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. 

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?

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  1. coach bob says:

    U R 100% CORRECT! I’VE FELT THIS WAS THE BEST IDEA FOR YEARS.

    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.

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    • Mike B says:

      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?

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  2. Dan Abrams says:

    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.

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  3. Passives Abseits says:

    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…

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    • Mike B says:

      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.

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      • Alex K says:

        The last instance of game rigging in English football involved individual players associated with Betting syndicates. Similar to recent issues with the Pakistani Cricket team. Players taking money to lose. The last example was in the 1960′s

        Examples of institutional game rigging exists in Italian football and involved top teams rather than those threatened with relegation. Those teams were punished by relegation from Serie A (the top league) to Serie B.

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  4. busx82 says:

    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.

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    • mark says:

      But you can’t say it isn’t popular. It’s the most popular sports league in the world. If a club goes bankrupt then they are relegated so there is incentive to avoid overspending. Also, who cares about competitiveness. College sports are not competitive at all..it’s the same teams competing for titles every season and they are extremely popular.

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      • KenC says:

        They may have an incentive to avoid overspending, but most of the teams in the EPL are deficit spenders anyway. The difference is that EPL teams and sports teams in Europe in general rely upon owners who will subsidize the team. Man City and Chelsea in the last decade have gotten billionaire owners who wiped existing debt off the books. With an out like that, the incentive to avoid overspending is undercut.

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  5. Eric says:

    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”.

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    • Mike B says:

      Since the Clippers are already in a market with an existing (and very much better) team there is nothing forcing the fans to give that team any money. If the fans stopped showing up and watching then the team would go bankrupt or move which is effectively the same outcome as would occur under relegation. What I believe you are forgetting is that Clippers tickets are probably much much cheaper and/or easy to get than Lakers tickets. If the Clippers either got better or went aware entirely this supply of cheap NBA tickets would disappear. The NBA is essentially providing two product lines in what is a very big basketball market. I think that’s a win for fans and consumers.

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      • Roline says:

        Going bankrupt or moving is NOT the same as relegation! Not even close. Some clubs have gone bust, though never I think in the Premier League (I haven’t double-checked that, though), and in all the League (of four divisions, of which the Premier League is the top one) there has just been one club to move, Wimbledon, which got kicked out of the League for it. They’re now the Milton Keynes Dons and are doing quite well, moving steadily up the divisions. The power of the promotion system in action.

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      • KenC says:

        @Roline, Portsmouth went bankrupt only a year and a half ago in the EPL, got 9 pts deducted and was ensured of relegation.

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      • Mike B says:

        When Southern Methodist University was banned from competition by the NCAA for one year the program never recovered and hasn’t had a competitive team since. I don’t know what happens in what ever business environment the Europeans play in, but here if a team was kicked out of a top tier league all the good players would leave, all the best staff would leave and all the fans would stop showing up partly to those last two factors. Television revenue would then vanish and the team would be toast until some billionaire decided to come and spend his way back into the top league.

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      • Roline says:

        I wasn’t sure if they’d been relegated before they went broke, rather than after. I said I hadn’t double checked!

        The promotion-relegation system has been in operation forever, long before Sky Sport’s money distorted the finances. I think the two issues should be kept separate – the current spending bubble and the strain that’s putting on even the biggest clubs is not a factor of the promotion-relegation system and should not be treated a such.

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  6. Josh says:

    Mike B., I feel like you don’t really understand the passion the fans have for their soccer teams. It’s not like it is here where the Camden Riversharks are ignored. People are very, very, interested in teams that are not in the Premier League. Not only that, there is a competition in England where all the teams in all the leagues are entered and all have a chance to win. That’s always exciting and awesome when there is a giant killing.

    Having excitement at both the top and the bottom of the standings is what makes promotion and relegation great.

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    • Mike B says:

      Hidden due to low comment rating. Click here to see.

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      • Alex K says:

        That would not be a bad development. It would at least provide a route to maintaining education alongside sporting ability. Currently in the UK a football talented kid would abandon a university education to pursue a place in the youth set up of a professional team. If they don’t make it, they would at least have a college education.

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    • Mike B says:

      BTW how can you ever hope to maintain rivalries in a pro/rel system with so many levels? Part of the joy of American sports at both the professional and school level is that you have so many contests that have been played out over decades or even centuries.

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      • Dave_W says:

        Speaking only for football, there’s a yearly knockout cup competition open to every team in the country (from all levels) and another open to every team in the top four levels. They are both seeded to some extent, in that the higher teams enter in the later rounds, but old rivalries are frequently thrown up in those ties. See, for example, Leeds United playing their old rivals Manchester United in the FA Cup in 2010 and the League Cup in 2011 – the former being the first game between two bitter rivals since Leeds were relegated some six years prior. That game was broadcast nationally and the atmosphere was electric, precisely because it had been some time since the clubs had played each other.

