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Fixing Baseball's Competitive Balance Problem
by Andrew M. Alexander
11 August 2003May the Best Team Win

A review of Andrew Zimbalist's book recommending repeal of baseball's antitrust exemption, May the Best Team Win: Baseball Economics and Public Policy.

Let’s suppose, for the sake of argument, that the Professional Bowlers Association Tour features the best bowlers in the world and attracts more bowling fans than any other tour.  Suppose that the PBA Tour is so well-established that competing tours fail to attract top-level bowlers to enter their events.

How would you feel if the PBA started charging higher ticket prices at tour events, raised food and beverage prices, sold television rights to the highest bidder (including cable television), and limited the number of tour events to increase demand for top-level bowling.  Bowling fans would be outraged.  Would such behavior violate the nation’s antitrust laws?  Should the Justice Department intervene?  What if the sport was not bowling, but Major League Baseball?

Andrew Zimbalist, the author of May the Best Team Win: Baseball Economics and Public Policy, would probably favor regulation of the PBA if it was indeed the most prominent bowling tour.  And Major League Baseball, as the only provider of “top-level baseball,” is a monopoly that should be subjected to antitrust regulation, according to Zimbalist.  Baseball’s monopoly position, says Zimbalist, results in higher prices for tickets, food, and cable television, and is responsible for baseball’s competitive balance problem.  The solution to all of these problems is for Congress to repeal baseball’s antitrust exemption.

But is baseball really a monopoly, and do professional sports leagues require antitrust regulation?  Do sports fans really need government protection to prevent themselves from spending too much on sports entertainment?  And isn’t the solution to baseball’s competitive balance problem a salary cap or strong luxury tax?

Most baseball fans agree that Major League Baseball is in some sort of trouble.  After the 1994-1995 work stoppage, average attendance per game declined from 31,612 to 25,021, and 20 of 30 teams saw declines in attendance in last season.  On the other hand, in 2002 average attendance recovered to 30,050 and industry revenues doubled from 1996-2001 (thanks in large part to lucrative television contracts with Fox and ESPN).

Yet the perception remains that baseball is no longer America’s national pastime.  As more and more families are priced out of an evening at the ballpark, and as many teams begin each season with little hope of winning their division, many fans are simply losing interest in the sport.  The free-spending New York Yankees, whose $157 million payroll contrasts sharply with the rest of the league, are widely viewed as the primary example of competitive imbalance in baseball.  The American League East, in which the Yankees play, is a shocking example of competitive imbalance:

Won-Loss Record on 8/11
New York Yankees
$157 million
Boston Red Sox
$101 million
Baltimore Orioles
$68 million
Toronto Blue Jays
$28 million
Tampa Bay Devil Rays
$19 million

It should be noted that $12.4 million of the Orioles’ payroll is going to Albert Belle, who is retired.

For Zimbalist, the roots of baseball’s problems are clear: Major League Baseball is an unregulated monopoly.  The Supreme Court’s 1922 Federal Baseball decision exempted MLB from the nation’s antitrust laws on the grounds that baseball did not constitute “interstate commerce;”  baseball has enjoyed exempt status ever since.  This exemption is unique to MLB; football fans may recall that Oakland Raiders owner Al Davis successfully brought an antitrust suit against the NFL and was able to move his team to Los Angeles in 1980.  Applying antitrust law, the judge in that case held that the NFL engaged in an “unreasonable restraint of trade” by preventing the Raiders from moving out of Oakland.  If Congress were to remove MLB’s antitrust exemption, MLB would be unable to prevent teams from changing cities – except when preventing such movement was “reasonable.”

Like most monopolists, MLB artificially restricts supply to increase demand, according to Zimbalist.  The “restriction of supply” takes the form of limiting the number of Major League ballclubs.  The most glaring example of this restraint on trade is the lack of a baseball team in Washington, DC, the nation’s sixth-largest market.  According to Zimbalist, MLB uses Washington as economic leverage against current baseball cities.  MLB threatens to relocate teams to Washington if current host cities fail to publicly finance stadiums for their teams.  On the other hand, if MLB were subject to antitrust regulation, it would be unable to prevent the creation of an expansion team in Washington unless such action was found to be “reasonable.”  Nor could MLB prevent an owner from moving its team to Washington -- or any other city -- unless such action was deemed “reasonable.”

The MLB “monopoly” results in higher prices for baseball fans, according to Zimbalist. Because each franchise enjoys exclusive marketing rights within its territory, each team can extract monopoly prices for tickets, food, beverages, and parking.  Each team can also extract the monopoly price when selling radio and television broadcasting rights in their market.  In short, consumers pay a much higher price for baseball entertainment than they would if baseball was regulated.

