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Competition Between Sports Leagues: Theory and Evidence on Rival League Formation in North America

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Abstract

We analyze the formation of rival leagues and deterrence by incumbent leagues in professional team sports, which is one of the least studied forms of competition in sports. We first survey the economic history of professional sport leagues in North America and develop stylized facts about rival league formation. We then develop a game-theoretical model to explain some of these interesting stylized facts, showing that if the bargaining power of the incumbent league is sufficiently small—i.e., less than a certain cutoff—the incumbent should choose expansion to deter the rival league formation; otherwise, it is optimal for the incumbent league to allow a rival league formation and then merge with it, conditional on rival league success. We further show that the incumbent league may pay players relatively high salaries as an alternative way to deter formation by a rival league.

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Notes

  1. In Federal Baseball Club of Baltimore v. National League (NL) of Professional Baseball Clubs the Supreme Court ruled that MLB was not engaged in interstate commerce and thus exempt from the antitrust laws; this 1922 ruling was upheld in Toolson v. New York Yankees (1952) and Flood v. Kuhn (1972). The 1961 Sports Broadcasting Act (SBA) explicitly exempted the merger of the NFL and AFL from the application of antitrust law. Mid-South Grizzlies v. NFL (1983) affirmed the NFL monopoly in the SBA and the NFL’s ability to restrict entry. In United States Football League v. National Football League, the rival USFL sued the NFL on the grounds that the NFL monopolized football in the US. The jury found in favor of the USFL and awarded $1 in damages, trebled to $3 as required by the Clayton Act.

  2. Boal and Ransom (1997) survey models of monopsony in labor markets including models like the one developed here.

  3. A large body of literature on entry and deterrence in a market exists in the industrial organization literature. More details on the theoretical analysis and applications of entry, deterrence, and accommodation can be found in Tirole (1994), ch. 8. See Farrell and Shapiro (1990); McAfee and Williams (1992); Pesendorfer (2005); Nocke and Whinston (2010), and Nocke and Whinston (2013) for a discussion of mergers among firms.

  4. The XFL – an 8 team league that was created by pro wrestling impresario Vince McMahon—played a single season in 2001 and is not generally regarded as a true rival league.

  5. Some expansion took place because jet air travel reduced the time required to cross the country. Congress has also periodically held hearings that have focused on expansion of the number of professional teams in US leagues, including in 1958, just before the New York Giants and Dodgers moved to California, and in 1995 after the Cleveland Browns moved to Baltimore to become the Ravens, and in several other instances. Congress has systematically upheld statutory exemptions from anti trust law granted to professional sports teams, although the possibility of statutorily ending this exemption has frequently been raised at hearings.

  6. All North American leagues limit the number of players that each team can have under contract. The roster size limit is not under complete control of the league; this limit is set during collective bargaining between the league and player unions. Modeling this interaction is beyond the scope of this paper. To simplify the analysis, we assume that the number of players is identical across all teams, and only consider how many teams a league needs to maximize total revenue. Others have modeled the supply of players as a fixed pool of talent - see Kahn (2007).

  7. Quirk and Fort (1997) and Vrooman (1997) make a similar assumption. While this does not reflect the complexity of actual revenue sharing arrangements in professional sports leagues, it simplifies the analysis considerably.

  8. Besides the wage bill, teams also incur other operational costs, such as stadium expenses, advertising, etc. We here omit them to simplify the analysis. An examination of leaked audited financial data from professional sports teams and sporadically published expense estimates from various media sources suggests that payroll expenses account for about 2/3 of total expenses incurred by professional sports teams in North America. Administrative and general costs – including front-office costs, travel, and training expenses – are the second most important expense. Stadium and arena expenses are generally low because of the large public subsidies that many teams receive for the construction and operation of facilities.

  9. A one team league is impossible, so the incumbent league only needs to expand to \(N-1\) cities in total to deter rival league formation.

  10. In Sect. 4, we discuss how dynamic entry from rival leagues affects the number of teams in the merged league. This provides insight into why a merged league may contain some or all of the teams from the rival league.

  11. This can be interpreted as an application of “raising rivals’ costs”, see Salop and Scheffman (1987), and Scherer (1980).

  12. Note that we do not address the issue of allocation of players across teams in this analysis. See Schmidt (2011) for the discussion of the issue of the allocation of players across teams.

  13. The labor supply curve in the MLB and the NBA may have also gotten flatter over time. MLB has extensively expanded its recruiting in Latin America in the last few decades and also draws players from Japan, Korea, and even Europe and Australia. Players from Europe, South America, and China now appear on NBA rosters.

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Authors and Affiliations

  1. Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK

    XiaoGang Che

  2. Department of Economics, College of Business and Economics, West Virginia University, 1601 University Avenue, P.O. Box 6025, Morgantown, WV, 26506, USA

    Brad R. Humphreys

Authors
  1. XiaoGang Che
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  2. Brad R. Humphreys
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Correspondence to Brad R. Humphreys.

Additional information

We thank participants at a session at the 87th WEAI Conference in San Francisco, and at the VII Gijon Conference on “Sports and Competition” in Gijon, Spain, several anonymous referees and Lawrence White for helpful comments.

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Che, X., Humphreys, B.R. Competition Between Sports Leagues: Theory and Evidence on Rival League Formation in North America. Rev Ind Organ 46, 127–143 (2015). https://doi.org/10.1007/s11151-014-9439-7

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