, the Red Stockings drew large crowds from coast to coast while compiling a 56–0–1 record. The next year, they lost only four games but disbanded when the season was over. The Red Stockings team resembled a strongman in a traveling carnival who offers to take on all comers. The sideshow may attract a crowd if it can bill the strong-man as “undefeated.” A strongstrong-man who has won two-thirds of his matches (an enviable record for most teams today), however, would not generate much interest.

39Eric M. Leifer, Making the Majors (1995), p. 15.

40See, for example, Gerald Scully, The Market Structure of Sports (Chicago: University of Chicago Press, 1995), pp. 3–40.

41James Quirk and Rodney Fort, Pay Dirt (1992), pp. 333–334.

42There are many wonderful histories of the origins of baseball and soccer. Two of the best are Harold Seymour, Baseball: The Early Years (New York: Oxford University Press, 1960) and David Goldblatt, The Ball Is Round: A Global History of Soccer (New York: Riverhead Books: 2006). For an excellent comparison of the two sports, see Stefan Szymanski and Andrews Zimbalist, National Pastime (Washington, D.C.:

Brookings Institution Press, 2005).

43See Michael Danielson, Home Team, p. 20.

setting the rules

Formally speaking, a league is a voluntary association that promotes the common interests of its members. Hence, the League of Women Voters (LWV) was formed in 1920 to help women exercise their newly won right to vote and continues its efforts to register and inform voters. Just as the LWV was originally formed to promote the interests of women voters, the NFL, NBA, NHL, and MLB were formed to promote the interests of the teams that are their members.⁴⁴ In particu-lar, leagues perform functions that no one team can do alone, such as establishing rules of play. However, the limits of these “core functions” has been the subject of much dispute, as owners often want to include more actions than players, other firms, and governments want them to.

As a result, leagues are by nature cooperative bodies. At one level, the teams are rivals that succeed at the expense of each other. At another level, each team’s success depends on the success of the other teams in the league and on the success of the league as an institution. Leagues create a body of rules, set schedules, pro-mote competitive balance, decide on revenue-sharing arrangements, stage cham-pionship tournaments, create a framework for the entry of new players and teams, and conduct advertising campaigns.⁴⁵

Of the functions of leagues, the most important is establishing and enforcing rules of the game. Without a single, commonly accepted way to play, teams cannot play one another, and the sport cannot function, let alone grow. For example, the many different rules by which 19th-century English football clubs played created conflict between clubs and stymied the growth of the game. In 1863, many clubs joined to form the Football Association (FA) to establish a single set of rules.⁴⁶ In addition to standardizing rules, the FA gave football the nickname it now enjoys in England and the United States. The approved version of the game was dubbed

“Association Football,” later shortened to “Assoc. Football” or “soccer.”

While the Football Association succeeded in establishing a common set of rules, its broad membership, from the most highly skilled teams to relatively informal clubs, prevented it from fulfilling other duties of a league. This under-mined early attempts to play a fixed schedule, as games were often dull, one-sided affairs. Recognizing the need to provide stable competition between evenly matched teams, 12 of the strongest clubs formed an elite grouping in 1888 that called itself “the Football League” (FL). Despite the seeming conflict with the FA, the FL did not attempt to displace the FA entirely. The members of the FL recog-nized that they were motivated by the interests of their individual clubs and not the welfare of the FL or the sport as a whole, and they chose to share power with the FA, allowing it to serve as an outside arbiter.⁴⁷ Over the next century, the FL

44Interestingly, the leagues themselves are organized as not-for-profit associations.

45Groups such as the Professional Golfers’ Association and the United States Tennis Association perform much the same function for these more individual-based sports.

46Unhappy that the new rules did not allow their rougher version of football, devotees of the style developed at Rugby formed their own association, the Rugby Football Union, in 1871.

47Wray Vamplew, Pay Up and Play the Game: Professional Sport in Britain, 1875–1914 (Cambridge, U.K.:

Cambridge University Press, 1988), p. 125.

grew to 92 teams, broken into four divisions. In 1992, the 20 teams in the strongest division broke away from the FL to form the Premier League (officially called the Npower Football League thanks to a 2010 sponsorship agreement with the British utility company Npower), with the FL supervising the 72 remaining teams.

Like soccer, baseball initially had different rules in different places. Two versions of the sport dominated, Massachusetts Rules and Knickerbocker Rules (also known as New York Rules). Knickerbocker Rules are the linear ancestor of modern baseball, while Massachusetts Rules may seem bizarre to the modern observer. Under Massachusetts Rules, a team got an opposing player “out” by hit-ting him with a thrown ball, the bases were arranged in a square rather than a diamond, and winning a game required 100 runs or getting every member of the other team out, as in cricket. By the middle of the 19th century, the Knickerbocker Rules had become the norm.⁴⁸

Baseball went through several attempts to find a stable league structure. The earliest central authority, the National Association of Base Ball Players (NABBP), was formed in 1858. It did not arise out of a need to standardize rules, because the Knickerbocker Rules dominated the game played by the teams in the NABBP (largely in the New York area). Instead, it sought to combat professionalism and preserve the “gentlemanliness” of the game. The NABBP failed to achieve its goals, and it succumbed to the growing professionalism of the sport, being replaced by the National Association of Professional Base Ball Players (NAPBBP) in 1871. The NAPBBP also proved ineffectual, particularly in enforcing player contracts. In 1876, the financial backers of several teams effectively staged a coup d’état, casting aside the NAPBBP and forming the National League of Baseball Clubs. The National League remains the oldest functioning league in American sports (hence its nickname, “the senior circuit”).

