Economics of Baseball: Revenue Sharing

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Economics of Baseball: Revenue Sharing

Major League Baseball is the highest level of professional baseball in the United States and Canada. The organization is comprised of a partnership between the National League, founded in 1876, and the American League, founded in 1901. There are currently 30 teams in Major League Baseball, 14 in the American League and 16 in the National League. "Since 1903, the best of both of these leagues have met in the World Series, with the winner of the best-of-7 series being declared World Champion" (Burnett). When the World Series ends, baseball's business season starts. Receipts are tallied to determine how much the teams that earned the most will have to pay the teams that have earned the least. Large market teams like the New York Yankees, Boston Red Sox, Los Angeles Dodgers, and the Chicago cubs "have an overwhelming advantage over smaller market teams which created an uneven playing field" (Alice). Revenue sharing gives small market teams like the Kansas City Royals, Tampa Bay Rays, Florida Marlins, and the Pittsburgh Pirates, a better chance at success by providing more resources to improve their roster.

In 1999, a "blue ribbon" panel commissioned by MLB found that "baseball franchises traditionally generate and retain a large majority of their revenue locally" (Jacobson) rather than nationally, causing a large and growing revenue disparity. Vince Gennaro, author of Diamond Dollars: The Economics of Winning In Baseball, found that 70 to 80 percent of a team's total revenue is contributed to local revenue. Local revenues consist of gate receipts, local television, radio and cable rights fees, ballpark concessions, advertising and publications, parking, suite rentals, postseason, and spring training. Revenues that are retained locally are a problem because all teams participate in the same national labor market. MLB has no salary cap; therefore, it is the teams’ decision how much they spend on payroll. The teams with the largest revenues have higher payrolls and are able to obtain and make offers on players that teams with lower payrolls cannot. As big market teams began setting up their own sports networks on cable, the revenue disparities accelerated. The clubs started profiting directly from subscriber fees and advertising sales. At the same time, other clubs began to benefit from building new stadiums.

According to the Report of the Independent Member of the Commissioner's Blue Ribbon Panel on Baseball Economics, the amount of a club's payroll is determined by the amount of the club's revenue and it has been argued that "the size of a club's payroll is the most important factor in determining how competitive the club will be" (Elanjin and Pachamanova). It showed in just five years the ratio of local revenues between the top seven clubs and the bottom fourteen clubs more than doubled from 5.5:1 in 1995 to 14.7:1 in 1999, because of fast growth rates on already large revenues (8). The ratio of payroll spending between the highest and lowest clubs went from 2:1 in the 1980s to 3.5:1 in the 1990s (9). From 1995 to 1999, no clubs from the 14 lowest payroll-spending teams won a Division Series game or a League Championship game and no clubs from the bottom 23 clubs won a World Series game (Levin, Mitchell, Volcker, and Will p.2-9). All of the World Series Championships have been won by one of the top payroll spending teams.

The conclusion was drawn that these problems were getting worse and unless the MLB took action, the problems would remain severe. They would have to break more than a century’s worth of tradition, "to ensure baseball's broad and enduring popularity, and to guarantee it's future growth" (Levin, Mitchell, Volcker, and Will p. 13). The panel recommended that the league should impose revenue sharing, a competitive balance tax, central fund distributions, a competitive balance draft, reforms to the Rule 4 Draft, and should utilize franchise...
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