Economics of Superstar

Topics: Economics, Monopoly, Perfect competition Pages: 6 (2139 words) Published: April 11, 2013
Economists are naturally attracted towards the sports environ, mainy due to the the labour markets which exists in that economy. In service industries such as teaching, medical, banking, etc., it is extremely difficult to measure the productivity of the labour. This industry comes along with plenty of data which can be used to define the productivity of labour.

Economics can be applied to this professionalism. In this, money changes hands in the production, distribution and consumption of sport. It is the mechanism by which assets of a firm (sporting resources, i.e. the players) are bought and sold between the various teams, which are used in the competition against their opponents on the field. These transactional decisions are very vital, as it can either cause benefits or could bring down the performance of the team.

So, how does the firm generate the revenues to pay their player’s salaries? Clubs and organizations, such as leagues and governing bodies, must co ordinate the match schedules, and should inform their potential viewers about the details of the upcoming matches. Such characters indicate that, professional sport can be viewed as an economic process. Inputs, , or factors of production, such as labour (athletes/manager) are combined with capital (field) to produce, along with another team in the league, a product (fixture) that is sold to the consumers typically in a stadium, or via broadcast media.

The model of perfect competition is a convenient benchmark for the economic analysis of sports labour market for two reasons. Firstly, it provides a theoretical basis for deriving a fair wage, i.e., the players deserve their wage according to their performance and productivity. The second reason is that it shows and highlights some uniqueness about the labour market in the sport industry. The standard model states that teams would hire labour up to where the wage was equal to the marginal revenue product of labour (MRLP), which is the revenue earned for the firm from the last unit produced by the worker being sold at a market price.

In the modern world, a growth in the freedom of contract for players in sports leagues has led to greater player salaries and also a rise in the total cost of players if transfer fees are included. An explanation to these developments can be made with the help to a variety of different theories of the labour market.

( diagram)\

As shown by the diagram above, each axis measures power and, suggests that clubs and players having low power results in perfect competition. Moving horizontally, it shows us the increasing club power with player power remaining constant. This indicates that the number of clubs is much smaller when compared to the players, or the players are loyal to their clubs, i.e. the players want to play for their club and would not want to leave them. This limiting case is a monopsony scenario.

When the extra wages are paid to the other players of the team, at the time of hiring another employee is what differs monopsony from perfectly competitive model. This drives a wedge between the MRLP and the wage. The figure above illustrates the comparison between, monopsony and perfect competition. The equilibrium level of the wage rate and employment, defined as hours of labour purchased per week. A1A2 is the perfectly competitive firm’s demand for labour, MRLP, defined over hours of work, while A1A3 is the corresponding MRLP of the monopsony. B1B2 is the weekly supply of hours of price-taking firms in the labour market. B1B3, is the marginal cost of labour (MCL). The perfect competitor maximizes its profit where B1B2 intersects A1A2, giving W0, E0 as the perfectly competitive equilibrium wage hours combination. The monopsony firm maximizes its profit where b1b3 (MCL) intersects a1a3, but the monopsony equilibrium wage hours combination is w2,e2. Under monopsony, the MRLP is above w2, hence explaining the exploitation of labour. The general interpretation...
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