Sports Econ

Collective Bargaining Agreement (CBA)
Agreement between sports league’s players (represented by Trade Unions) and league owners. It establishes the specific elements of how the league will operate, such as: division of league revenue, team salary cap, free agency requirements…

(Larry) Bird Exception
Allows a team to resign one of its own free agents for any salary (up to the individual maximum that was introduced in 1999) regardless of the team salary cap. This exception, by giving a player’s existing team a large advantage in the competition to resign him, intends to preserve continuity to team rosters and to enhance competitive balance (because teams that sign star amateur players have a better, long-term chance to hold on to the player.) Today, a player must be with a team for three years before the team can use the Bird exception. From the owners’ perspective, one problem with this exception is that it allows teams’ payrolls to go way above the level stipulated by the salary cap

Allows (NBA) team to re-sign one of its own free agent players without regard to the salary cap. Exceptions from the Salary Cap, free agent is re-signed by that team at an amount up to maximum salary. Bird Rule, applys to players who have completed 3 seasons in NBA without being waived or having changed teams. Contracts cannot exceed 6 years. Originated from Boston Celtics who resigned their player Larry Bird.

Mid-level exception (MLE)
NBA, can use this to sign a player once a year to a contract at maximum amount and specified length, both of which depend on the team’s cap status. An exception from the salary cap which is devised to control the team’s costs.

Competitive Balance
Measures Include:
-Number of different teams that have won title
-Number of different team who reached an advanced stage (playoffs/post-season)
-Number of teams that have been consistently bad
-Correlation between team’s records over two-year period
-How often teams finish with winning records
-How closely grouped teams are around the .500 mark in a season
-How varied is the group of competing teams for a certain title over a period of time
Sports league must have competitive balance and parity across its teams, without balance there will not be the necessary uncertainty of outcome in individual games and season to maintain fan interes.
It isn’t equality of team strength, but equal opportunity. A league seeking to maximize its revenue will not want each of its teams to have an equal chance to win the championships, rather the teams with larger ‘markets’

Rozelle Rule
Falls under the category of Reserve clause. NFL, named after Pete Rozelle, commissioner who implemented the rule, which allows the commissioner to compensate a team whose free agent was signed away by another team by taking something of equivalent value from the signing team. Most often this is a draft pick given to the team losing the free agent. Fear of losing out on this a future high draft pick limited free agency. This rule was replaced by “Plan B” which allows a team to name 37 man roster the reserve clause would apply to.

Promotion/Relegation System
English Premier League system. Ability for teams to transfer or move between two leagues (upper/lower league) based on their performance the previous year. From this model tendencies such as stronger consumer demand, higher player salaries, better players, more competitive balance, and lower public subsidies, ensue.
Because team membership is not fixed, team have no monopoly control over there territories. A new team can always be established. Also creates fan confidence that the league is producing the highest possible quality of product.

Reverse-Order Draft (Competitive Balance policy/tool)
Teams with the worst record from the previous season have the ability to pick drafts first. This is a competitive balance policy/tool, to promote competitiveness of the teams by allowing worse teams to develop better players through the drafting order. NFL and MLB both use this, it is also known as reverse-record draft.

Salary Cap
Competitive Balance policy/tool:
Agreement or rule that limits the amount of money a team can spend on its players’ salaries.

Luxury tax
-Tax placed on teams often who do not have a salary cap. This surcharge is placed on teams’ aggregate payroll to the extent to which it exceeds a predetermined level of payroll. Intended to prevent high profile teams from signing all the best players, competitive Balance measure.
-For every dollar a team spends above the tax threshold, they must also pay some fraction to the league. This system is used to discourage teams from greatly exceeding the tax threshold, with the goal of ensuring parity between large and small market teams.
-It is paid by high spending teams — those with a team salary exceeding a predetermined tax level.

Unbalanced Schedule
Competitive balance policy/tool:
A schedule in NFL especially which is unbalanced so the that teams play other teams closer to their level. Better teams/better teams while mediocre teams play other mediocre teams, this increases uncertainty of outcome in the game

Revenue Sharing
Competitive Balance policy/tool:
It is designed to help redistribute money from high-revenue teams (generally in big markets) to needier teams (generally in small markets.
NFL- All broadcasting and licensing revenues are shared equally among all teams.

