Competitive Balance Theory: Evolution and Application

The idea that sports leagues benefit from increased balance of competition was first notably posited by Rottenberg. His idea that the baseball league should develop a sort of free market for labor within it, and that talent would be evenly distributed between all teams since certain competitive balance restrictions would be put in place to try and eliminate the distinct and unfair advantages that many teams had over others. While there have been many different rules and regulations implemented within the professional sports realm to deal with the issue of competitive balance, some of these solutions have actually added to the problem. When Rottenberg developed his own theories surrounding competitive advantage in 1956, he could have never imagined the many permutations of his theories that would come into existence all around the world over the next five decades.

Competitive advantage helps sports leagues by making sure that no one team or group of teams has an unfair advantage over the others due to access to resources or financial backing that others may not have. It is similar to the idea that antitrust policies enacted to keep businesses from being able to create monopolies is good for the entire economy as a whole (Vrooman, 1995). The sports league’s revenues, in theory, would increase because games would not be decided by one team’s ability to attract expensive, talented players over another.

The basic idea behind Rottenberg’s assertions is that sports teams that can either generate large revenues or that have the ability to draw from large financial resource pools have a distinct advantage over teams that do not have access to these tools, and that competition would improve if every team had an equal opportunity to attracted and keep talented players. One of the first manifestations of this idea came in the form of a “free agency” policy which was implemented in the U.S. professional baseball leagues in 1972. The U.S. National Football League (NFL) also implemented a similar policy in 1993 after a decade long labor dispute between the league and its players wishing to change the league’s labor regulations (Vrooman,1995).

Another policy that has tried to level the competitive playing field in professional sports leagues is the salary cap. Salary caps were designed so that no one team would have an unfair advantage over another relative to the amount of money they could spend on player’s salaries (Grant, 1991). Often, before the cap, teams with large revenues and access to financial backing would be able to attract very talented and expensive players, creating a sort of sports franchise monopoly within the league. The salary or payroll cap has coevolved with other competitive advantage policies, and yet this single policy is still one of the most influential and controversial in all professional sports leagues that have adopted it (Grant, 1991). For example, when the NFL adopted the Collective Bargaining Agreement of 1993, the free agency and salary cap came as twin competitive advantage equalizing policies. Each policy was meant to complement and counteract the other, yet the payroll cap was limited at just 64% of the NFL’s 1994 gross revenue (Vrooman, 1995). This may seem like quite a bit of money, but limiting players’ salaries while giving them the opportunity to move around from team to team rather freely through the free agency, has been counter productive.

Originally, the free agency was supposed to create a fair and non-competitive labor market through the players’ ability to move freely across an equalized labor market, where their talents would be valued individually (Rottenberg, 1956). But when the salary cap was implemented, it created a theoretical obstacle to the free agency’s ability to self-regulate the professional sports leagues’ labor markets (Vrooman, 1995). If teams were limited by the entire league’s revenues, the incentive to create competition and for one team to attempt to build a strong, competitive franchise is all but eliminated. Since all the teams share in the same revenue pool, and are limited by the same payroll cap, there is no incentive for a team to really build itself up with talented and often expensive players. Also, the talented players have less of an incentive to move around, keeping the competitive advantage rather stagnant (Grant, 1991). Since both policies were implemented together in 1993, it is often a point of contention whether or not the league intended to truly open up the labor market for players or if the policy shift was intended to generate overall revenue and fan respect.

The popular arguments for the salary cap and strict compensation rules are many. First, it is argued that player salaries should be controlled so that teams are able to recoup their investment in as talented players developed and generated revenue (Vrooman, 1995). Second, it is believed by many leagues that talent will gravitate grav I tate intr.v. grav I tat ed, grav I tat ing, grav I tates

1. To move in response to the force of gravity.

2. To move downward.

3.

.Click the link for more information. toward large market teams under the free agency policy, and that restrictions and regulations are necessary to defy de fy

tr.v. de fied, de fy ing, de fies

1.

a. To oppose or resist with boldness and assurance: defied the blockade by sailing straight through it.

b.

.Click the link for more information. This sort of economic gravity and maintain competitive balance within a league (Vrooman, 1995). The opposition to these arguments is rooted in conventional economic theory. It posits that the distribution of talent would be the same under free agency as it was under the reserve clause or salary cap, and that competitive advantage or balance would not be affected by these institutional changes. This argument was originally made by Rottenberg when he stated, “that a market in which freedom is limited by a reserve rule such as that which now (1956) governs the baseball labor market A place where labor is exchanged for wages; an LM is defined by geography, education and technical expertise, occupation, licensure or certification requirements, and job experience

.Click the link for more information. distributes players among teams about as a free market would.” (Rottenberg, 1956) and later reiterated by Demsetz.