        Contrast a system in which, say, a team from Florida is assigned to play a team from New York twice a year until the end of time – and thus each becomes the other’s main rival despite the fact that several other teams play closer to each of them. That looks every bit as strange, to the eyes of people from countries where teams are so much more closely tied to geography.

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      • Mike B says:

        If you have an FA Cup tournament why isn’t that the premier national achievement in association football instead of the premier league championship? Why can’t teams form whatever conferences they wish instead of being pushed into an existing hierarchy?

        The conference system allows North American leagues to have teams that are somewhat orthogonal to eachother. Players you can trade players to another team at the same level…but not risk having them compete against you directly. Similarly having a bunch of neutral cities close by takes the pressure off having to deal with obnoxious rivals every time you leave home.

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  7. naren.g says:

    The author makes a few good points that particularly apply to basketball more so than the other big NA pro sport leagues. As we have seen over the past 2 years, players are choosing markets more so than teams. Additionally you are seeing mid and small market teams, over paying to attract or keep talent (eg. Joe Johnsons atrocious contract in Atlanta). Even in the case of Miami (which is a top ten market in a top ten state) the states tax incentives played a big part in the decision of wade, lebron and bosh to take less to locate there.

    The nugget I think we can take out of this article, is that it makes little market sense for the league to allow teams to exist in a. overlapping markets or b. shrinking markets, if they are concerned about the long term health of the league. And I COMPLETELY agree that revenue sharing is not the way to compensate small market owners.

    The problem as I see it that there are successful brands and successful markets. Unfortunately, due to movement restrictions, successful brands cant expand into larger markets, and successful markets are stuck with failing brands.

    The solution for greater mobility for teams, will dramatically improve the competitive balance of the NBA. Just based on market size alone, it makes no sense, that a team moves from seattle to okc. It also makes no sense, that the nba is hell bent on keeping a team in NOLA. Additionally they dont want to allow any team to locate to Las Vegas.

    If you were to evaluate markets, based on projected growth/economic performance, overlap, regional branding etc. you can easily see a very different mosaic emerging. Here is what would likely happen:
    1. You would see a lot of overlapping market teams move to the closest larger urban centers. (Eg. Sacramento Kings could move to the Bay Area while keeping their Sacramento (tv) fan base. Milwaukee, would make the same move to Chicago.)
    2. You would have greater regional branding for teams. (i.e. it might not make sense to have a team in charlotte as a city, but as a region the carolinas are growing and have a strong basketball culture. So you may want to rebrand the team Carolina Bobcats and focus on regional identity. That could also apply to Orlando and Cleveland)
    3, You would see teams move from shrinking markets (i.e. there is no market reason why a team would remain in NOLA in the long term. They would likely move to nearby Houston or Dallas as their Second Team. Same applies to Oklahoma City and Detroit)
    4. You want to expand into more lucrative foreign markets (i.e. You would likely see a team locate to Mexico City to capitalize on a much larger market than all but the top 10 markets in the U.S. I anoint the San Antonio Spurs as the one to make this move.)
    5. You would probably see guest cities emerge (i.e. For the cities that lost their teams, you would see them return to play 10% of their regular season games there. Allows you to keep using the existing arena and those games would definitely sell out. This might apply to a Chicago team touring Milwaukee, or a Texas team plays a few games in NOLA etc.)
    6. And finally you would have less issues with free agency based on destination (i.e. if you make most destinations equal, in terms of marketing opportunities and long term career potential, then you will see a lot more competition between cities are markets)

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    • Alex K says:

      The point at which comparing US and European sport falls down is in fan behaviour.

      European fans do not see a team as a franchise they start following dependant on whether an owner chooses to relocate or start a team. It results more in a loss of fans than creation of new ones. Nor whether the team is successful or not.

      To be a fan is to support that team whether it wins or loses and specifically not to support another team that opens up shop. If you move cities or across the globe, you don’t change teams. I may go watch FC Pauli whilst working in Hamburg, I will never be a FC Pauli fan or supporter.

      Manchester United & Manchester City could never merge to create one Manchester Franchise. The fans of both would not support the new joint franchise.

      What is likely is that the fans would abandon the new new team and the fans go and set up a new club, starting at the bottom tier. Examples being Wimbledon AFC & FC United, created by fans unhappy with the new owners of their team.

      The failure of American Sports to gain traction in Europe comes down to those sports being imported into Europe rather than growing from grass roots involvement. The same may be said of the failure of soccer in the US in the 70′s. Whether the fact that soccer is a popular high school sport in the US makes a difference now is to be seen.

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  8. Thomas says:

    “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.”

    Ironic that on an economics blog the profitable Pirates and Clippers are labeled incompetent. Perhaps the owners are treating their franchises like businesses rather than toys.

    According to Forbes, the Clippers have paid a 12.25% annual return on Sterling’s initial investment, and has returned operating profits in each of the five previous years (all numbers as of 2008: http://www.forbes.com/lists/2008/32/nba08_Los-Angeles-Clippers_322952.html).

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