WHY LEAGUES? MAKING PLAY AND PROFITS
Leagues enable owners to pursue economic goals and objectives that they cannot pursue as
successfully acting alone, such as setting a season schedule, organizing championships, and
implementing rule changes. Coordinated league activity makes league play happen, but it also
provides owners with many profit opportunities off the field. We cover the general idea behind
such cooperation by team owners in this section, but the actual elements of that cooperation re
ceive separate attention in subsequent sections of this chapter.
SingleEntity Cooperation: Making League Play Happen
Some cooperative actions among teams must happen for league play to occur at all. This type
of activity is called singleentity cooperation. Singleentity cooperation defines the actions that
owners must take to make league play happen in the first place—setting schedules, the rules of
play, and the structure of championships. However, even at this seemingly innocuous level of
creating league play, economic issues arise.
Setting the Schedule Setting the schedule is the most basic form of singleentity cooperation. If
team owners cannot cooperate with each other to set a schedule, then league play, by defini
tion, cannot occur. Even this type of singleentity cooperation has economic impacts. Again in
his congressional testimony (NFL Report, 1999, p. 2), George Halas empha sized that bal
anced scheduling, home and away, was essential to the success of the league. Originally, all
owners wanted to play the biggest drawing teams (home and away), but Halas convinced them
that the season would be more interesting to fans, and stabilize more teams financially, with
such a balanced scheduling approach.
Halas’ wisdom here is that leagues need to act in their singleentity capacity to include all teams
in the schedule. If only larger teams played each other, smallermarket teams would fail eco
nomically. In trying to generate widespread fan interest and league growth, Halas under stood
that stronger teams must play weaker teams as well as other strong teams in order to cultivate
broad fan interest. This broad fan interest is especially important for championship play at the
end of the season.
Another important element in setting the schedule is establishing season length. There is noth
ing magical about the length of seasons except that it helps determine profits from the regular
season and the playoffs. Season lengths certainly have changed over time. The season length
in the American League increased from 154 games to 162 games in 1961, a 5 percent increase
(the National League followed suit the next year). The most recent change in the NFL season
(there have been many over the years) was from 14 to 16 games after 1976, a 14 percent in
crease.
Setting the Rules
If teams play under different rules, they aren’t playing the same game. In
addition, there must be officials and appeals for the sake of fairness. Once again, however,
even this basic singleentity determination has economic elements. Rule changes alter the bal
ance between offense and defense in producing winning margins. In turn, this changes the pat
tern of winning between teams, which is what fans pay to see.
Sports economics pioneer Gerald Scully (1989) details the economic implications of changes in
playing rules. For example, narrowing the strike zone would be expected to favor hitting relative
to pitching. In Table 5.1, the “predicted” column shows what Scully predicted would happen to
batting average and earned run average due to narrowing the strike zone in 1969. Batting aver
ages should rise because a good pitch is easier to detect in a smaller zone. Pitchers should fare
worse, with a higher earned run average. As Table 5.1 shows, both of these results did occur in
1969.
The designated hitter rule was another important change in the American League, relative to the
National League. In the American League, teams are allowed to designate a hitter to take the
pitcher’s place in the lineup. This means that there is one more skilled batter in American
League lineups than National League lineups. Scully (1989) points out that measures of hit
ting, especially slugging average, increased significantly in the American League over the Na
tional League after the designated hitter rule was implemented.
What do all of these rule changes have to do with economics? In narrowing the strike zone or
adopting the designated hitter, the offense was favored because that’s what owners thought
fans would want and pay to see. If fans get bored with the length of games, shorten them. If
fans want more action, institute more offense if it is affordable relative to the value created. This
is surely what the NHL decided when it changed the final standings point system so that both
teams get 1 point when a game goes to overtime, and the winner gets an additional point, start
ing with the 1999–2000 season. While more games should go into overtime with this change
(you still get a point for tying rather than losing!), scoring during overtime should rise since there
is the additional overtime point. Banerjee, Swinnen, and Weersink (2007) docu ment that this is
precisely what occurred under the altered point assignment.
Cooperation and Championships
The ultimate indicator of fan demand for winning is the
crowning of a league champion. Therefore, determining a champion is very economically valu
able. However, the way championships are structured also produces economic incentives for
team owners. Relative to a league that just crowns the team with the highest winning percent as
its champion, adding playoffs does two things: (1) It extends the season and fan interest for a
few teams, and (2) it reduces the returns to buying talent.
James Quirk and I (Fort and Quirk, 1995) found that playoffs reduce the chances that the team
with the highest winning percent will become the eventual league champion, even though those
chances remain higher than 50/50. This means that the expected value of talent falls, too, caus
ing owners to choose lower talent levels. One implication of this is that owners have a greatly
reduced incentive to hoard talent to ensure the
highest winning percent relative to the rest of the teams in the league. Finally, the number of
playoff games also is a choice variable for leagues. For example, prior
to 1968, there were no playoffs in MLB. Indeed, there were no divisions in either the American
League or National League, so the winners of each league just met in the World Series. The
American League and National League championship series started after divisions were created
in 1968. With the 1992 expansion, MLB added another round of playoffs after three divisions
were created in each league. Once again, these rounds generate additional revenues for a few
owners and impact the talent choices of all owners in the league. Similar increases in the num
ber of cham pionship rounds have been adopted by the other major professional leagues over
time as well.
Joint Venture Cooperation: The Economics of League Behavior
Walter Neale (1964) was the first to recognize the important relationship between single entity
action and economic outcomes, naming it the “peculiar economics” of team sports. But this pe
culiar economics only begins with the singleentity actions of owners in leagues. Once owners
act together in pro leagues to set the stage for competition on the field, they may also act to
gether to raise profits for member owners.
All cooperative actions that do not make play happen are called joint ventures. In this section,
we will set up the idea of joint ventures, the main categories of which are covered later in the
chap ter. In a joint venture, all owners in the league surrender part of their autonomy to allow
the league
to act on their behalf. However, the objectives of joint ventures can also be pursued individually
by owners rather than through the league. Given that, economic intuition suggests that joint ven
tures are cooperative acts aimed at increasing profits relative to acting individually. Singleentity
action helps create efficient schedules, rules, and championships. However, since the time of
Adam Smith, we’ve known that joint venture cooperation can facilitate market power and its inef
ficiency (Wealth of Nations, Book I, Chapter X), “People of the same trade seldom meet to
gether . . . but the conversation ends in . . . some contrivance to raise prices . . . [Government]
ought to do nothing to facilitate such assemblies, much less render them necessary.” Market
power doesn’t have to be the result of joint venture actions; it just ends up that way.
Owners really do control their leagues. If leagues do not make owners better off than if they
were acting alone, the owners will simply leave the league. A variation on this theme is seces
sion from the current league and creation of another. This doesn’t happen often because
leagues are good at doing what owners require, but it does happen. In the 1940s, the National
Basketball League (NBL) faced a rival, the Basketball Association of America (BAA) (Quirk and
Fort, 1992). The BAA, composed primarily of arena owners, had a lock on the largest and most
valuable venues. Defection to the BAA by NBL teams because their own league could not se
cure these profitable venues led to the demise of the NBL. After the 1947–1948 season, the four
strongest NBL franchises went over to the BAA. After the next season, six more NBL teams de
fected. The NBL died because it hadn’t satisfied one of the most basic requirements for its
member owners, namely, a chance to play in the most lucra tive venues. The Learning High
light: Challenging European Football’s Power Structure presents
