Economics of Sport

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The Relationship Between the Objectives of Owners of Professional Clubs and Franchises and League Structures

Introduction
In the literature related to sports economics there is a strong debate regarding the objectives of clubs and franchise owners and their implications on league regulations. As Sandy et al (2004) state, ‘there is a conflict between the interest of the league in having most teams win half of the games to maximise competitiveness and those of the individual teams which maximize income through winning as many games as possible’ (2004:158). Models have been developed by Scully (1995), Sloane (1971) and Dietl et al (2011) in the attempt to explain how sports organisations’ behaviours affect competitive balance and club profits. The reminder of this paper is structured as follows. The Market Structure section assesses the debate on market structure. The Club Objective section makes an overview of club objectives and outlines the two major notions of profit and utility maximisation, which it then compares and explains using the above-stated models in the subsequent section. The Empirical Evidence section highlights authors’ perspectives. Finally, the Conclusion summarizes the paper and concludes.

Market Structure
Classical economics theory states that the best industry that a given firm can be in is a monopoly. Here, a firm can maximise its profits without having to engage in competition. However, the sport industry is bizarre in this sense. The Louis – Schmelling Paradox, as defined by Neal (1964:3), emphasises the need for competition as a requisite of existence, the complete opposite of orthodox economics concept. The paradox revolves around the example of a fighter who can only maximise his profits by engaging in combat with a contender (the stronger the contender, the higher the profits). Neal (1964) argues that, from an economic perspective, the league is, in fact, ‘the firm’ in the case of professional sports and that the teams not only form a joint product, but a collection of utilities defined as the ‘league standing effect’. The paper concludes that the league is actually a natural monopoly. However, Sloane (1971:128) rejects this hypothesis by stating that although ‘the league organisation is the equivalent of a trade association, in fact, the Football League merely sets the rules within which clubs are free to operate as they see best’. Subsequently, Rottenberg (1956:243) underlines an oligopolistic market structure and refers to the baseball league as ‘a collusive combination’ and is partly supported by Jones (1969:9), who argues ‘although most of the conditions for stable collusion are present the factor that distinguishes the professional sporting leagues from other oligopolistic coteries is mutual dependence’. In essence, as Sandy et al state: ‘the more unpredictable the outcome with regard to winning, and the greater the number of teams of teams that have a chance to win the championship, the more suspense is generated and hence the higher the entertainment value’(2004:157). Moreover, Kuypers(1995) defines competitive balance in three senses: the balance of attractiveness of a match, the closeness of a championship and the absence of long-run domination. Szymanski and Smith(2010:19) continue: ‘Football has aspects of a quasi-public good in that it provides entertainment to a fairly wide public of fans. The interest of the owners may differ from the general interest’. Although Morrow(2003:5) states that ‘market forces can maintain a degree of competitive balance among member teams’, these arguments has been used throughout the development of leagues in order to explain the existence of policies and regulations such as salary caps and revenue sharing, which will be covered later on.

Club Objectives
Sloane (1971:132) defines four possible assumptions in regards to a club’s behaviour, which he derives from the theory of the firm: 1. Profit Maximisation
2. Security
3. Sales...
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