Abstract
In this paper we develop an economic model of a professional sports league, in which the teams acquire playing talent in an external market. There have been several earlier formulations of this open model and all rely upon an inappropriately specified revenue function. Team revenues should depend upon the absolute quality of the teams, as well as their relative quality measured by win-percent. An inference that has been cited widely in this literature is that revenue sharing increases competitive inequality. We show that this analysis is flawed. If the revenue function is specified appropriately, gate revenue sharing always reduces competitive inequality.
Highlights
This paper presents new results for an economic model of a professional sports league, in which the teams hire playing talent from an external market at a cost per unit of talent that is determined exogenously
The Nash equilibrium differs from the joint profit maximizing equilibrium, and exhibits a higher degree of competitive balance
We argue that several previous formulations of this “open” model are based on an inappropriately specified revenue function
Summary
This paper presents new results for an economic model of a professional sports league, in which the teams hire playing talent from an external market at a cost per unit of talent that is determined exogenously. The teams’ revenues are assumed to depend on the relative quantities of talent hired but not on the absolute quantities of talent. The introduction of a gate revenue sharing arrangement tends to increase competitive inequality. This paper demonstrates that revenue sharing always reduces competitive inequality if the teams’ revenues depend on the relative quantities of talent, represented by win-percent, and on the quantities of talent in absolute terms. Goddard examines the effect of revenue sharing on competitive inequality when revenues depend on win-percent only.
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