The University of Chicago Magazine June 1995
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Bottom-line Drive


We have to remember that prices in the U.S. have been increasing, on average, for 40 years. Since 1950, the cost of living, as measured by the Consumer Price Index, has increased about fivefold. In inflation-adjusted dollars, the price of an average seat to a Major League game has actually decreased over this period; tickets were lower in real terms in 1993 than in 1950. Relative to other forms of entertainment -- professional basketball or football, amusement parks, concerts and plays, and even restaurant meals -- baseball tickets are less expensive and have risen more slowly in price. At the same time, we are more than twice as wealthy now as we were 40 years ago. Converting salaries into baseball-ticket equivalents, the average 1950 family income could have purchased about 1,200 tickets; today the corresponding figure would be 3,000.

The assertion that it costs a family of four $100 to attend a game is worse than comparing apples with oranges. That supposed "hit" includes four tickets, four hot dogs and soft drinks, a couple of beers, ice cream, parking, two souvenir caps, and a game program. With the exception of alcohol, fans are permitted to bring their own food into most ballparks (try that at a movie theater!). If you do eat at the game, you are simply substituting a meal there for one at home or at a fast-food restaurant, not buying a second dinner. And souvenir caps and pennants are not something we purchase at each and every game. In fact, no one is forcing fans to buy anything beyond the actual ticket.

Today's athletes are bigger and stronger. Salary levels produce tremendous incentives to stay in shape.


But if players ultimately prevail in this dispute, won't my tickets go up in price to reflect management's higher costs?

When team owners announce price increases each year, or when they promised lower ones if replacement players took the field this spring, the principle is the same: Charge what the market will bear. Profit-maximizing pricing decisions are based on the anticipated demand of fans for baseball. As long as the owners' cartel remains intact (more on that in the sixth inning), if demand increases, so will ticket prices and team revenues. Player salaries do not determine, or much influence, ticket prices, no matter how often owners allude to their increasing payrolls to justify price hikes, and no matter how much fans believe them. (In nominal terms, players' salaries have increased by 2,000 percent since free agency in 1976; ticket prices have risen only 150 percent -- not what you would expect if the former really determined the latter.)

In fact, it is the other way around: In economic jargon, the demand for the players -- and thus the level of their salaries -- is derived from the demand for baseball. After that, it is merely a matter of dividing the spoils between two powerful and protected groups, the owners' cartel and the players' association. Only two things can lower ticket prices: less fan demand or more competition.


Owners are going broke now. How can they afford to lose any more money? And isn't the whole purpose of business to have profits?

On the eve of the strike last summer, spokesmen for Major League Baseball reported that perhaps as many as 19 of the 28 teams were losing money; a week later they lowered the number to between 12 and 14. Shortly after, Financial World magazine put the figure at five or six. About that time, NPR asked me to assess the various claims and to provide my own estimate. I applauded the iterative process that was quickly narrowing to the correct answer: zero. No baseball franchise is losing money for its owner(s), despite steady protestations to the contrary.

Three years ago investor groups in eight cities fought for the right to pay the $95-million fee for one of the two expansion (and thus decidedly mediocre) franchises; next year two new owners will gladly part with $150 million apiece to join the cartel in 1998. If the net revenues were really expected to be negative over time, you couldn't give a franchise away, let alone sell one for a nine-figure sum.

Owners and their accountants can make any team appear unprofitable, using perfectly legal and acceptable practices -- assigning some revenues to related enterprises, as the St. Louis Cardinals do with parking and the Atlanta Braves do with broadcast rights (Ted Turner owns both the team and the station that televises its games); taking advantage of differential tax rates on personal income vs. capital gains, steering current profits into the future; writing off current losses on one's team against profits on other corporate activities; and using the franchise and ballpark to advertise their other business interests such as beer or automobiles.

Stories about the precarious financial state of baseball date to the 1870s. They were no truer then than they are today. Gerald Scully and other economists who have done research in this area peg the average annual rate of return in all four professional sports leagues at easily over 20 percent, even for small-market teams. But what if some were to go under? So what? A franchise is a small business, and the normal failure rate on this type of investment, as restaurant owners and department-store managers well know, is certainly not zero.

