A Free Market Solution (from Europe) to the Labor Problems in North American Sports

The following is a guest post by David Berri, a Professor of Economics at Southern Utah University. He is also the lead author of Stumbling on Wins, the general manager of the sports-economics blog Wages of Wins, and is a frequent contributor to the Freakonomics blog.

Soon after presents are opened on Christmas morning, the NBA – after a lengthy lockout – will finally open its 2011-12 season with a slate of five games. Although NBA fans are pleased the lockout has ended, they’d probably prefer that it had never happened. Unfortunately for fans of pro sports in North America, such disputes frequently cause games to be missed. But maybe there is a free market solution to this problem to be found in, of all places, Europe.

Although we tend to think such disputes are a contest between labor and management, frequently the real conflict – as noted in my recent posts here — is between small and large market teams. In North American sports, team revenue seems to depend on the size of the market where the team plays. For example, according to Forbes.com, the New York Knicks had $226 million in revenues in 2009-10, while the Milwaukee Bucks brought in just $92 million. A similar story is seen in baseball, where the New York Yankees brought in $427 million in 2010, while the Pittsburgh Pirates had only $160 million in revenues.

Such revenue disparities often cause small market teams to demand more money. Ideally – from the owners’ perspective – this money comes from the players, which is what we saw happen in the NBA dispute, where the players just took a pay cut. In baseball, the players have historically been unwilling to accept wage cuts for small market teams. Consequently, baseball has transferred – via the luxury tax – money directly from large market teams to small market teams.

If we look to Europe, though, we might see a better approach. To understand it, let’s consider the arguments of Frederich Hayek, who argued that a centrally planned economy can’t work as well as a free market one because the central planner could never have enough information to make adequate decisions. OK, but what does this have to do with sports?

Essentially, North American sports leagues use central planners to determine the location of sports teams. In contrast, European sports leagues rely on the market.

For those unfamiliar with the nature of European sports leagues, let’s briefly describe the promotion and relegation system. In a league such as the English Premier League, the bottom three teams in each season are demoted to the Championship League (a lesser league). The top three teams from the Championship League are then promoted to the Premier League. Consequently, losers in the Premier League – as we see in a capitalistic market – are punished financially. And success in the Championship League is clearly rewarded.

By allowing teams to play their way into the league, any market can have a team. Consider the allocation of teams in the English Premier League today. Currently there are five different teams in the London area. This makes sense, since London is by far the biggest urban area in England. Of course, New York is the largest metropolitan area in the United States, and in each of the major North American sports leagues there are no more than two teams located in the Big Apple (a point I will return to in a moment).

In the English Premier League, though, there is no restriction on where the teams can be located. So we see three teams in the Birmingham area (second largest urban area), but Leeds (third largest in population) and Bristol (fifth largest in population) have zero teams. And the two teams leading the Premier League thus far this season are in Manchester (fourth largest in population).

A central planner would probably never have placed two teams in Manchester while skipping over Leeds and Bristol.

In contrast, North American sports leagues are planned. For a market to acquire a team, the existing owners must first agree to expand – or move an existing team. And then any new ownership group must be approved by those very same owners. 

The existing owners have insisted that the large markets be restricted (again, New York doesn’t have more than two teams in any of the major sports leagues). Consequently the league has moved into smaller markets. To make this work, the smaller markets are encouraged to assist the team via taxpayer subsidies for new arenas. Furthermore, if the team struggles, high draft picks and/or luxury tax dollars are transferred to the team in the name of creating parity.

All of this is done in an effort to ensure that all teams are profitable. Yes, failure in North American sports is simply not allowed by the central planners. Not surprisingly (and consistent with Hayek’s contention that central planning doesn’t work that well) chronic failures – like the L.A. Clippers and Pittsburgh Pirates – are not uncommon.

Once upon a time, the Pirates often contended for and won titles. But since 1992, the Pirates have always been losers. Their ineptitude, however, pales in comparison to the Clippers. Since the Clippers came to California in 1978, the team has had only three winning seasons. And one of these was the first season in San Diego in 1978-79.

Had the Pirates and Clippers played in something like the English Premier League, the Pirates would have been relegated in 1995.  And the Clippers would have been gone in 1981-82, sparing Los Angeles this team entirely.

