The discussion of promotion and relegation is part of a broader issue in sports economics: open vs. closed leagues. In closed leagues the number and the identity of member teams do not change from season to season.41 New clubs can only be added by the vote of the existing league members. On the other hand, in open leagues the worst teams—normally measured by winning percentage—are relegated to a lower tier league and the best teams from that league (or leagues42) are promoted. The former is widely used in the United States (e.g., the National Basketball Association, the National Football League, Major League Baseball) while the latter is e.g., used in European soccer leagues.43
The impact this structural difference has on the individual soccer club as well as consumer welfare has been studied by several authors. Ross and Szymanski (2002, p. 625) argue that "the institution of promotion and relegation tends to raise consumer welfare by increasing effective competition among the teams in a league." Noll (2002) finds that players earn higher wages and attendance is higher in an open league. Szymanski and Valletti (2005) show that an open league incentivizes each team to win. Even the bottom teams need to keep up their effort until the end of the season to avoid relegation. However, the willingness to share income (such as media or gate revenues) between the teams in open leagues is lower. While Ross and Szymanski (2002) use a theoretical approach only, Noll (2002) as well as Szymanski and Valletti (2005) empirically support their model by using the English football league as an example.
In their literature reviews on soccer economics, Matheson (2006) and Szymanski (2006b) point out that there is little research on the determinants of promotion or relegation. The reason for this may be that sports economic research is mainly focused on U.S. sports and, as mentioned earlier, U.S. sports use closed leagues and are therefore not affected by promotion and relegation.
41
Only relocation of teams can change the cities that have a major league team. 42
In many league systems there is more than one league at the next lower hierarchy level. 43
66 In the following paragraph I will discuss the few available studies on the determinants of promotion and relegation. Dherbecourt and Drut (2009) analyzed promotion and relegation in the five biggest top tier European soccer leagues from 2004 to 2009. Their regression model includes socio-economic variables such as GDP, population and unemployment of the region. Club internal factors such as average age of the team, coach seniority, percentage of foreign players or championship history are also accounted for in their model. They find that regional factors play a significant role. Clubs from regions with a higher percentage of services industries and a higher percentage of educated people have a lower relegation probability. They suggest that while soccer used to be fueled by the industrial revolution—it was a way to socialize for people who moved to industrial cities from rural areas (see Kuper and Szymanski 2009)—globalization and the decrease of industry in Europe are responsible for the decline of elite clubs from industrial regions increasing the chances of clubs from other regions. Moreover, the promotion probability is negatively impacted by GDP growth and positively by unemployment as well as by the fact that another club from the same city is playing in the first tier league. In addition, experience in the top tier league, qualification for a European cup competition and stadium attendance reduce the probability of relegation. They also include the shareholder structure of the clubs in their analyses. The fact that a billionaire owns the majority of shares of a club—such as Roman Abramowitsch at Chelsea London or Silvio Berlusconi at AC Milan— also decreases (increases) its relegation (promotion) probability.
Wallbrecht (2010) uses a dataset from the German soccer 'Bundesliga' between 1963 and 2010 to analyze the impact of regional factors such as GDP or population as well as some club related factors (e.g., experience, attendance, previous relegations) on relegation chances. He finds that higher GDP, higher attendance, and more experience in the 'Bundesliga' decrease the chances of being relegated while previous relegations increase the chances of being relegated again.
Frick and Wallbrecht (2012) analyze seven top tier sports leagues in Europe from four different sports and four different countries for all seasons after World War II. Using an organizational ecology approach, they find that previous club performance (number of previous championship titles) and average attendance affect 'survival' in the league in a statistically significant and economically relevant sense. In line with results from Hoehn and Szymanski (1999) and Wallbrecht (2010), they find that the number of previous relegations increase the chances of being relegated again.
67 Frick and Prinz (2004) analyze 12 major European soccer leagues over a 25-year period (1976-2000) and find the 'Bosman-ruling' to have different effects on stronger than on weaker leagues.44 In countries such as England, Italy or Spain, survival probabilities of newcomers have decreased since the 'Bosman-ruling.' The reason for this is the signing of many foreign-born players by established teams in these leagues. In countries such as Yugoslavia, Russia or Belgium, the dominant teams have lost their star players to foreign clubs. Therefore, survival chances of promoted teams have increased.
This article analyzes the determinants of promotion and relegation further. In particular, I add two aspects that have not been investigated before. First, my research covers leagues since their inaugural season. This gives me the opportunity to study up to 110 seasons in one league alone. The long timespan of the study should help to eliminate short-term trends. Second, I expand the research on promotion and relegation to second tier leagues. These leagues are interesting for several reasons. Two competitions can be studied at the same time. Some teams in the league are fighting for promotion while other teams fight against relegation. Additionally, there are no teams that dominate the leagues for a long period of time because if a team plays well, it is promoted to a higher tier league.