Baseball: How To Level The Playing Field

Since the start of the strike by Major League Baseball players and the premature death of the season, sports writers, TV analysts, and fans have been busy assigning blame and taking sides--without addressing the underlying economic issues and special problems of baseball and other team sports.

The stubbornness and solidarity of owners during the strike have been blamed on the special exemption from antitrust laws granted to Major League Baseball in 1922 by the U.S. Supreme Court. But baseball isn't alone in its immunity to antitrust litigation: The Clayton Antitrust Act of 1914 exempted all unions, including sports unions. And other sports, even those subject to antitrust litigation, have had similar conflicts: Witness the 1987 National Football League players' strike.

The most important distinguishing characteristic of the economics of baseball has nothing to do with antitrust: It is that baseball fans, like fans of other team sports, often care less about the absolute quality of performance by players and teams than about their records relative to the teams they compete against. This consideration differs from those involved in most other products and services. Will the team they root for win a lot of games, make the playoffs, and possibly even win the World Series? Will their favorite batter lead the league, or will a star pitcher win more than 20 games?

A TIGHT RACE. The sensitivity of revenues from attendance and television to relative performance implies that revenues are greater when games are close, races are tight, and perhaps also when the teams that win the World Series or championships in other sports tend to change from year to year. Owners oppose free agency and unfettered competition for rookies, arguing that races would not be close because teams in large markets or with deep pockets would buy up the best free agents and rookies. Yet studies find that the tightness of races and difference in won-lost records have not changed much since baseball went to free agency in 1976.

The importance of relative performance also means that spending by teams can degenerate into an "arms race." Each team alone has an incentive to dm a bit more to get a competitive edge, but no team may get an edge on the competition if all spend more. Just as nations can increase their weapons without changing the balance of power, the ranking of teams in a sports race may be unchanged when they all spend more on players, farm teams, scouting, managers, and in other ways.

Owners and players need to find a set of rules that limits spending and encourages competition without tilting the labor-management balance too much to either side. Owners believe the solution is a cap on team salaries, but players correctly perceive that such caps are too rigid.

Strikes and lockouts might occur even with the best of intentions, as players and teams struggle over the division of sports revenues. Although the median salary of players is about $500,000, even well-paid employees may want to strike and use other tactics to earn more, especially when their careers last only a few years. And while owners are frequently successful businesspeople who get a thrill from involvement in sports, they still want to keep down costs and earn a reasonable return on their investments.

FOR RICH OR FOR WORSE. Instead of a salary cap, baseball should tax total spending by major league teams on players, player development, and anything else that may improve a team's record. For example, they might impose a 33% tax on all spending for those purposes by a team above $40 million, approximately the average amount spent by Major League Baseball teams in these ways. At the end of the negotiations between owners and players, the union sprang this kind of tax on the owners.

Such a tax would discourage excessive spending of the arms-race variety. In addition, since the tax revenue collected by the leagues would be distributed to all teams, it would help compensate owners in small markets for the greater resources of the New York Yankees, Los Afgeles Dodgers, and other teams in large markets.

But a tax on spending is not enough, for it does not give badly run teams an added financial incentive to improve their records and make the races closer. This can be accomplished with a second tax on teams that perform below average.

The more games a team lost in the previous year or two, the larger would be the amount it would be obligated to pay into the league's treasury. Such a tax would encourage weak teams to try harder, whereas the rookie draft and certain other rules of Major League Baseball favor rather than punish teams that

do badly. When weak teams are favored, they have less incentive to become more competitive through their own actions--such as improving the quality of their decisions and management.

The predictable result: close and efficient competition without a salary cap and without shifting the balance of power toward owners.

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