In North America, though, despite years of failure, both teams have been consistently rewarded by their league. The Pirates – via luxury payments from teams like the Yankees – are actually profitable. And the Clippers have routinely been granted high draft choices and – via the intervention of Commissioner David Stern – were recently given the amazing talents of Chris Paul.

The chronic failures of the Pirates and Clippers suggest that the ownership of these teams are less than competent. And in a capitalistic system, incompetence leads to failure. But in North American sports leagues, when incompetence leads to shortfalls in revenue, the league turns to the players and demands wage cuts to compensate the losers. < /p>

This in turn leads to labor disputes. It’s my opinion that all of this could be avoided if losing teams in North America were simply relegated and all markets opened to competition.

For example, let’s imagine that multiple basketball leagues were created in North America. Currently, beneath the NBA is the NBA Development League (which could be the Championship League equivalent). Beneath the NBADL, one could create another league. Any city or part of a city (i.e. Long Island in New York could have their own team) — could enter a team in a lower league. If that team was successful it could eventually join the NBA. And the teams that fail in the NBA would be removed.

Such an approach might end the small market vs. large market dispute because the advantages of the large markets — more specifically, the power to monopolize large cities — would end. And without this dispute, maybe the labor disputes that plague North American sports leagues could also end.

Of course, to implement this plan, North American sports leagues would have to end central planning and the desire of guaranteed profits. It is unlikely the owners of North American teams – who clearly profit from the current arrangement – would agree to such a move. In fact, it was reported a few months ago that North American owners would like to end the system of promotion and relegation in the leagues where these owners have invested in Europe.

If these owners were ever successful, then essentially American owners would be exporting central planning to a market-oriented industry in Europe.  And who would have guessed this would ever happen?


Not to mention the English Premier League teams from Wigan (population 81,000), Bolton (139,000), and Swansea (not in England!).

Mike B

Promotion and Relegation are DISASTROUS ideas that if anything Europe needs to abandon as soon as possible. First it doesn't even begin to bring the sort of parity that you seem to be clamoring for as, just like in North America (or even more so) success breeds success. Yes, instead of having geographic monopolies team must compete more for fans, at least at first. Soon network effects take over, the best teams get the most fans which allows them to consistently get the best revenue and buy the best talent and then close the cycles by having the best records. This can unbalance leagues even more than in North America.

Second this required "learning curve" for teams in the Premier League has created a host of "elevator teams" which are too good for the lower level leagues, but not nearly good enough for the Premier league. They simply cycle between promotion and relegation while most of the premier teams stay entrenched in their position. Promotion and relegation also creates severe problems for the owners as lower level teams typically play in smaller arenas and have much lower overhead. Being promoted might means suddenly sees a huge jump in the overhead needed to compete effectively, but either not have the money to provide it or not have the fanbase (or arena) required to support it (or both). Again this exacerbates the elevator problem. Finally for an owner being relegated essentially means a near total loss of one's investment. Fans won't pay for lower levels of play, your games aren't going to be featured on television any more and most importantly, your players probably aren't going to want to play on in what is essentially a backwater league. For many teams relegation would be tantamount to the NCAA's death penalty, ie a program ending event. Yes, if you don't mind being an elevator team that effectively gets promoted into the role of Washington Generals for a season it wouldn't be a big deal, but in the North American sports environment if a small market team fell out of the big leagues there's a good chance it would never come back. Perhaps you should tell people that to fix this problem of uncertainty for the franchise owners the Promotion - Relegation leagues need to provide so called "Parachute payments" to the relegated teams so that they won't just fold and go bankrupt.

Those are just the business implications of relegation. From a fan's perspective it is equally disastrous. Fans invest a lot in their teams and to have that team suddenly demoted to a minor league would effectively invalidate that investment. When you consider that fans not only buy all manner of branded items, but even pay out thousands of dollars for personal seat licenses (or wait years on a season ticket waiting list), relegation would completely wipe out that investment and we're not even getting around to the emotional toll.

In the North American system team don't represent just arbitrary flags, they represent geographic regions and when teams play they write another chapter in an ongoing competition between distinct cultural groups. As you pointed out most of the Premier league teams are concentrated in the largest markets. Not only does this shut out large parts of the country from being represented, but forces people to pick teams that can endure and not get relegated (thus wasting their emotional investment), teams that probably don't represent any specific culture, but more vague (and perhaps divisive) social and ethnic traits.

