Competitive Imbalance and Budget Constraints
New Horizons in the Economics of Sport series
Chapter 1: A new research area: disequilibrium sports economics
Ever since Rottenberg’s (1956) pioneering article, sports economics has been set within the framework of equilibrium economics, in particular when modelling team sport leagues. Four pillars of this mainstream approach are crystal-clear in the economics of team sport leagues. The first one of course is the concept of economic equilibrium assumed to be reached by a league for its product market and labour market for talent – its major input. Economic equilibrium is obtained through the usual marginal calculation achieved by all economic agents operating in a league’s market, namely, the calculation of team owners driven by a profit maximization objective, both in the original model (El Hodiri and Quirk, 1971) and later in the standard model of a closed North American team sport league (Fort and Quirk, 1995). Therefore, the assumption of profit maximization is a second pillar. The equilibrium solutions in the labour market for talent (the marginal productivity of labour 5 the wage rate) and in the market for output (fan attendance equalizes marginal revenues with marginal costs) are supposed to prevail. The league’s labour market equilibrium in the standard model does not produce a perfect competitive balance where all teams would have an equal probability to win the championship and a 50–50 chance of winning any game. This first-best competitive balance is out of reach along with the league’s economic equilibrium unless the market size of each team is absolutely identical (no big-market teams, no small-market teams).