Competitive Balance in Sports: "peculiar Economics" Over the Last Thirty Years

• Publication year: 2019
• Author: By Daniel A. Rascher, Ph.D. and Andrew D. Schwarz

COMPETITIVE BALANCE IN SPORTS: "PECULIAR ECONOMICS" OVER THE LAST THIRTY YEARS1

By Daniel A. Rascher, Ph.D. and Andrew D. Schwarz²

In 1984, with its ruling in Nat'l Collegiate Athletic Ass'n ("NCAA") v. Board of Regents of University of Oklahoma,³ the Supreme Court recognized that benefits can accrue to society when potential competitors limit their competition in the interest of competitive balance. In the thirty years that have followed, a period in which professional sports have increasingly become partnerships between owners on the one hand and strong players associations on the other (notwithstanding the recent cultural clashes between owners and players), courts and collective bargaining have mapped out boundaries of acceptable collective action geared around creating competitive balance, all in the name of increasing consumer demand for each sport's product. Similarly, college sports (though not in a bargaining-based partnership with its players) have relied on the same competitive-balance justification for its collective refusal to pay athletes at market-based rates (in addition to claims that the existence of college sports requires that "athletes must not be paid"⁴).

However, while the last thirty years have seen competitive balance put forth as a pro-competitive justification, the economic basis for this claim is not quite so clear. In fact, in many cases rules that have been adopted with the express aim of achieving competitive balance have been shown not to do so, while others that do achieve balance may only do so at the expense of consumer preferences. Figuring out which rules truly grow consumer demand is an empirical exercise—there is no one-size-fits-all theoretical answer.

At the professional level, the logic of competitive balance has received a fairly non-critical view, with players associations generally accepting that salary caps, revenue-sharing, and individual player maximums grow the total value of the sport via improved competitive balance, even though many of the mechanisms in question are not based on firm economic theory. In contrast, on the collegiate side, where in the absence of collective bargaining such rules have been challenged in antitrust litigation, courts have been more inclined to look for evidence that the team and individual-player pay caps implicit in "amateurism" actually help competitive balance before simply accepting this economic nostrum as fact. Put to that test, the argument that caps on compensation improve competitive balance has tended to fall flat.

For example, in O'Bannon v. NCAA, a group of men's college basketball and football players brought an antitrust class action to challenge the NCAA's restrictions on their ability to earn money from the use of their name, image, and likeness (NIL).⁵ The district court rejected competitive balance as a procompetitive justification for the naked collusion on athlete remuneration, finding that "the NCAA's current restrictions on student-athlete compensation do not promote competitive balance."⁶ The Ninth Circuit concurred.⁷ In NCAA Athletic Grant-in-Aid-Cap Antitrust Litigation (a.k.a., "Alston"), a class of major college football and men's and women's basketball players challenged the NCAA's collusive pay restrictions preventing schools from offering more compensation to these athletes for their athletic services.⁸ In that case, the notion of competitive balance as a procompetitive justification took a back seat, with the defendants (NCAA and the FBS⁹ conferences) proffering no evidence and thus having this defense ruled out at summary judgment.¹⁰

[Page 58]

The analysis below explores whether and when efforts by sports leagues to promote on-the-field competitive balance are in the interests of consumers. First, we show that competitive balance can be an important and pro-competitive objective and outcome of sports leagues, but that the evidence is mixed as to whether consumer demand hinges on balance.¹¹ Second, we discuss the history of league efforts to promote competitive balance. Finally, we analyze the efficacy of two of the rules purporting to affect competitive balance, revenue sharing and salary caps. Along the way we also explore a case study: how would a class of elite athletes demonstrate class-wide harm from an anticompetitive restraint on the commercialization of their NIL and athletic reputation.

I. IMPORTANCE OF COMPETITIVE BALANCE: THE HISTORICAL ANTECEDENTS

The on-field dominance by the New York Yankees baseball teams of the 1920s led to attendance problems for the Yankees and for many of the other Major League Baseball (MLB) teams. Fans grew tired of lopsided, predetermined affairs, instead preferring uncertain outcomes and balance.