Demsetz saw this as an application of the Coase theorem in law and economics, as the Coase theorem is attributed to Ronald Coase (1960). This theorem describes the economic efficiency of an economic allocation or outcome in the presence of externalities. In other words, it explores the implications of regulation within a market, like a sports league. Demsetz asserted, “No matter who owns the right to sell the contract for the services of a baseball player, the distribution of players among teams will remain the same.” (Demsetz, 1972). Recent studies have reached a consensus that there has been no change in competitive balance due to free agency in either MLB, NFL, or the NBA (Vrooman, 1995). This is alarming, considering the fact that many of these regulatory policies were implemented at a time where players were arguing the necessity of free agency and teams were arguing against salary caps.

It is interesting to note that while the idea of free agency has helped to create a sort of thin veil of competitive balance that is often supported by the league’s fan base, the free agency policy itself has done little to help equalize the competitive advantages that many teams possess. In fact, the free agent policy has helped increase players’ and on-field crew salaries alike while doing little to support the equalization of competition (Grant, 1991). The most influential hand in competitive advantage has, and continues to be the revenues that sports teams are able to generate. Often, these revenues are directly related to or proportional to the size of the franchise’s fan base and the media coverage that is afforded to the team in question.

The competitive balance theory’s development itself has been influenced greatly in part by the political and cultural impact that the implementation of related policies has had over the years in the countries and leagues that have been affected. Certainly the MLB and NFL have garnered more fan appreciation and respect for having implemented these policies, and NFL players in particular are happy about the free agency because it generally means higher salaries, but the theory itself has evolved to take into account many facts that have surfaced as of late. These facts act as “inconvenient truths” which help to paint some of the competitive advantage policies in a different light.

Much research has been done to determine the most influential factors on a team when it comes to competitive advantage. Many researchers conclude that a franchise that has a large media audience and has the ability to draw from a larger pool of potential audiences will have a distinct competitive advantage over teams that cannot (Vrooman, 1995). This comes from the fact that teams with large media resource pools and generally more successful than other teams that have smaller media and fan bases. This is in direct contrast to the efforts afforded by the leagues to try to reduce competitive advantage all around. One reason why the teams with larger media and crowd resources do well could be the fact that as more talented players are able to move into free agency, they seek higher and higher compensation and attention through larger media and crowd outlets (Grant, 1991). A very talented player may not want to play in a small town because there would theoretically be less exposure to media and fans, and as a marketable good or commodity, that player knows that his or her talent would not be compensated for as well as it could be in a larger town.

The basis for argument with Rottenberg’s presentation of competitive advantage mitigation lies in the basic economic theories that govern other markets. It is only logical that these theories be applied to labor markets within sports leagues. Although many fans and sports enthusiasts were happy to see that changes intended to increase the competitive balance were enacted in many different sports leagues within the U.S., it remains to be see whether or not these change have resulted in much more than higher revenues and better labor conditions for the players and teams themselves. Other outside factors such as media coverage and the size of the team’s fan base have much more of a direct impact on specific franchise revenues and their ability to attract talented, often expensive players to their team (Grant, 1991).

While Rottenberg’s original ideas and feelings toward wanting to help level the competitive edge that some teams had over others is rather idealistic and optimistic, in reality, there will always be methods for leagues, teams, and individual players to maximize their own revenues and salaries in the face of unfair competitive advantages. Professional sports is such a huge industry and has so much political and economic clout in countries like the United States that it is questionable whether or not the leagues and players will ever really agree to subject themselves to labor and economics policies designed to encourage perfect competitive balance. All economic theories begin to break down in an imperfect world, and so long as there are other distinct incentives for leagues, teams, and players to enact or even throw out policies intended to foster competitive balance, it will likely remain that maximized or perfect competitive balance is an ideal yet to be achieved.

References

Coase, Ronald H. 1960. “The Problem of Social Cost.” Journal of Law and Economics. Vol. 3,

No. 1. Pp. 1 — 44.

Demsetz, Harold. 1972. “When Does the Rule of Liability Matter?” Journal of Legal Studies.

Vol. 31, No. 5. Pp. 13-28.

Grant, Robert, M. 1991. “The resource-based theory of competitive advantage.” California

Management Review. Vol. 33, No. 3. Pp. 114-135.

Rottenberg, Simon. 1956. “The Baseball Players Labor Market.” Journal of Political Economy,

Vol. 6, No. 2. Pp. 242-58.

Vrooman, John. 1995. “A general theory of professional sports leagues.” Southern Economic

Journal. No. 12, Vol .4. Pp. 12-20.

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