ANDREW ZIMBALIST
An Economic Lesson from the Sports Industry It is a truism, most would say, that sports leagues have one fundamental difference from other industries. In order to produce their output, the teams must cooperate. While Coca Cola can make soft drinks without Pepsi, the Red Sox can’t play games without an opposing team. Not only must the Red Sox have an opposing team for each game, but they need a full league of opponents to conduct a championship season. Further, for the championship season to hold the fans’ interest, there must be a significant degree of uncertainty as to which team will emerge as the winner. This uncertainty is engendered by having a level of competitive balance among the teams. Herein lies a major conundrum of sports leagues. Given that some teams come from large cities with a deep corporate base and others come from smaller cities with an exiguous corporate base, and that all teams compete in the same market for players, how can these teams with very disparate economic underpinnings compete with each other in a meaningful way? Sports leagues have attempted to an-
swer this question in different ways. With varying degrees of success, U.S. leagues have used a combination of a team payroll limits (salary caps), individual player salary limits, franchise debt restrictions, luxury taxes on high payrolls, revenue sharing among the teams, and reverse order amateur drafts, inter alia. European soccer leagues generally employ only minimal revenue sharing and no salary caps; instead, they are organized within each country in a hierarchy of promotion/relegation leagues. The bottom three or so teams in the top league are relegated to the second league the next year, while the top three or so teams in the second league are promoted to the top league. The same interleague mobility applies for the second and third leagues, the third and fourth, and so on. This open system has several effects on competitive balance and fan avidity. First, fans have at least two competitions to keep them interested in the outcome of games: (1) whether their team will finish at the top of its league and (2) whether the team will finish near the bot-
tom and be relegated. In the English Premier League (EPL), the race to finish first is complemented by the race to finish in the top four (the top four clubs compete in the Pan-European Champions League the following year) and in the top seven (the fifth, sixth and seventh best EPL teams normally qualify for the UEFA Europa League competition). On the other end, there are usually six teams that are within a few points of finishing in the bottom three teams during the last several matches of the season. Thus, aside from a handful of clubs in the middle, the fans of a strong majority of the EPL’s twenty clubs have something significant to root for throughout the season. Second, the open European soccer leagues have an automatic market-balancing system. The process by which a team enters a country’s top league is not by buying its way in. It is by working its way up. That is, an entrepreneur sees an opportunity in an available market to build a soccer club. He/she enters the team in a low level league, invests in its players and a facility, and, if the team succeeds, it goes to