Sports & the Free Market

[Jaggy Bunnet]

I have always thought of the US as being opposed to intervention and supportive of the free market. However, from the little I know about US sport, it appears there are a number of major interventions that prevent a free market operating (salary caps, draft system, standard salaries for rookies).

In contrast, football (or soccer if you must! ) is run (certainly within Europe) as a very free market - no salary cap, players can sign for the team that will pay them the most, no draft system, salaries set individually.

I would be interested in comments on why the different approaches exist and what the benefits of each are.

My thoughts:

Major American sports leagues (American football, basketball, baseball) are far and away the highest payers. There is therefore no external pressure on wages as players cannot move to a league outside the salary cap. In contrast players are free to move throughout Europe so any cap would require all major European Leagues to apply it and to enforce it. Getting agreement is unlikely to be possible. No country could introduce a cap individually as they would lose the best players to countries without a cap.

European football is generally in a financial mess as clubs spend higher and higher percentages of income on salaries. Even highly successful clubs often have higher levels of debt than they can sustain without outside support. Such support can either come from businessmen who invest in a club knowing they will lose money or from local government (for example Real Madrid sold their training ground to the council an leased it back at well below market rates). Does the presence of a salary cap prevent something similar happening in the US?

One possible justification is that unless there is competition and uncertainty, there is no sport. Nobody would be interested in the same team winning every year and the draft/cap systems tend to ensure teams are of a similar standard. Does it work that way?

Many European leagues are dominated by two or three teams who win the vast majority of titles (England - Arsenal/Man U, Holland - Ajax/PSV, Scotland - Celtic/Rangers) but attendances are often increasing rather than reducing.

 

[Segnosaur]

I have always thought of the US as being opposed to intervention and supportive of the free market. However, from the little I know about US sport, it appears there are a number of major interventions that prevent a free market operating (salary caps, draft system, standard salaries for rookies).

You're right, there are interventions to prevent sports franchises operating in a pure 'free market'. And yes, competitiveness has something to do with it. But I don't think Salary caps have very much to do with things, since they tend to be set up for particular situations. (The draft is the major influence.)

Note that there is one place where free markets do apply: Free agency. A player who's contract has ended can sometimes (depending on the league's rules) get hired by any other team.

Major American sports leagues (American football, basketball, baseball) are far and away the highest payers. There is therefore no external pressure on wages as players cannot move to a league outside the salary cap. In contrast players are free to move throughout Europe so any cap would require all major European Leagues to apply it and to enforce it. Getting agreement is unlikely to be possible. No country could introduce a cap individually as they would lose the best players to countries without a cap.

It wouldn't really be necessary for the cap to be respected by all leagues. It is mainly a legal thing... if a player signs with a team in a league, legally they cannot go and play in another league, even if they offered more more money, until the terms of the contract run out.

European football is generally in a financial mess as clubs spend higher and higher percentages of income on salaries. Even highly successful clubs often have higher levels of debt than they can sustain without outside support. Such support can either come from businessmen who invest in a club knowing they will lose money or from local government (for example Real Madrid sold their training ground to the council an leased it back at well below market rates). Does the presence of a salary cap prevent something similar happening in the US?

Nope, US sports are also in horrible shape.

As I mentioned, not all sports have a salary cap; and in many cases, free agency (and overall greed) have made salaries far too high.

Average attendance is down in many sports in North America. There may be many reasons for that:
- Rising ticket prices (in large part to cover the cost of Salaries) has priced games out of the reach of average fans
- Labour problems (stikes and lockouts) have interrupted seasons, and when the games resumed, the fans didn't come back
- Escalating salaries may breed resentment with the 'poor' people
- On average, the population is getting older, and supporting a sports team is more of a 'young person' thing
- Rapid expansion of various leagues has diluted talent