[Page 59]

In 1964, economist Walter Neale recognized the uniqueness of competitive balance to sports in noting the "peculiar economics of professional sports."¹² Neale's work pointed out that while Coca-Cola may wish that Pepsi would disappear, the Yankees benefit financially when the Oakland A's¹³ are of high quality. Thus, the nature of competition was infused with a need for cooperation, which has itself been the core of the argument that sports leagues and their franchises constitute a joint venture or perhaps even a single economic entity.¹⁴ In fact, the courts upheld the Commissioner of Major League Baseball's decision to nullify certain trades in 1976, explicitly based on the notion that athletic competition would be reduced if allowed to be consummated.¹⁵

Does competitive balance increase demand? The economic research offers nothing more than an "it depends." Optimal levels of competitive balance can increase demand, but there is a growing body of recent research drawing on behavioral economics showing that competitive balance may often be outweighed by fans' preference that the home team win or for there being an upset, whether expectations are met and how, or changes in league standings.¹⁶ Notwithstanding the many measures of competitive balance (e.g., within-game, game-to-game, within-season, season-to-season¹⁷), increased expected closeness of a contest has been shown to increase live gate attendance and television viewership.¹⁸ The closeness of winning percentages and total team quality (measured as the sum of winning percentages) has been shown to improve TV viewership while the score at halftime affects the second-half television audience.¹⁹ The closer games are expected to be (using both winning percentages and betting odds) and the higher the total quality of the two teams are, live gate attendance is improved as well (when controlling for other factors).²⁰ Analysis of MLB from 1901-1998 shows that attendance is improved with closer standings throughout the season.²¹

[Page 60]

Twenty years after Walter Neale's revelation, the Supreme Court in Board of Regents recognized the special economic forces at work in sports leagues, holding that specific NCAA rules (namely the joint sale of television rights), which would otherwise be illegal per se in other industries, needed to be evaluated using the rule of reason weighing the net anti- or pro-competitive effect of the rules in question.²² Fast forward twenty-five years to the more recent American Needle case, where the Supreme Court noted that the legitimate interest in maintaining competitive balance among teams is still subject to the rule of reason.²³ Ironically, in both of these cases, though the Supreme Court has enshrined competitive balance as a laudable aim, nevertheless both leagues/sanctioning bodies in question (the NCAA and the National Football League) lost, with the restraint in question found not to be justified because of competitive balance, and in the two more recent cases when the NCAA tried to take advantage of the legal support for competitive balance, it found it could not prove its "amateurism" rules contribute to competitive balance.²⁴

To be clear, the concept of (athletic) competitive balance is pro-competitive (in an economic sense) only when it generates a desired product attribute that enhances the product and increases revenues, although in a rule-of-reason setting, it may have to be weighed against possible anticompetitive effects. As one of this paper's authors explained in Alston,

"Procompetitive effects" is an economic term of art with specific economic meaning. In that economic context, the term is not a malleable, catch-all phrase, synonymous with socially desirable aims, however laudable those goals may be. To be procompetitive, a restraint must cause increases in overall economic welfare or the reduction in economic exploitation, as economists define those terms. . . . If a restraint causes net improvement to economic welfare according to economic theory and consistent with the results of studying the effects in the market place, a restraint can be characterized as causing "procompetitive effects."²⁵

With many current leagues sharing specific revenue streams with players, it is clear that to the extent there is an optimal level of competitive balance in a given league/sport, it will benefit fans, owners, and players. Where room for debate exists is whether a specific rule actually enhances consumer demand (or even promotes competitive balance at all).

[Page 61]

II. THE EXOGENOUS STRUCTURE OF SPORTS LEAGUES

The notion that competitive balance is a key part of the product that customers of sports demand, and that it is really unique to sports, is essentially what Neale called the "peculiar economics of sports."²⁶ Three critical exogenous²⁷ facets of sports leagues help explain why rules aimed at enhancing competitive balance can be pro-competitive.

A. Competitive Balance Is Exogenous

As noted above, a unique aspect of sports leagues is that the primary product is typically an event (or season culminating in a championship) between two competitors, often two different companies. Yet, cooperation is needed and (some level of) parity is desired by fans. This cooperation and goal of...