Monopolies often are run by greedy owners, and Zimbalist’s characterization of MLB’s owners is generally consistent with this stereotype.  Not content to extract as much cash as possible from fans, baseball’s owners are also constantly trying to break the union:

Other than the 1972 strike that affected the regular season for nine days, all subsequent work stoppages in baseball ensued from owner demands for change.  Since the players won free agency in 1976, during each contact negotiation they have been confronted by an ownership demand that free agency be abridged in one way or another.  The owners always came to the table without a cohesive vision for the industry but with a demand for unilateral sacrifice by the players.  In practice, as implemented by the commissioner’s office, the subtext was often to break the union.  Along the way, the owners cried poverty as the players experienced ownership collusion and saw franchise values rising.

Zimbalist has singular contempt for Bud Selig, the current commissioner of baseball and former owner of the Milwaukee Brewers.  Zimbalist rehashes all the usual allegations against Selig, using language that suggests he is merely reporting the opinions of others.  With regard to Selig’s proposal to contract the Minnesota Twins, Zimbalist reports, “Some said that Selig had a conflict of interest.”  Regarding Selig’s negotiation strategy before the potential 2002 work stoppage, Zimbalist writes, “To some it seemed that Selig was not interested in negotiating anything, but that his real interest was in busting the union.”  Zimbalist writes that Selig “repeatedly violated an internal baseball rule that prevents owners from making loans to each other…without first receiving the permission of the commissioner and all of the other owners,” labels a Selig statement on the minimum salary issue as “a characteristic obfuscatory comment,” and starts one sentence, “When Selig pretended that he was being forthcoming with MLB’s financial numbers in December 2001…” 

But even if Zimbalist’s contempt for Selig is thinly veiled, he is correct in identifying MLB’s primary problem -- competitive imbalance.  Zimbalist argues that the imbalance is not a necessary consequence of free agency, which became a right of the players in 1976.  Free agency made the league more competitive by making it more expensive for owners to hold together a good team, he argues.  This argument would be compelling if each franchise was spending approximately the same amount of money on payroll, as do teams in the NFL.  However, because high-payroll teams like the Yankees spend millions more than low-payroll teams, Zimbalist's argument makes little sense.  Free agency is the mechanism by which high-revenue teams like the Yankees acquire the best available talent, such as Jeremy Giambi and Hideki Matsui, during the off-season.  Free agency certainly contributes to the competitive balance problem.

The competitive balance problem seems to have emerged as high-revenue teams learned how to take advantage of their exclusive territories to greatly increase local (non-shared) revenues through local cable contracts.  The Yankees contract with the YES Network is worth at least $42 million a year, a source of income that is unmatched by any other team.

And the competitive imbalance problem is acute.  From 1995-2001, only four teams from the lower half of the payrolls reached the playoffs.  Those four teams won only five games, and no team outside the top quartile won a single World Series.  (The 2002 Anaheim Angels and San Francisco Giants had the ninth and fourteenth highest payrolls, respectively.) 

For Zimbalist, competitive imbalance is the heart of baseball’s problem.  According to his baseball-as-monopoly theory, teams like the Yankees exploit their exclusive rights to compete for revenues in their territories.  Take away baseball’s antitrust exemption, and another team would enter the New York City market, siphoning revenues from the Yankees and remedying baseball’s competitive balance problem.

The 2002 collective bargaining agreement made small steps toward remedying the competitive balance problem.  The luxury tax taxes teams whose payroll exceeds $117 million in 2003 at a 17.5% rate, and teams who are over the luxury tax for three consecutive seasons will be taxed at a 40% rate.  From 2003-2006, about one billion dollars will be transferred from high-revenue to low-revenue teams.  But as the Yankees’ $157 million payroll shows, the agreement does not go far enough in remedying the competitive balance problem.  And the luxury tax threshold increases each season through 2006, meaning few teams besides the Yankees will feel its effects.

What is needed is not antitrust regulation but a salary cap or a strong luxury tax.  Repealing MLB’s antitrust exemption seems like a way of avoiding confrontation with those most responsible with maintaining the status quo – the players union and the high-revenue owners.

And it is not clear why Zimbalist thinks MLB is a “monopoly” anyway.  He states that baseball is a monopoly because “it is the only provider of top-level professional baseball in the country.”  But so is the Professional Bowlers Tour, and is anyone clamoring for increased antitrust scrutiny of bowlers?

The answer to baseball’s competitive balance problem is simple: a salary cap and/or a stronger luxury tax.  What is needed is the cooperation of the players union and the high-revenue teams.  Consumers don’t need antitrust protection when deciding whether to attend a bowling event, and I doubt they need it when deciding whether to go out to the ballpark.

May the Best Team Win is available at Amazon.com.

Andrew Alexander is Co-Editor of IntellectualConservative.

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