The Economics of Sports Leagues

The discipline of economics is generally valid for all industries across the world. This is because the basic fundamental economic principles of demand, supply, and free market are applicable to almost all industries in the world. There are only a few industries where these economic principles are not really applicable. The sporting industry is one such unique case.

The normal economic principles of demand and supply do not really apply here because of certain economic peculiarities. Hence, we need to understand the specific economic issues that are relevant to sports leagues and how they must be taken into consideration.

In this article, we will try to understand the peculiar economics related to sports leagues.

1. The Objectives are Not Economic: First and foremost, the behavior of an economic agent is considered to be rational in nature. Economic agents are supposed to try to meet objectives such as profit maximization, wealth maximization, or even revenue maximization. However, this is not the case when it comes to sports leagues. Although many sports leagues try to run with the basic objective of profit maximization, it is often not very fruitful.

   Sports leagues and teams are able to make money because of their fan following. Sometimes, this means that the league has to compromise on short-term profits in order to keep the fans interested. Hence, the objective of the league is not static. Instead, these objectives keep on changing based on the stage of the league and even the stature of the club. Hence, many economic laws that blindly pursue the principle of profit maximization are not applicable to sports leagues.

2. Inverted Joint Production: There is almost no sports team in the world that is valuable in its own right. This is because no team can play against itself. Teams only derive value when they compete against other teams in a league.

   If there is no league, no competitors, and no competition, the team does not have any significant economic value. This is because the product being sold by the sports league is entertainment.

   Entertainment is a function of the close matches which happen as a result of tough competition between teams. Hence, the sports league teams jointly produce the product.

   Generally, economic organizations try to produce the best product which can always beat the competition in the marketplace. However, this logic does not work in sports leagues. If the product of one team is far better and always beats the competition, the customers i.e. the viewers begin to lose interest.

3. Free Market is Not the Ideal: Under normal scenarios, economists always believe that a free market is the best way to run a marketplace. This is because, in a free market, the best players get access to the best resources and are able to utilize them to the maximum extent. This is good for the resources, the market players as well and the overall economy.

   Adam Smith has defined this phenomenon as the invisible hand wherein if each player pursues their own individual objective, the objective of the marketplace is also achieved.

   However, this rule does not apply to sports leagues. This is because in the case of sports leagues, if a sports team is able to perform well and corner all the resources i.e. players, then they will end up winning consistently. There will not be an element of uncertainty in the game. As a result, the viewership and fan following will drop and there will be negative economic impacts on the entire league.

   Hence, it can be said that the free-market principles do not apply to sports leagues. Instead, the sports league exists in a controlled environment wherein it is imperative to ensure that all teams have approximately the same level of competition.

4. Control of Supply: As mentioned above, leagues cannot work on a free market principle. Instead, they need to restrict the supply in order to retain their value. It is for this reason leagues generally control clubs and their authority to participate in different games.

   In essence, they form a cartel of clubs that actively work with each other. However, they do not co-operate with the competition. The word “cartel” generally has a negative connotation when it comes to economics. However, sports leagues are natural monopolies. It is common for leagues to control the supply in the following manner.

5. Control over the number of Clubs: Every league in the world controls the number and type of teams that participate in it. There are a finite number of teams that are allowed to participate in the league. By doing so, the league is able to control the number and types of players that are involved as well.

6. Control over Player Movements: It is common for sporting leagues to exercise some kind of control over the movement of players within teams.

   Generally, leagues exercise this control by limiting compensation, having cooling-off periods, and creating rules that govern the transfer of players between different teams in the league. This control is necessary to ensure that the competitive balance within the league is maintained.

7. Control Over Playing in Other Leagues: Sometimes, sporting leagues allow their top teams to compete in other leagues. For instance, the top teams of the English Premier League are allowed to compete in the Champions League. However, the sporting leagues want to limit the exposure to the general public to ensure that some sense of excitement is present with regard to the league.

Hence, it can be said that the economic fundamentals of sports leagues are quite different from the general economic principles. It is for this reason that the reader must become aware of these peculiar economic fundamentals in order to better understand the decision-making in the game.