Here's what's happening with the major sports leagues in the US:
- Baseball: Attendance is down, salaries are escallating. The league wanted to remove 2 teams a few years ago who were loosing money, but the courts stopped it. Baseball is a mess, with regular strikes/lockouts
- Basketball: Still fairly popular. Its not doing too badly, but rosters are fairly small, and they've done a good job of keeping things in check. (I admit, I don't pay that much attention to Basketball)
- Hockey: Major problems ahead. No good salary control, small market teams loosing money, expansion into areas (like southern US) where there is no fan base have resulted in games played in arenas that are 2/3s empty
- Football: Probably the sport that's on the best footing. Good salary control with limits, no recent labour problems, good attendance, and most importanly high TV revenue. (With the amount of money they earn from TV, they could play all their games in a hidden studio in the middle of the Dessert and the league would still turn a profit.)

One possible justification is that unless there is competition and uncertainty, there is no sport. Nobody would be interested in the same team winning every year and the draft/cap systems tend to ensure teams are of a similar standard. Does it work that way?

The draft does help a little, but unfortunately, players do have enough leverage (via free agency, or through threats to 'sit out' part of their contract) to allow more to move to the 'successful' teams.

There have been some franchises that have been successful getting players 'through the draft' to build a winning team. But it depends on the rules. (For example, baseball drafts players so young that you'll never know whether a player will be any good or not.)

 

[Michael Redman]

Baseball and hockey (I think) have no salary cap, and are in worse financial shape than football and basketball, which do.

In my view, salary caps are not interventional or anti-free market any more than limiting the number of pieces a chess player can use. It's competitive rulemaking. The league as a whole is an ecomonic unit, not an economy. The league is the free market actor. There is no intervention or regulation. In fact, Baseball enjoys an exemption from regulations that all other US business are constrained by. And even within the league, no one tells teams how much they can spend on expenses other than player salary, or where to set ticket prices, or how much they can ask for media rights. They are free to do whatever they wish, within the competition rules.

 

[Segnosaur]

Baseball and hockey (I think) have no salary cap, and are in worse financial shape than football and basketball, which do.

Last I heard, hockey had a salary cap, but it only applied to rookies. (Makes sense; you don't want someone coming in demanding millions without ever having played a game.)

I had heard that Basketball had a salary cap, but it only applied to existing players; rookies could get anything. (So the team could spend millions on a 'new' player who may have done well at college but doesn't have the talent to play in the pros.)

In my view, salary caps are not interventional or anti-free market any more than limiting the number of pieces a chess player can use. It's competitive rulemaking. The league as a whole is an ecomonic unit, not an economy.

Very well stated, might I say.

 

[Tmy]

US Sports are very free. (Baseball has a weird sort of sactioned monopoly)


Players are free to go where they want. Thing is there are nor many options. Rival leauges have formed but most fail. At one tiemtehre was the NFL and USFL both competing for players. Being drafted by an NFL team means only that NFL team has a crack at you. You could always go to the USFL.

Salary caps and such are internal control that the leagues have on their franchises.


If you want to talk about free market intervention then take a look at college sports.

 

[Malachi151]

Actually sports can never be a free market because they manage the size of the industry. The NBA, ro whoever regualtes new teams and how many teams there can be in order to keep profits high. They intentionally under supply the market in order to create high demand, and thus high profits.

You see, sports is not like production of cars. In sports they intnetionally keep a small group of teams in order to keep prices high.

What would happen if they had 10,000 basketball teams? Basketball players would not be paid millions of dollars. Sports works the way it does because of the media, which allows them to keep a small number of teams and players and still meet demand.

Before TV athletes hardly made any money, now they make millions for doing the same thing athletes did 70 years ago because of the media.

Anyway, sports is a good example in a lot of ways as to why regulations are good and how regulations make a more fair and better running system. Not only how pay is done in sports, like salary caps and team spending limits, but sports rules in general.

You have rules in sports, just like in econmics, to create a fair system that promotes healthy competition. If they take all the rules away then you have chaos and might makes right. Take away the rules and Shaq can just run the ball up and down the court like a football players adn punch people in the face to knock them out, etc. Image sports with no rules and compare that to the free-market economy. You get the same idea.