Finally, one would actually expect the direct financial rate of return from owning a sports franchise to be lower than in alternative investments because of the non-pecuniary benefits of ownership -- it's fun and you are bestowed with instant celebrity status. (The same principle holds with regard to professors' salaries: The non-monetary benefits such as the prestige, a lower clothing budget, and a demanding but more flexible work schedule should translate into lower financial gains than one could get in industry or government.)

Unfortunately, most of the profits earned on sports franchises result from being able to operate a monopoly in a highly protected market, not from shrewd decision-making, business acumen, and hard work. And, unlike in most other environments, excess team profits can exist indefinitely because they are immune from competitive pressures.


Don't we need a reserve clause or some other restrictions on player movements, such as salary caps, to ensure competitive balance across teams?

Player reserve systems have no significant impact on the distribution of playing strengths across teams. They merely transfer money from players to owners, precisely as economic theory predicts. The same would be true if salary caps, the latter-day reincarnation of the reserve clause, are imposed. It is not in the owners' or the league's best interest to have sizable inequalities across teams; such disparity reduces overall revenues and profits. (There is some mutual advantage to having big-city teams win more frequently than others, because this will likely produce larger revenues -- and salaries.) Furthermore, beyond a given point, adding more star talent to a team will cost the owner more in salaries than can be recouped from the higher attendance and revenues that winning more games would bring.

More than 30 years ago Simon Rottenberg and U of C Nobel laureate Ronald Coase laid the theoretical basis for these statements. Empirically, the distribution of won-lost percentages and pennants before and after free agency -- 18 different teams have appeared in a World Series in the last 20 years -- support these scholars' hypotheses.


Haven't recent expansion and personal greed left the quality of today's players and the quality of play far below levels of yesteryear?

No. By any reasonable, objective standards and measures, both players and play are better today than they ever were, and economics has a lot to do with it.

If baseball talent has declined, it would certainly be unique in sports. Swimming records continue to fall; track-and-field athletes run faster, jump higher, and throw farther now; qualifying times for the Boston Marathon are tightened each year; NFL and NBA players today are superior to those who played these sports earlier. Why? Because more opportunities for fame and fortune have lured a higher percentage of a growing population to strive for excellence in these areas. Today's athletes are bigger, stronger, and faster; they are in better physical condition; they start earlier in life and put in more hours (key ingredients to success, as Michael Jordan found out when he tried his hand -- and eye -- at baseball). Technology, in the form of equipment, shoes, clothing, training facilities, computers and videotape, and knowledge of human body mechanics, has improved athletes' efficiency in all sports, including baseball.

The number of Major League Baseball players as a percentage of the nation's young, male population has fallen steadily over this century. Based simply on raw population numbers, and then factoring in African Americans, Hispanics, and international players -- none of whom were on baseball payrolls 50 years ago -- I estimate that we should have at least three times as many equally qualified players today.

Economic theory leads us to expect that salary levels reached by the top 700 players would produce tremendous incentives for them to stay in shape and to play better. More important, high salaries are a strong inducement for athletically inclined teens to consider careers in professional sports. Owners today also have sizable financial stakes in their players' performances. Mistakes are more costly to them, which suggests they have ample incentives to scout well, to hire well, and to motivate their players.

Even if it could be proven that the quality of play is lower today, it's doubtful that fact alone would affect baseball's marketability. The bottom line for most fans, once a certain level of quality of play is achieved, is evenly matched teams, an uncertain outcome, and some way to identify with one side or the other. If absolute quality were the most important consideration for fans, taking things to their logical conclusion, in each sport we would have just two all-star teams barnstorming the country and appearing on television weekly -- a scenario few would find appealing.

Whatever ballplayers earn, their pay is less, on average, than their economic value to the teams' owners.


Why do these athletes make so much money? Do they really deserve those salaries, and couldn't we pay them a lot less and still see about the same quality of play?

As much as it may gall some diehard fans, today's ballplayers are, first and foremost, entertainers. In the context of that occupational grouping, many Major League players are relative paupers. Male entertainers such as David Copperfield, Garth Brooks, and Tom Cruise have annual incomes that exceed the entire payrolls of many baseball teams. Indeed, George Will charges more per hour to talk about baseball than Frank Thomas gets for playing it.