While promotion and relegation systems may seem to be more open, they actually only serve to erect barriers to entry. It puts the importance on a team's brand. Few fans will ever invest in a team that is only going to get relegated and no team can ever have a guaranteed market. The result is a mildly competitive oligopoly where a small number of core teams can ride roughshod over token opposition like major college football programs.

The best part of the North American system is that it makes the entire region involved in the performance of the team. Good owners that field good teams will be rewarded with not only fans paying for their product, but also government subsidies. Even in small markets that don't decide to compete the fans are still benefited by lower ticket prices and the fact they can see good teams when they come to town. The Baltimore Orioles have had something like 14 straight losing seasons, but I can get tickets there for as cheap as $1, while tickets for my hometown Phillies are ungodly expensive. If the O's got good I wouldn't be as interested in attending professional baseball games any more because the price would be too high.

I support the pay to play system where teams that want a shot at the gold ring have to pay to get it. For some teams like the Yankees this is easy, but for small market teams the barriers are not insurmountable. The Green Bay, WI is the smallest market in the country to have a top tier professional team, but they not only do, but that team is one of the best in the league? Why? Because the team is municipally owned and the population of Wisconsin supports it. The problem with North American leagues is not that it is centrally planned, but that it is not planned/regulated enough. Sports teams should be treated like a public Utility. They are there for the benefit of the population they serve and in turn the served population only gets one team. The best thing that could happen is more municipal ownership like the case of Green Bay, but unfortunately most leagues prohibit it. promotion and Relegation will only wind up screwing the existing fanbase more and eventually force small market teams to root for large "naturally" branded teams that aren't at risk of the "death penalty".


Mike B

I forgot to mention that TV rights for a Premier League team are about L45 million while a Champion League team's rights are L1 million. It that doesn't say financial death penalty I don't know what does.

As non-free market as the North American system is, it is at least more egalitarian. You plunk down an investment and you get a return. In Europe the required investment isn't at all well defined. You have to pay up front for facilities, staff and players to win up into the premier league, then keep paying to avoid relegation and maybe, MAYBE you'll attract enough fans to make your investment pay off. Or those fans, which aren't locked in by Geography like they are in the US, will just root for the national branded teams of Arsenal or Manchester United leaving your investment a complete writeoff. Because few will ever take such a risk the Premier league is dominated by an aristocracy of teams...which is exactly the sort of system Europe wants.



An additional free-market dimension for soccer in Europe is that the market for players is truly international - which is not really the case for basketball, baseball or (American) football.

So within a country a team's fortunes rise or fall depending on its performance, but with sufficient investment it can hire the best talent not only from its (within-league) competitors, but also from the rest of Europe's (and indeed the world's) top teams.

As a result, more common than people (like Mike B) complaining about a lack of local fans, are moans about how few players in the UK premiership are British...

Mike B

Um, you might want to double check where a large proportion of both Baseball and Basketball players in this country are coming from. Both sports, basketball in particular, have a strong international presence.

The strange thing about the English Premier league is that, well, it hasn't gone international itself. Across the top European leagues there are a handful of teams with strong international brands (like AC Milan, Real Madrid, Juventus, etc) and then a whole bunch of crap teams that nobody really cares about. These top flight teams should pick up stakes and form a pan Europe NFL style 30 team league divied up by geographic region and cram all the existing national leagues into the dustbin. Such a system would be more efficient and more profitable. Furthermore it would be better for the players as they wouldn't have to play in so many different championship tournaments and the strange dichotomy of the professional league circuit and the national league circuit could be largely ended apart from the Olympics and World Cup. I mean having a bi-yearly showdown between division rivals Paris and Berlin (or Berlin and Athens!) would be a marketer's wet dream.


Gary L.

While players pay be coming from foreign countries in Baseball and Basketball, there really isn't much competition for those players from professional leagues in their home countries. The NHL probably comes closest to having real competition from a foreign league. There's a segment of players who could potentially play in the NHL, but choose to play in Eastern Europe's KHL for more money. Some of those players are better suited to the KHL style of play (larger playing surface, so more speed, less hitting) while others prefer to play in or near their home countries.

Jaromir Jagr, currently 40th in the NHL in points, spent the last 3 years earning a reported $5M per year playing in Russia. There were also reports this summer that Washington Capitals goaltender Semyon Varlamov was considering returning to Lokamotiv Yarlslavl of the KHL. Varlamov ultimately signed with the Colorado Avalanche after being traded by the Capitals. Had Varlamov returned to the KHL to play for Lokamotiv, he likely would have been among those tragically lost when Lokamotiv's plane crashed on September 7, 2011.