Free Agency
Player who is able to sign with any team or club, not under any specific contract

Major Spots Leagues

Profit maximization and Price Discrimination
Anti-trust exemption for MLB

Anti-Trust Laws/Exemption
Anti-trust Laws are instituted to prevent corporations or industries from fixing prices and forming a cartel. The anti-trust laws are also instituted to encourage competition.
MLB has an exemption from a 1922 court case which has been upheld since then and was first challenged in 1972.

1890 Sherman Anti-Trust Act Section I & II
Section One: Absurd Clause, forbids any combination of restrictive trade.
Section Two Violation: if combination results n monopolies
Commerce Clause: Government has the right to regulate international trade and commerce among/between states (inter-state commerce)

Trade Unions
Negotiate CBAs and represent the players interests. Trade Unions are protected from antitrust liability through the Clayton act of 1914

SSNIP (Small but Significant, Non-transitory Increase in Price)
Function of monopolies, company’s ability to raise its price by 5% for example without decreasing its profits/profitability than it has monopoly pricing power.

Barriers of entry
Monopolization. Restricting new teams from entering the league. Include: Location, Branding, Salaries, Television deals, player’s unions, and facilities

Rule of Reason
Since Sherman Act Section 1 is an absurd clause, as lawyers form together under one law firm, there are revisions to the Sherman Act which include this clause that deems section one “unreasonable” and applies this rule, which balances impact of combination on both sides and rules reasonably.

Arbitration & Final Offer Arbitration
Disputes are taken to an independent arbitrator to be resolved.

Reserve Clause 1879
This clause contained in all standard player contracts that upon the contract’s expiration the rights to the player were to be retained by the team to which he had been signed. THis meant that both the player’s obligation to play for the team as well as the team’s obligation to pay the player were terminated, the player was not free to enter into another contract with other team. The player had the choice to negotiate a new contract to play for the same team or ask to be released or traded.

Sports Broadcasting Act
This 1961 piece of legislation exempted the NFL, NHL, NBA and MLB (which was presumably already exempt due to it 1922 exemption, reaffirmed in 1952) from antitrust statute for the purpose of allowing teams in a league to come together to package their television rights and to sell them as a cartel. The details of this broadcasting exemption made it clear that it applied only to over-the-air, free television. The intention was twofold: to allow leagues to pool broadcasting rights fees and divide them equally in order to promote greater balance and to increase the amount of television coverage which otherwise may have been curtailed since the home team was construed to have the copyright on the game.

Non-statutory Exemption v. Statutory Exemption
Antitrust exemption ensured by Clayton Act of 1914, the “statutory” labor exemption allows unions to enter into agreements which may create monopolistic practice regarding the working conditions of the employees it represents.
“Non-statutory” exemption, more applicable exemption to sports, is judicially-derived expansion of the labor exemption that protects union activity from antitrust liability. This exemption is the crux of nearly all antitrust actions in pro sports (not including baseball). It is based on the policy that favors collective bargaining and gives it preference over antitrust laws. Any union-management agreement that was a product of good faith negotiation will receive protection from antitrust laws, meaning that union/provisions of the agreement cannot be attacked as collusive or anti-competitive. Example: Salary cap is agreed by both sides, it could technically be a violation of antitrust, but since cap was part of CBA negotiated in good faith and agreed to by both sides, the salary cap cannot be violated.

Invariance Principle
This principle basically states that the ultimate allocation of players across the teams will not vary whether the league has a reserve clause or a free agency based system. The reason is that players will eventually find their way to the team where they have the highest marginal revenue product. The difference between the reserve clause and free agency systems is that in the former the players’ value accrues to the owner and in the latter it accrues to the player. When there are restrictions on trading and significant transactions costs, the invariance principle will not operate perfectly. Nonetheless, the available evidence in MLB and the other leagues is that the advent of free agency did not create more imbalance in the allocation of talent.

Player talent in the league will move to the team where he is most valued, invariant of team revenues. End up with the team where they have the highest use, changes revenue distribution amongst teams but not competitive balance.

Basketball Related Income: Total revenue stream of basketball related events including everything from broadcasting to naming rights to gate revenue. The BRI is used to set the salary cap of the player’s at 51% and revenue-sharing payments and expansion fees are excluded.

Define Gross Revenue: includes national tv and radio, and gate revenues. Initially introduced with first salary cap in the NBA for 1984-85. Subsequently adopted with first NFL salary cap in 1994. It is the first and the narrowest definition of leaguewide revenue used as a basis for a cap. The first NBA cap equaled (.53 x DGR)/( # of teams) and the floor was same but used .48 instead of .53. The NBA and the NFL subsequently broadened the definitions of what should be included in revenue.
All revenue generated by a league/team, NFL has something known as All Revenue (AR) now which includes basically all revenue streams.