As to why players' salaries have grown to today's levels, one reason is technology. Forty years ago, seeing the best players was possible only for fans in the parks. At that time, Major League ballplayers earned four or five times the average U.S. male salary, and three to four times what the top minor leaguers made. Today those ratios are about 25 to one. Improvements in communications, principally television -- with large color screens, cable, videotape, and direct satellite feeds -- have made today's star athletes accessible to fans nationwide. And if you can thus see the best for about the same price as you'd pay to watch those less talented, why not see the best?

Television focuses demand on the relatively few, and brings them great financial rewards -- while depreciating the economic value of the also-rans. As my U of C colleague Sherwin Rosen pointed out in an important paper in the early 1980s, changes in communications technology and low-cost access have turned mere stars into highly compensated superstars.

The demand for baseball -- in ballparks, on television, and on logo merchandise -- produces the revenues that represent potential income to players. In Pogo's terms, we have met the enemy and it is us. (The fact that baseball players have tremendous talent is not by itself a reason. Circus performers, symphony orchestra members, and professional bowlers are also highly skilled, but the best of these, because the demand for their services is so much less than for baseball, earns less in a year than a ballplayer can make in a week.)

An equally important ingredient in the determination of six- and seven-figure salaries is the baseball industry itself, a legal cartel with 28 members. These firms are free to make joint output and pricing decisions, and to insulate themselves effectively from market forces, ensuring sizable and fairly stable profits. (Contrary to what one would suspect from all the attention paid to it in the popular press, baseball's antitrust exemption, which allows owners additional freedoms to discuss and to take interdependent action, is not an overwhelmingly important consideration here.) Once profits are generated, it's purely a matter of who is more successful at the trough, the owners or the players, who are now armed with free agency and a powerful union to represent their interests -- factors they didn't have 20 years ago when they had to square off individually against a unified owners' cartel.

It should be noted that whatever ballplayers earn, their pay is less, on average, than their economic value to the owners in terms of ticket sales, television contracts, and other revenue they produce for the league. Under the reserve system that prevailed until the mid-1970s, they were paid a lot less than their relative worth to owners. But even with a union, free agency, and salary arbitration, there remain residual restrictions on player movement and open bidding, such as initial assignments of players to particular teams and required years of service (in both minor and major leagues) to reach free-agent status, which combine to produce an exploitation rate of 15 to 20 percent.

Do the players deserve the salaries they receive? To the extent that fans are willing to pay large sums to see them perform, and because they are worth small fortunes to their owners, the answer is clearly yes. To the extent that current salary levels are by-products of what is essentially a monopoly, and thus would be far lower if there were 56 teams and 1,400 players instead of current numbers half that size, the answer is no. From one other vantage point, the answer could be "maybe."

For most of us, our economic worth, and thus our salary, in one industry is about what it could be elsewhere. Insurance salesmen could conceivably sell shirts, or even make them, and wouldn't suffer tremendous economic hardship if they moved from one job to the other. But athletes, movie stars, and others with highly specialized talents would experience a huge drop in income if they had to move to another profession. The formal term for this differential amount is economic rent. One implication is that we could tax away a substantial fraction of a player's salary without affecting either his decision to remain in baseball or (until his morale suffered) his hitting or pitching.

In this framework, a player doesn't earn his seven-figure salary, and we as fans don't get any additional benefits in the form of better performance, from this extra "rent" money that players are able to collect courtesy of their free agency and union. But as author and former Major League pitcher Jim Bouton said, "Players don't deserve all the money they're getting, but the owners don't deserve it even more."


What does it say about our values when we pay professional athletes such outrageous sums, while we entrust our children, our most treasured possessions and society's best hope for the future, to schoolteachers whom we pay relative pittances?

Nothing. A few centuries ago philosophers and precursors of modern economists debated what was then termed the water-diamond paradox: Why could diamonds, which had no real use, command such a high price while water, essential to sustain life, sold for practically nothing? The answer -- whether water and diamonds or schoolteachers and ballplayers -- is that the relative scarcity at the margin, not total value, determines the price. It is simply easier -- and less expensive -- to find one more person who can teach high-school history well than it is to find someone who can hit .300. The fact that the U.S. spent less than $2 billion on baseball in 1993, the last full season played, and over $400 billion that same year on elementary- and secondary-school education suggests that our values are quite respectable, thank you very much.


