Discussion on Competitive Balance

Competitive Balance The conclusion of Fort and Quirk (2004) that nothing can be derived regarding the competitive balance between a win- and a profit-maximization league if no further assumptions are made on the club-revenue function beyond concavity is, no doubt, correct. This can be illustrated graphically in Figure 3.1 for a simple two-team league with linear marginal- and average-revenue curves. The large-market team x is portrayed from left to right, and the small-market team y from right to left. The distance between the two origins is determined by the (constant) supply of playing talent. Under the profit- maximization assumption, both clubs’ demand curves for talent are given by their marginal revenue curves with the competitive market equilibrium in point (T ). Under the win maximization assumption, both clubs’ demand curves for talent are given by the average-revenue curves, and the market equilibrium is found in point (T ) (see Kesenne, 1996, 2000).

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Club Objectives, Competitive Balance, and the Invariance Proposition

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Subscriber: Ohio State University; date: 17 August 2018

In this particular representation, which shows a very steep slope of the MR-curve of large- market team x and a very flat slope of the small- market team y, it can be seen that that the competitive balance under profit maximization (T ) is more unequal than under win maximization (T ).

However, there might be good reasons to make further assumptions about a club-revenue function in team sports that will allow drawing some valuable conclusions on the competitive-balance issue. The slope of the MR-curve is affected by the preferences of the spectators regarding the win percentage of the team and the competitive balance in the league. We try to show here that there should be a relationship between the slope and the intercept of the MR-curves in order to become well-behaved revenue functions.

Most sports economists agree that five major variables should enter a club’s revenue function:

1. The market size or drawing potential of the team 2. The winning percentage 3. The competitive balance in the league 4. The ticket price 5. The absolute quality of the league (see Scully, 1989; Noll, 1974; Zimbalist, 1992; Vrooman J., 1995; Downward and Dawson, 2000; Dobson and Goddard, 2001; Szymanski, 2003; Sandi, Sloane, and Rosentraub, 2004; Gerrard, 2006; Fort, 2006; Kesenne, 2007).

The absolute quality, however, is constant in a fixed-talent supply model. Because we want to concentrate on the player labor market, we also start from an exogenously given and constant ticket price. Based on the extensive empirical evidence (see Simmons, 1996; Forrest and Simmons, 2001; Garcia and Rodriguez, 2002), the positive impact of the market size is unquestioned, but there is some reasonable doubt about the relative importance of the winning percentage and the competitive balance. In particular, the importance of the uncertainty of outcome on attendances and public interest is doubtful (see Borland and Macdonald, 2003; Szymanski and Leach, 2006). This is a crucial issue regarding the competitive balance between win- and profit-maximization leagues.

In the following two-club model, we start from a specification of a club-revenue function that leaves open the relative importance of winning and competitive balance. As in

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