Posting System
This is the 1998 system that MLB agreed to with Japanese Professional Baseball that calls for Japanese teams to “post” players they are willing to sell to MLB teams. MLB teams bid on the player and the highest bidder (and only the highest bidder) then gets to try to make a deal with the player. Only if a deal is consummated with the player, the MLB team pays the bid to the Japanese team. The system is also in place with South Korean baseball. The system has a number of defects: it encourages blocking by MLB teams which reduces the chance that star Japanese players come to MLB; it encourages imprudently long contracts; it leads to undercompensation of the player and overcompensation of the team owner in Japan, inter alia.

Japanese player is “posted” or made available by his team/league, MLB place bids to the team for this player. Highest bid wins the negotiation rights to that player for 30 days where the player’s contract is negotiated. If a contract is established MLB team has to pay both the fee and the player’s contract, if it falls through no fees are paid and the Japanese (or S. Korean now too) player is able to return to his team.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
All interest, taxes, depreciation, and amortization entries in the income statement are reversed out fo bottom-line net income. It is used to measure and enable comparison between companies or teams by canceling out effects of different asset bases (canceling depreciation), different takeover histories (canceling amortization), effects due to different tax structures as well as different capital structures (canceling interest payments).

Escrow System
Introduced in the NBA CBA in 1999 and picked up, in an amended form, in the 2005 NHL CBA. The escrow is intended to serve as a break on the growth of the player salary share in defined revenues. It hockey it serves as a guarantor. The basic idea is for the league to withhold a percentage of the players’ contracted salaries some or all of which might not be returned, if the players’ share went above a pre-defined threshold
Controls the amount of revenue that goes directly to the player’s, it is used to ensure that player’s revenues/salaries and benefits do not exceed the guaranteed share of the BRI. To do this 10% of the player’s benefits/salaries are withheld and set into an escrow account. End of the season the player’s revenue/benefits are compared to the BRI and if the team went over the money goes to the owner, and the rest returns to the player. NBA and NHL

Right of 1st Refusal
Contractual right that gives a baseball team, for example, the right of first refusal on a ballplayer’s contract, this means that the club can make the first offer, or even match other offers, before the player signs/plays for another team.

Amnesty Player
NBA can waive on player and remove his salary from the salary cap, enabling the team to sign a new player or escape heavy luxury taxing. Still upholding contract with amnesty player, but enables team to sign a new free agent. However, some salary caps are exceeded to such a great extent that even under this provision, the team cannot sign another free agent.

Marvin Miller
Executive director of the MLBPA, transformed the union into the strongest trade union in the country. Negotiated first CBA, raising salary prices, he also introduced arbitration into the CBA. Also introduced free agency into the MLB after helping Catfish Hunter sign with Yankees, following years he eradicated Reserve Clause by advising Messersmith and McNally to sit out their next playing year and then sign as free agent. Helped transition from reserve clause to free agency. As an economist, he recognized that there had to be a limited amount of free agents, not every player could be one to effectively use free agency as a tool to increase salaries, too many free agents drive salaries down. He agreed to limit free agency to players with 6+ years of service, knowing that restricting the supply would drive up salaries as owners bid for an annual, finite pool of free agent players.

Bud Selig
MLB commissioner, introduced revenue sharing into the league, merged National and American League into the MLB. During his term as commissioner, he has instituted:
-Realignment of teams into 3 divisions per league, and intro of playoff wild card teams
-Interleague play
-2 new franchises
-Unbalanced schedule
-Home field advantage in World Series granted to the winner of All Star Game in same season
-World Baseball Classic

Curt Flood Act of 1998
A 1998 act of congress and passed into law, named after Curt Flood, the baseball player who challenged the reserve clause in a 1969 that went before the Supreme Court in 1972. Although Flood lost the case, his case unified the PA and gave it momentum to more aggressively pursue free agency. In the 1998 act, it is stipulated that the sphere of labor relations in MLB would not be covered by MLB’s presumed antitrust exemption going forward. Both the players and the owners supported this act in congress with the hopes that without the exemption it would make work stoppages less likely in the future. Namely, the PA would now have an additional weapon — an antitrust challenge — and would not always have to go on strike to defend its interests during an collective bargaining dispute.

