Competitive Equilibrium In Professional Sports

The role of money and promoting league parity and competitive balance has always been a challenge for professional sports leagues. Sports teams are spread all over the globe, with some teams located in large metropolitan areas which can afford high revenue while others are in small cities which have lower exposure to the outside market. As a result, the financial resources available to teams are significantly different, allowing richer teams to outspend the poorer teams as they can access to more resources to procure more expensive, and likely, better talent, leading to a potential league competitive imbalance. To overcome this issue, leagues have imposed numerous policies, such as setting a limit on teams’ payrolls in the form of a salary

It will investigate whether the new policies introduced in this timeframe and the current system have achieved its proposed aim of promoting a competitive equilibrium in the league. In sport literature the standard definition of competitive equilibrium states that each team has an equal chance of winning a randomly chosen game and this paper will be based on the same concept. As Ross (1997) stated in his studies, competitive balance is a main concern for all General Managers to maintain league sustainability as a more competitive league, represented by a more uncertain outcome, raises the interest of the fans and the quality of the league itself, leading to larger revenues and higher demand for its product. Moreover, having a balanced league, guarantees the survival of small-market teams which have lower resources. This is supported by the studies of Quirk (2004) who found out that those teams that can access to lower resources, suffer from decreased revenues which can cause the team to fail and therefore it could hurt heavily the league itself

Starting with 22 teams based in various US cities, today it has 30 teams, 29 in the USA territory and one in Toronto, Canada. The teams revenues are derived mainly from 1/30 share of league-wide revenue from merchandise, national and overseas TV contracts, from the local TV contracts, sponsorships and gate revenues, and finally, when they are imposed, from the luxury tax payouts. Since teams are located in different areas with varying market sizes, their total revenue can differ significantly due to more lucrative TV contracts, sponsorships and higher ticket sales in metropolitan areas. Economic forces dictate that richer teams can afford to pay more expensive and talented superstars, leading to potentially one way games. Noll (1974) mentioned that as the league has grown in terms of size and revenue, the challenge of maintaining competitive balance is becoming a key factor for a league if it wants to continue promoting fan interest and safeguarding financial sustainability of the