25 October 2009

No Salary Cap Not So Bad?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Ken Shimizu says:

As a die hard San Francisco 49ers fan, I thought I would give some insight on the upcoming expiration of the Collective Bargaining Agreement between the owners and the players of the NFL. The CBA expires in 2010, and if a new deal is not in place by the start of the 2010 season, there is a provision in the contract that nullifies the current salary cap structure. To most fans of the NFL, this seems like blasphemy, and would ruin the integrity and competitive balance of the NFL. However, in viewing the uncapped season from an economic perspective, we may see a shift toward a free market solution.

The current salary cap based system relies on revenue sharing and yearly increase in both the salary cap, and the minimum teams must spend. This acts almost like a price ceiling, limiting the amount that players can receive because of the total balance of the NFL teams. Certain positions are deemed as more important than others and players within that position are given relative wages instead of being paid their real value. With the switch to the uncapped structure, players will be given wages closer to their real value. This will theoretically eliminate deadweight loss for both the producer (the player) and the consumer (the owner).

Real life examples show the problem in this system. With the loss of the salary cap and revenue sharing, the balance of power shifts heavily in favor of teams with more money. In looking at Major League Baseball, of the 5 teams with the highest salaries, only the 1 team hasn’t been to the World Series since 2000. Of the bottom 5 teams, only the Florida Marlins have actually been to the World Series in recent memory, and 3 of the 5 teams are at the bottom of the league perennially.

Bottom Line: With the competitive balance of the NFL being one of its most appealing aspects, the owners and the players MUST find a way to agree on a salary-capped structure. Though players may lose out on their market value, they’re still making millions and millions of dollars in the end. Further, creating a large competitive imbalance may create more deadweight loss via players on horrible teams, eliminating the benefit of improved salaries.

5 comments:

Eric said...

Teams in smaller markets like competitive balance. Teams and fans in larger markets don't. Why should teams and fans in larger markets and players in all markets (through capped salaries) subsidize teams in smaller markets? Who actually benefits from this? Are they paying for their benefit?

Ken Shimizu said...

In order to answer these questions, I think we have to take a step back and see what the outcome of subsidizing smaller market teams is. This subsidization leads to a competitive balance among all 30 teams, leading to higher ticket sales for all 30 teams across the board.

We have already seen the results of an uncapped, unbalanced league such as the MLB. Several of the teams are being moved or are having trouble making a profit. Due to the these troubles, the league as a whole has seen a decline in popularity, meaning a decline in revenues.

Taking these two factors into account, we can see that while the larger market teams are forced to share revenue season to season, in the long run, the larger market teams receive a benefit from the overall popularity of the league.

I guess another way to look at it is to view the popularity of the league as a faux-public good. Every "person" (team) gets taxed a certain amount to keep the "national defense" (popularity) in tact. This is because, without this public good, every person is, at least in this case, "dead."

Sorry if that's unclear or didn't make sense. I can try to clarify for you.

Eric said...

@Ken
Mostly what you said makes sense.

I have a few questions.

1. If a team wants to move and may not make a good profit where it is, why shouldn't it be allowed to move? If it moves, its current city loses the team but the team and the league would have increased revenue.

2. Does competitive balance actually yield higher ticket revenues and higher EBITDA for a team or for the league?

3. What is the nature of the 'public good'? To whom does it accrue--owners, players, fans in a league city, fans not in a league city, the league city itself?

Thanks

Ken Shimizu said...

Hey,

#1 is actually one of the problems with revenue sharing. The NHL has a revenue sharing program, and you will often see the Phoenix Coyotes playing at home in front of <10,000 fans. They sell tickets at a cheap price just to draw in fans. There is absolutely no reason for a team to be there, and the only reason they are still there is because they are receiving revenue from the NHL.

In the case of the NFL, we're not talking about teams losing a ton of revenue. Rather, teams that can make a profit but cannot compete with the Dallas Cowboys or New England Patriots (both of whom have crazy revenues from a nation-wide fan-base.) If one team has a budget of $300M and another has a budget of $100M, the team with $300M can simply outbid the other teams, field a New York Yankees like All-Star caliber team and completely decimate the competitive balance (see George Steinbrenner)

#2 - While i don't have actual numbers pre/post CBA. I do know that ONE of the reasons the NFL is extremely successful despite the lack of games played is the fact that any team can win on any given week. Now this may actually be attributed to a number of factors including the nature of the game. The success of the league could also be attributed to an alternative factor such as the scarcity of games available. I guess the competitive balance argument is based more on a qualitative sociological argument rather than a quantitative or qualitative economic one. Having a large fan base in one team, for all we can tell, may actually be beneficial for some. The Cowboys being dubbed as "America's Team" and the die hard nature of Raiders fans comes from the pre-CBA NFL. However, in an unregulated league, generally, 3 or 4 teams dominate the market and field high caliber teams, and the other 27 vie for lesser spots. If 20 teams suck, 7 are ok, and 3 or 4 are good, I can't imagine you could generate as much revenue as you would be able to if 26 teams are good to great and 4 suck. Especially when seating to every game is limited and many of the stadiums are sold out every week.

#3. I'm not too sure what you mean by "nature of the public good," but I'll try to answer the other part as best as I can. The public good is invested in by owners and accrues to all the owners. While there are secondary benefits to players, fans, the league city, etc., I've decided to leave them out of the equation for the sake of simplicity. Their benefits are not calculated in the owners decisions to share revenue. The decision to share revenue is made by the owners and the owners alone, and therefore, we will look at the benefits of the owners alone. Again the owners are the taxpayers, and the popularity of the league is the public good they are investing in. The viability of the league is dependent on the popularity of the league, which is why I compared it to National Defense. A country w/o National Defenses (let's forget about Costa Rica for a minute) will be taken over and will no longer exist.

This is merely my take on the situation minus numbers. My view is SEVERELY biased because I watch the NFL religiously, and enjoy the competition in every single game. If I had more concrete numbers or some sort of time series data set, my opinion would probably change. I hope I was able to make my point clear. Feel free to ask more questions, I'd be happy to answer them.

Ken Shimizu

Eric said...

@Ken,
Your response is the kind that I hope for when I make a comment. Thank you very much.

Like you I like the NFL and close games.

I will ask more questions if I have any. First I have to think about your great answers.

Cheers,