Non-statutory Exemption
In contrast to the statutory exemption which comes from the Clayton Act of 1914 and allows unions to exist (despite the fact that they inherently restrain trade), the non-statutory exemption has evolved from court decisions which stipulate that, in arms’ length bargaining, a union can surrender labor market rights in exchange for other benefits. Thus, this exemption is what allows the NFL, NBA and NHL to conduct their amateur drafts (MLB doesn’t need this because of its presumed blanket anti-trust exemption.)

Union Shop
In labor law, this is a unionized shop where the workers are required to join the union once they gain employment in the shop (company). Because workers have to join the union once employed, labor law has been interpreted to grant the union in the shop the ability to bargain over the conditions under which workers enter the shop. In the case of sports leagues, the unions get to bargain over the terms of the amateur draft — terms that usually involve a restraint of trade. In MLB, drafted players go to the minors, not into the union, but MLB has a presumed antitrust exemption and, thus, the amateur draft is protected by the exemption. In football and basketball, the drafted players generally go directly to the majors and the draft is protected in part by union shop law and the nonstatutory exemption. In hockey, drafted players often go to the minor leagues and the legal status of the draft is more complicated.

Seitz Decision
Peter Seitz ruled in 1975 in the Messersmith/McNally arbitration that the players had in effect become free agents by sitting out the 1975. The decision was followed by two unproductive court challenges by MLB and set up both the coming of free agency and the growing acrimony between the players and the owners, which, in turn, led to two decades of labor unrest.

Winner’s Curse
This concept refers to a situation where multiple owners bid for a player’s services and the winner of the contest is deemed to be cursed, because the winner is likely to have overestimated the player’s value by virtue of the fact that the losers all agreed on one thing — the player was worth less.

Joan Kroc and municipal ownership
Joan Kroc inherited ownership of the Padres when her husband Ray Kroc died. After owning the team for several years, largely for real estate/tax planning reasons, she sought to give the team to the city of San Diego. MLB rules prohibited municipal ownership and this rule was protected presumably by MLB’s antitrust exemption. Instead she ended up selling the team to an ownership group led by Tom Werner.

What would have been the impact on team sports leagues in the US if the Supreme Court had agreed with the NFL in American Needle v. NFL and granted all professional team sports single entity status?
This answer might begin with a short explanation of the American Needle case, but this is not necessary. The issue here is how might an exemption from Section 1 of the Sherman Act change the way sports leagues operate. The answer for MLB is the easiest because MLB already has a presumed antitrust exemption and, hence, it might not change its behavior in any significant way. Regarding the other leagues, it may make them more reluctant to allow teams to move to a new city (though the league policies have become pretty well protected by rule of reason cases) and it would protect them in cases such as American Needle, in broadcasting territory allocation, in centralized internet and marketing policies, and so on.

Discuss how the European open sports leagues with promotion/relegation and pan-European competition establish a different dynamic with regard to competitive balance and how that dynamic affects league policies toward revenue sharing.
There are various competitions for fans to root for in Europe: winning the EPL; coming in top 3 or 4 in order to make the following year’s pan-European Champions League; avoiding placing in the bottom three and face relegation to Division II; coming in the top 6 or 7 to make into the Europa competition; competing in the Champions or Europa League if one’s team is in it; competing in the domestic FA cup, inter alia. The downside is that because there is a premium on being successful in the pan-European competitions, this requires the top domestic teams to have superior resources so they can compete against the best European teams, so the EPL and other European soccer leagues do not engage in substantial revenue sharing (most do not even share equally the national TV revenue). Because of this, inequality in outcomes tends to be perpetuated and a quasi-caste system develops wherein there is little turnover among the top clubs. The other interesting element is that because leagues are open, large cities tend to host multiple teams (greater London hosts 6 EPL clubs) and so team strength does not tend to correlate strongly with the size of the local market.

Illustrate graphically how a monopoly reduces output and raises price relative to a competitive industry and, thereby, creates deadweight loss. Discuss one prominent way in which sports leagues exercise monopoly power by reducing output.
Graph is the same as the one provided in class. Probably the best example of an artificial reduction of output in a sport league is in the number of teams. There are more financially viable cities that would like to host teams than there are teams available. The leagues use the artificial scarcity (or the excess demand) to extract public subsidies to support facility construction and favorable lease terms.

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