Sports Industry

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Sports Industry

Athletic activities have long been part of all societies, but it was not until the early twentieth century that professional team sports began to develop. Since then, the top levels of basketball, football (soccer in North America), baseball, hockey, and North American football have become widely popular professional activities that have attracted the attention of economists.

While professional sports grew in the first half of the twentieth century, a major turning point came in the 1960s when lucrative television contracts began to greatly increase team revenues. Revenues were no longer limited by the number of seats in the stadium or arena. Players’ salaries later increased rapidly. Economists’ interest in the sports sector did not begin in earnest until the 1990s, largely as a result of the increased involvement of the public sector in financing professional sports facilities in the United States. The first economics journal in the field, the Journal of Sports Economics, began publication in 2000.

GROWTH OF PUBLIC FUNDING

The policy issue that has attracted the most attention from economists is the growth of public funding of stadiums and arenas in the United States, funding that is based on the proposition that professional teams have a significant economic impact on a city.

The sports industries argue that teams raise incomes and employment in host cities and that publicly funded facilities, and perhaps tax concessions, are a good investment for an urban area. If these benefits are the carrot, the stick is the threat to move a team to a more hospitable city. To make this a credible threat, leagues typically keep in reserve at least one city that is anxious to host a team. As a result, many cities have provided subsidized facilities, with price tags in the hundreds of millions of dollars.

Economists have undertaken many studies of whether these subsidies are warranted. There is little difference in their results, which conclude that teams have either a slightly negative or no discernable impact on a city’s economy. Rodney D. Fort discussed some of these studies in his book Sports Economics (2006).

A number of factors explain these findings. Perhaps the most important is that team-related spending by local residents is still spent, but on other goods and services, in the absence of a local team. In addition, professional sports as a tourist attraction are overrated; while visitors attend games, they usually come to the city for other reasons and enjoy games while they are in town. Finally, much of a team’s revenue is spent outside its city, both for away games and for the earnings of players who live elsewhere in the off-season.

PLAYER MARKETS

A second major area of interest to economists is the analysis of the markets for players. These markets provide examples of shifting market structures and changing claims to income. For many years, teams held monopsony power, the power that comes to a single buyer, in the market for players. This power came from player drafts and reserve clauses.

The player draft is a system in which teams in a league select (“draft”) incoming players in an ordered fashion, usually in reverse order of finish in the last season: the team that finishes last gets the first draft choice for the next year. A player may sign only with the team that drafts him, and that rule applies even when a team trades or sells a draft choice to another team.

The reserve clause, which originated in professional baseball in 1877, bound a player to the team with which he signed his first contract, usually the team that drafted him. While the team had the power to trade the player or to sell his contract, the player was not able to sign with another team even when his contract expired. As the only buyer, a team held complete monopsony power and was thus able to keep salaries low.

Leagues argued that these restrictions on player movement improved competitive balance across teams. In fact, however, economic markets still functioned. Teams traded both draft choices and players. As Fort pointed out in Sports Economics, there is no statistically significant difference in competitive balance before and after draft systems were in place in the National Football League and in Major League Baseball. Rich, winning teams have tended to buy good players and maintain their winning ways.

Teams’ monopsony powers were reduced by the growth of player unions in the 1960s and 1970s. There have been player strikes and owner lockouts in several sports. As a result, the markets for players have changed.

Reserve clauses began to break down in baseball in the late 1970s, and other sports followed. While player drafts still operate, reserve clauses bind a player to a team for a limited number of years. Players now become free agents after several years in the league and are able to change teams and to negotiate their own contracts.

As a result, salaries are much higher than they once were. Michael Leeds and Peter Von Allmen cited examples in The Economics of Sports (2005). Average annual salaries in the United States in 2002 ranged from a low of $1.3 million in the National Football League to a high of $4.5 million in the National Basketball Association. At the same time in Europe, ordinary soccer players earned from $600,000 to over $1 million dollars annually, plus bonuses. Star players in all sports earn far more, as they attract more fans and increase box office and television revenues. It is not clear whether these salary levels will continue in all sports, as the 2004 to 2005 season-long lockout in the National Hockey League has resulted in team salary caps.

SCANDALS

Two problems continue to plague major league sports, despite the efforts of many organizations. First, there are scandals arising from the use of performance-enhancing drugs; in 2006 alone, for example, there were widespread doping allegations in major league baseball and in the Tour de France cycling race. Doping scandals have led to questions regarding the legitimacy of records set by players or teams later found to have been using performance-enhancing drugs. Second, and more infrequently, there is game fixing, usually associated with gambling. In 2006, for example, a widespread game fixing scandal arose in football (soccer) in Italy, involving several of the country’s top-level teams.

There are similar problems in amateur sports, where success may bring present or future financial rewards. In some sports it is lucrative advertising contracts for “amateur” athletes. In others, such as American football, universities are training grounds for professional athletes, and it is the promise of future benefits that tempts some players to use performance-enhancing drugs.

Politics plays a key role in international sports. At various times, countries have boycotted the Olympic Games, as in the Moscow Games of 1980. Votes to award the Olympic Games to a city are often a very political matter, sometimes associated with charges of bribery, as in the case of the 2002 Winter Games awarded to Salt Lake City, Utah.

These problems aside, markets in sports industries operate as understood by economic theory. Each team in a professional sport has some monopoly power as the only seller of the sport in its home city. A team also has some monopsony power as one of a small number of buyers of player talent. After a few years, ordinary players have market power in the sale of their services, augmented by union contracts. A very good player has considerable power as his marginal revenue product exceeds that of other players. But all this likely matters little to fans, the final purchasers of the industries’ outputs. Fans, after all, do not cheer for markets, they cheer for their home team.

SEE ALSO Entertainment Industry; Industry; Olympic Games