Considering the success of the highly regulated NFL over the last 20 years, this is a strange argument

Alex K

Interesting stuff. As an Englishman and English sports fan I would like to point to the failure of the English system.

The English Premier League has a problem in so far as the same few clubs win the league each year. You can predict the top 3 or 4 teams before the season. This is because the successful are the richest. Success builds riches, and those riches determine future success by being able to acquire the best players.

Manchester United have dominated the premiership interupted only by wealthy new team owners buying clubs and injecting money into those clubs. Examples being Chelsea and more recently Manchester City. Manchester United have a global fan base and revenue stream. It is now impossible to break into the top of the table after promotion to the premier league, unless you get a benefactor with deep pockets.

This wasn't the case before the formation of the premier league, when TV money used to be distributed to lower league teams. Prior to the premier league Notts Forrest rose from the lower leagues to the top and even won in Europe. A feat now impossible.

As for the long term health of an uncompetitive league, English Football has larger revenues than ever before, but the wage bills are an unsustainable percent of revenue. The league is running on empty and nearly bust. The teams are financially in the red. The domestic fan base is ageing, with ever fewer younger fans and dependent on the exploitation of foreign markets for revenue growth.


Mike B

Of the 45 clubs to have competed since the inception of the Premier League in 1992, only four have won the title. QED


I'm not sure I understand the thesis. There is certainly a contrast between the planned, broadly static structure of American sports and the promotion/relegation system used across Europe (and South America, and Asia, and Oceania, and Africa).

Outside North America, performance on the pitch determines which teams are in the top league and which are in lower leagues. What I don't understand is how that can be simplified to "the market"? Blackburn Rovers have been in the Premier League for the best part of 20 years (other than a one-season sojourn in the Championship in the late-90s) but their average crowd is considerably smaller than that of many teams in the Championship.

By the same token, Leeds United have been paying the price for horrible mismanagement (mainly overreaching their resources in the mid-90s) in the second and even third tiers of English football for some time - but still have average attendances well in excess of those of most of the Premier League teams.

Even if one accepts that a team's spending correlates directly to their performance (and there are studies that show that this is likely the case, although teams do buck the trend) gate receipts and other income that depends entirely on the local market are such a small proportion of a club's overall income that I don't think the argument that a club's takeup in the local market corresponds to its success can hold too much water.


Gelvis Sequera

Even when the promotion/relegation system should be good to establish a good minimum level, it doesn't work for in favor of equality of the overall league. In europe, the English Premier league, The Italian Serie A and The Spanish First Division have big money problems on almost 75% of the teams, mainly because the free market structure thats raises the goods value (The players salary).

There should be a point in the middle (I'm thinking on the NFL approach but with a more acceptable inscription rules and a ascension league where the rookies prove themselves to be as good as their paychecks)


"is a free market solution to be found in, of all places, Europe."

This and the final paragraph would seem to indicate that the author thinks that Europe has some sort of command economy, like North Korea. I can assure him that we've had a free market here for some centuries now!

I can also assure Mike B that a team's support is very much tied to geography. Most areas have a team, and the locals support it. For a lucky few, this is a Premier League side, such as my own home-town team, Sunderland AFC, but small local clubs such as, say, Blyth Spartans or Bedlington Terriers have a devoted fan base. Fans of small clubs might follow one of the big teams second, but should they ever play each other (which can happen in knock-out cup competitions), there's no doubt that loyalty to the home side would win ( plus the vast majority of neutrals would support the underdogs and hope the big team lost, but that's another matter).

As a fan of a club that's bounced between divisions for years, I well know the heartbreak of relegation and the joy of promotion. You don't know what you're missing - all you have is stagnation, and stagnation is, ultimately, death.


Mike B

Why would you root for a team that doesn’t play in a league that matters? Minor league sports are just this side of pointless from a competitive atmosphere point of view. I’m from South Jersey that that puts me in the Philadelphia Phillies baseball market, but technically there’s a closer team in Camden, New Jersey that plays in the independent Atlantic League of Professional Baseball, aka Urban Renewal League. The team is full of has beens and never weres. Their games are not covered, their outcomes not reported. If there are playoffs and standings I am never aware of them because nobody takes the league seriously. The team competes purely on price with the more polished Major League product serving the needs of families and large groups looking for an affordable activity on a weekend afternoon.