Didn't the recent strike cost the U.S. economy dearly, especially the cities in which there are teams?

The U.S. Conference of Mayors put the figure at more than $1 million per game to the home city, plus thousands of jobs lost at each ballpark. Zero is closer to the truth than these estimates.

Annual per-team revenues from all sources are under $70 million, much less than a medium-sized department store in the central city. And full-time employment for all 28 teams is less than 2,000, including the 700 players. Baseball, by any financial measure, is simply a very small industry; we spend only about 30 cents on baseball per every $1,000 of Gross Domestic Product. (Fruit of the Loom, for comparison, employs 35,000 people, and its sales revenues are larger than for all Major League teams combined. AT&T is 10 times larger than Major League Baseball; Sears, 30 times.)

Teams are located in cities with billion-dollar economies. Those who have done macroeconomic modeling of cities and regions consistently failed to detect any impact of the strike on employment, tourism, business revenues, or disposable personal income. One reason is because tickets and beer not sold during the strike were not "lost," but simply transferred to other areas of these local economies. Families spent their recreation-budgeted dollars elsewhere. For example, September 1994 was Hollywood's highest grossing September ever -- hardly a surprise. With no baseball at the parks or on television, people went to more movies. Restaurants, museums, amusement parks, video-rental outlets, and theaters gained, in the aggregate, about what baseball lost. The strike may well have affected where some people in Chicago drank beer, but it almost certainly did not affect the total amount they consumed.

This does not mean that no one suffered -- beer vendors inside ballparks, for example, lost income from their largely part-time jobs. But because it's easier to identify them, and to interview them, than it is the thousands of other retail outlets in these metropolitan areas that each experienced small increases in their sales revenues, we get a distorted picture of the strike's economic consequences.


Doesn't the strike's ending mean that baseball's troubles are behind us -- at least for a while?

First of all, there is no agreement between owners and players; we could see another work stoppage this year and/or one in basketball or football. And that is a reasonable expectation precisely because there are sizable excess profits to fight over -- Willie Sutton robbed banks, not dry-cleaning establishments.

In competitive markets, there are simply fewer profits for unions to fight over, and the U.S. economy has become increasingly competitive over time with shifts from manufacturing to service industries, increased international trade, enforcement of antitrust statutes, and better communications and transportation (which reduce spatial monopolies). This is why what little strike activity we have in this country is limited to the government sector, such as public schoolteachers and municipal workers, where competitive pressures are absent, and to anticompetitive areas such as professional sports. Remove the monopoly profits from sports and even a strong union will have less incentive to interrupt play. But how do we do that?

The competitive ideal would be more teams in more cities, a wider range of viewing options and prices for fans, and a reduction in the cartel's control over broadcast rights, minor-league farm clubs, and stadium use. The reason we have only 28 teams is not because of insufficient fan interest, a dearth of player talent, efficiencies from operating at that scale, or a lack of investors. It is because owners and players both benefit financially from the current arrangements, and because they have been remarkably successful at collecting subsidies and securing protection in Washington, state capitals, and mayors' offices. (Whatever animosities and contempt players and owners have for each other, rest assured that they will be quite united in protecting the cartel, the golden goose for both sides.) Some deregulation and an infusion of competition could bring the same consumer benefits to baseball that they provide in other sectors of the nation's economy.

Far more troubling value-issues than the assertion that ballplayers get paid more than schoolteachers can be found in the fact that -- when it comes to applying existing statutes and enacting complementary legislation to require professional sports leagues to abide by the same economic rules as other businesses -- public servants at all levels and of all political persuasions have consistently looked the other way. Worse, fans and citizens in general continue to let well-heeled owners, players, other special-interest groups, and their own elected officials get away with it.

Allen Sanderson is a senior lecturer in economics at the University of Chicago and senior study director at the National Opinion Research Center (NORC). When not answering the sports-and-economics questions of reporters from the Chicago Tribune to the New York Times, he teaches a two-quarter introductory economics sequence in the College, and works on NORC survey research projects related to labor markets and higher education.

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