Sometimes leagues manipulate rules to create more excitement or to pro-tect players. Both these motives have affected kickoffs in the NFL. For many years, the NFL made teams kick off from deeper and deeper in their own terri-tory in an effort to generate longer and more exciting kickoff returns. Prior to the 2011 season, as part of its attempt to limit devastating head injuries, the NFL reversed itself and moved kickoffs from the kicking team’s 30-yard line to its 35-yard line.

In an attempt to win back fans after the cancellation of the 2004–2005 season, the NHL instituted a number of changes designed to increase scoring. These included limiting the equipment and activities of goalies, allowing longer passes, and instituting “shootouts” to end tie games. After seeing how popular it had been in the rival American Basketball Association (ABA) and American Basketball League (ABL),⁴⁹ the NBA added the three-point basket to increase scoring and restore the value of outside shooting; more recently, they permitted teams to play

“zone” defense.

48See Harold Seymour, Baseball (1960), pp. 23–30; and Robert Burk, Never Just a Game: Players, Owners, and American Baseball to 1920 (Chapel Hill: University of North Carolina Press, 1994), p. 14.

49Terry Pluto, Loose Balls: The Short, Wild Life of the American Basketball Association (New York: Simon and Schuster, 1990), pp. 29–30.

Leagues establish and enforce rules governing behavior off the field as well.

In its early years, baseball’s National League expelled teams for failing to play out their schedules. Individual players were also banned from baseball for intention-ally losing games, as was the case for eight of the Chicago “Black Sox” following the 1919 World Series, or for betting on baseball games, as Pete Rose was in 1989.

The NFL suspended Alex Karras of the Detroit Lions and Paul Hornung of the Green Bay Packers for one year in 1963 for betting on league games. Players may also be suspended for engaging in activity that may reflect poorly on the league, as witnessed by Major League Baseball’s suspension of Melky Cabrera in 2012 for using a banned substance.

Leagues have also played a role in purging the crowds of “undesirable ele-ments” that discouraged attendance. For example, Sunday beer sales at baseball games have been allowed only fairly recently. In the 1890s, the National League tried to present a wholesome image by expelling the Cincinnati Red Stockings for serving beer at all. Prior to the 1930s, games were not even played on Sundays in many cities. Currently, in the NHL, teams can be penalized during a game if fans repeatedly throw objects onto the ice and delay the game. In the NFL, the home team can be penalized if its fans are so noisy that the opposing team cannot hear the snap count.

limiting entry

In recent years, one might be forgiven for thinking that American universities had lost the ability to count. How else can one explain the fact that, in 2011, the Big 10 athletic conference had 12 teams in it, while the Big Twelve Conference had only 10 teams? Their command of geography also seemed to be slipping.

In 2011, the Pacific 12 Conference welcomed the University of Colorado, which is located about 1,000 miles from the Pacific Ocean. Not to be outdone, the Big East Conference was preparing to invite San Diego State University, which is only about 15 miles from the Pacific Ocean, but close to 3,000 miles from its new East Coast rival, the University of Connecticut. All across the country, major intercol-legiate athletic conferences are reconfiguring in ways that destroy century-old rivalries and appear to make little sense.

To comprehend conference realignment, it is first important to understand why collegiate sports conferences or professional sports leagues place any limit on their size. In North America, MLB, the NBA, and the NHL have all restricted themselves to 30 teams, while the NFL has 32 teams. In Australia, by contrast, the Australian Football League has 16 teams. In Japan, the Nippon Professional Baseball League (NPB) has just 12 teams. For many years, NCAA conferences typ-ically had 8–10 teams. Today, many observers think that the NCAA will eventu-ally have 4 “super conferences,” each with about 16 teams.

The forces that determine how large a league becomes can be found in the work of Nobel laureate James Buchanan.⁵⁰ In his theory of the economics of clubs,

50James M. Buchanan, “An Economic Theory of Clubs,” Economica, vol. 32, no. 1 (February 1965), pp. 1–14; and John Vrooman, “Franchise Free Agency in Professional Sports Leagues,” Southern Journal of Economics, vol. 64, no. 1 (July 1997), pp. 191–219.

Buchanan reasoned that admitting a new member to a club—in this case, a sports league—brings costs and benefits. Existing teams benefit from the admission fees that new teams pay to join the league and from the additional fan base and media outlets new teams bring.⁵¹ Additional members also bring a cost. For example, admitting new teams to the league spreads any shared revenue over more mem-bers and reduces the ability of existing memmem-bers to use the threat of moving to the new city as a bargaining chip when negotiating with their current home cities.