Probably the highest cost of any sports fan comes in the time they devote to the sport. I don’t know what’s going on in the UK, but in the US we have 4 major professional leagues plus the college and high school levels. People simply don’t have the time to invest in rooting for teams that are playing for the residue left in the pot after the small potatoes have been scooped out. Look how much attention is played to Division 1-AA football compare with 1-A. I’ve been told that 1-AA actually has some sort of playoff, but I have no clue who won it recently let alone when it even takes place! That’s still division I, there’s still divisions II and III that I know/care even less about (although I do know that in div III everyone who participates is a winner ;) )

I am guessing that the big difference between North American and European sports culture is the role of student athletics. Instead of having a local pro or semi-pro sports club most North Americans latch on to the athletic program their local secondary school either through their own kids or some sort of civic attachment. Any given team can go on to make the post-season, win several levels of “regionals” and then win the state championship game. Most schools have some storied season where they actually managed to win the state championship and even if that happened 7 decades ago people know that in any given season they too could win it all. That doesn’t happen in a promotion league because there are a minimum number of years it will take before you even have a shot of winning it all. It’s like grinding in a video game…it’s just demoralizing.

The same goes for college sports. There is nothing that says that Boise State can’t play for the National Championship as long as it goes undefeated. I think North American just prefer to be able to root for their team to go all the way. On the first day of the season the best team in the country or state is tied with the worst. That’s hope, that’s what keep the fans going. In the UK if you aren’t in the Premier league you’re a loser from day one.


coach bob


I think the US market understands the promotion/relegation idea, now that Euro soccer games are broadcasted here. If I were a Pitt Pirates fan, I'd be more open to having the team stay in pitt, than close. Of course the cache of playing in the top division is key for fandom, but the depression that follows when a team leaves is ultimately disastrous for all those concerned.

Mike B

The fix to teams leaving is to have a Federal regulator approve all such transactions. Your power company can't just ship your power out of state and turn off your lights so why do we allow professional sports utilities to do the same?

Dan Abrams

The NYC area has THREE hockey teams. To exclude either the islanders or the devils would be ridiculous. For most of their history, the Devils played in the same complex as the two NYC football teams, in New Jersey. Even today, one can get to the devils via the PATH train from midtown manhattan faster than one can get to Mets, Yankee, or giants stadium.

Passives Abseits

Relegation is awesome... the best thing about it: it makes tanking impossible... the most intense games in Europe are always (and in any sport) the ones, where 2 teams fight for their lifes just to stay in the league...

Mike B

It also encourages teams to rig games. Go read the Freakonomics posts about rigged sumo matches and how on the last match of an tournament players on the bubble of not getting a winning record will win against opponents who are "safe" nearly 86% of the time. Also don't forget the current system encourages teams to change adopt a playing style that is about not losing instead of taking risks to win which in turn results in even lower scoring.


There's lots wrong with the English Premier League. It is uncompetitive and many clubs are deep in barely sustainable debt. Bankruptcy is not uncommon.

Success on the pitch is the preserve of a small band of rich clubs. Only 4 clubs have won the Premier League trophy in the past 20 season. Manchester United have won it 11 times.

Is that good model to follow? Not so sure myself.


Glad to see someone bring some sense to the table. Fans with broader knowledge of sports other than the US pro leagues have touted the idea of promotion and relegation for years precisely for the reasons outlined in David's article - that it would incentivize owners to field teams that aim to win, rather than teams like the Clippers who traditionally have just sucked up cash from fans while providing little of worth in return other than a cheap seat to watch a visiting team.

Although the Clippers appear to have turned the corner (based on a non-statistically significant one game sample against the Lakers last night) it would have been nice to effectively see them turfed from the league a long time ago for their repeatedly poor performance based on Sterling's apparent unwillingness to spend. It's time for fans to be treated to seeing NBDL teams with a chance to be promoted and player contracts structured so that individuals can void their deals and move to a "first division" club when their team is relegated. Maybe such a system could also be used as a way to circumvent the whole NCAA debacle at the same time by allowing high schoolers and college dropouts to go pro like every other professional sporting league outside of the USA. At least players like Brandon Jennings and Jeremy Tyler wouldn't have to go to Europe to get professional level practice just because they had no intention to masquerade as "student-athletes".