If the revenue from admitting one more team declines as the league grows—

as one might expect if leagues admit cities from the most profitable cities first and then admit teams from less and less profitable cities—the marginal revenue curve slopes downward, as in Figure 3.6. Similarly, if the cost of admitting one more team rises, the marginal cost curve slopes upward. The equilibrium point occurs where the marginal revenue and marginal cost curves meet (e₀), which leads to optimal league size Q₀.

In recent years, several factors have changed the economic landscape of col-lege sports, increasing the marginal value of new members to several conferences.

Three of the most important reasons all come down to one thing: the growing importance of football as a source of revenue.

The growing importance of football created a problem for the Atlantic Coast Conference (ACC), which had a long history of success in basketball but little tra-dition in football, and the Big East Conference, which had been formed specifi-cally as a basketball conference and had turned to football only as an afterthought.

The ACC adjusted to the new reality by adding such football powers as Virginia Tech, the University of Miami, and Florida State University. The Big East failed to adjust, making such missteps as rejecting a bid by Penn State to join the confer-ence in the early 1980s, and has seen a steady departure of teams, several of which (Boston College, Miami, Virginia Tech, West Virginia, and—in 2013—Pittsburgh and Syracuse) left for the ACC. To enhance the status of football, the Big East has invited such schools as Boise State and the University of Houston. Big East, indeed!

In addition, the growing popularity of—and revenue from—conference championship games in football vastly increased the desirability of such games.

However, NCAA rules specify that conferences must have at least 12 members to hold a football championship game. This led the Pacific 10 to add Colorado and Utah, and the Big 10 (which already had 11 teams) to add Nebraska for the 2011 season. Both conferences held their first football championship game in 2011.

Figure 3.6 also shows the dangers that face professional leagues when they limit the number of teams. At the dawn of the 20th century, the National League, then the only major professional league in North America, restricted itself to only eight teams. It failed to recognize, however, that rising populations and incomes in urban centers had shifted the marginal revenue curve rightward from MR₀ to MR₁. The shift caused the equilibrium point to shift to e₁ and the optimal league size to grow from Q₀ to Q₁. The failure of the National League to expand led Ban Johnson to found the American League in 1901.

51More generally, Buchanan assumes that members of a club produce “club goods” that members of the club share with one another but outsiders cannot enjoy.

Leagues also dictate where entry can occur. Table 3.5 shows that, in 2010, each of the 10 largest metropolitan areas had several professional franchises.

As expected, New York, the largest market, had more franchises than any other area, with 11. Los Angeles and Chicago, the second and third most populous

table 3.5 The Ten Most Populous Metropolitan Statistical Areas and Their Sports Teams in 2011

City (population)^a MLB NBA NFL NHL MLS WNBA

New York (18.9) 2 2 2 3 1 1

Los Angeles (12.8) 2 2 0 1 2 1

Chicago (9.5) 2 1 1 1 1 1

Dallas (6.4) 1 1 1 1 1 0

Philadelphia (6.0) 1 1 1 1 1 0

Houston (6.0) 1 1 1 0 1 0

Washington, D.C. (5.6) 1 1 1 1 1 1

Miami (5.6) 1 1 1 1 0 0

Atlanta (5.3) 1 1 1 0 0 1

Boston (4.6) 1 1 1 1 1 0

aPopulation in millions.

Source: U.S. Census Bureau, “Population and Housing Occupancy Status: 2010—United States—Metropolitan Statistical Areas,” American FactFinder, 2010, at http://factfinder2.

census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=DEC_10_NSRD_GCTPL2.

US24PR&prodType=table, viewed April 4, 2012.

e₀ e₁

MC (marginal cost) Marginal Revenue and Marginal Cost

League size

0 Q₀ Q₁

MR₀ (marginal revenue) MR₁ (marginal revenue)

fIgure 3.6 Determining the Optimal Size of a League

The optimal size of the league is set where the marginal revenue meets marginal cost.

metropolitan areas, had eight and seven. MLB and the NBA had franchises in all of the 10 largest metropolitan areas. It may seem odd that the business savvy NFL does not have a team in Los Angeles, but, as we see in Chapter 7, having a large city ready to bid away another city’s team might be a good business strategy. The NHL was in every area except Houston. The WNBA had entered five of the ten largest metropolitan areas, while MLS was in eight.

Placing franchises in the largest cities has important implications for the individual teams, as it ensures that each team has a large fan base to which it can market. On the other hand, adding teams to a market dissipates the monopoly power of the existing teams. To have a monopoly, a firm must produce a good with no close substitutes. As the number of available substitutes increases, the demand curve facing the incumbent firm (team) becomes more elastic. In Figure 3.7, the addition of a new, nearby team shifts the demand curve from D₀ to D₁, reduc-ing the profit-maximizreduc-ing price from p₀ to p₁. The more teams that exist in any given area, the more vigorously they must compete with one another in all areas of revenue generation, from luxury box sales to regular ticket sales to advertising.

Placing teams in all the most desirable cities also helps to keep out compet-ing leagues in much the same way that controllcompet-ing access to a key input limits

Placing teams in all the most desirable cities also helps to keep out compet-ing leagues in much the same way that controllcompet-ing access to a key input limits