What is competitive balance?

(revised 29 Oct. 2009)

• Blue Ribbon Panel report (2000):

competitive balance exists when– “there are no chronically weak clubs because of

MLB’s financial structural features”– a well-managed club has a reasonable hope of

reaching postseason play and winning

Why is competitive balance an economic issue?

• The demand for MLB will tend to fall if--– too many teams cannot compete– fans perceive that the richest teams have an

unfair advantage

Simple measures of competitive balance

• Standard deviation of team winning percentages• Number of WS or pennant winners, compared

with--– number of teams in league– previous years or intervals

• Average number of games out of first place?

MLB’s competitive balance, then & now• 1903-1950s: not much, but gradually improving• 1965-1976: improved more; amateur draft helped• 1977-early 1990s: peak of competitive balance• 1995-2001: competitive imbalance?

– strong correlation between payroll and W-L % and postseason

• no teams outside top 25% of payrolls won WS• only 4 teams from bottom half of payrolls made postseason

(and they won just 5 of 224 games)• 2002-2008 WS winners and payroll rank: Angels (15th-

highest), Marlins (26th), Red Sox (2nd), White Sox (13th), Cardinals (11th), Red Sox (2nd), Phillies (13th)– 2002-2008 WS runners-up: Giants (10th), Yankees (1st), Cardinals

(11th), Astros (12th), Tigers (14th), Rockies (25th), Rays (29th)

Does a higher payroll mean more wins?(2002-2009)

• Regressions of regular-season win. % on Opening Day payroll for all 30 teams find –

– In general, ~ 25% of the variation in wins was explained by variation in payroll.– Effect was small but statistically significant.– Actual variation in wins is much larger than payroll-predicted variation in wins– 2002-2007:

• Payroll had a positive effect on wins, but smaller than one might think– $7-8 M in payroll = 1 more win– Marginal benefit of Yankees’ last $50 M in payroll = 0 wins?

– 2008: exception: statistically insignificant relationship for AL and MLB overall• Payroll explained only 10% of the variation in wins in MLB• AL: < 3%; NL: 25%

– 2009:• AL: Payroll explained 48% of variation in wins• NL: Payroll explained 7% “ (insignficant)

What is “market size”?

• Market size is based on REVENUES (both actual and potential).

• Revenues are very dependent on the quality of the team’s product (wins, players, stadium, etc.), but also on local factors like– area population– area per-capita income– area level of interest in baseball (hard to

measure)

• Hard to separate team factors from local factors, actual from potential market size

Two crude measures of market size• TOTAL REVENUES, as compared with the other

MLB teams• ESTIMATED TEAM VALUE, as compared with

the other MLB teams– more forward-looking, e.g., higher if team is about to

move into new stadium

• Top third = “large market,” middle third = “mid-market,” bottom third = “small market”?

• Market size perhaps cannot be measured precisely

Can the small-market teams compete?MAYBE MAYBE NOT

• First 15 years of free agency (1977-91) saw unprecedented parity, several successful small-market teams

• Insignificant correlation between payroll and W-L % through mid-1990s and in 2008

• Recent success of some small-market teams

• Market size is not static

• Yankees: 4 WS titles in 5 years (1996-2000)

• 1997-2007: statistically significant correlation between payroll, W-L %

• Only one small-market, low-payroll team has won WS since 1991

• Collapse of Montreal Expos (well-run small-market team)

Competitive balance in recent decades

• Recall:– 1977-early 1990s: peak of competitive balance

– 1995-2001: some pattern of competitive imbalance

• Explanations:– Free agency (post-1976) helped comp. balance

• Easier for also-rans to improve themselves with new talent

• Rising salaries --> harder to keep championship teams intact

– Growing revenue and wealth imbalance in 1990s• Growing importance of local media and stadium revenues

– Value of MLB’s national TV deal fell 60% in 1994

• Increasing corporate (esp. media) ownership of teams

Competitive balance in other pro sports

• (NFL) National Football League: highest comp. balance– lowest concentration of championships

– policies: ~70% of revenues are shared; hard salary cap; “unbalanced” schedule

– lowest correlation between payroll and performance

• (NHL) National Hockey League: ????– Pre-2004: in the middle:

• low concentration of championships (1991-2002: 8 different teams)

• little revenue sharing, no luxury tax, no salary cap

• lower payroll-performance correlation than MLB or NBA

– 2004-05: season-long lockout by owners, who got a salary cap

• (NBA) National Basketball Association: least balanced– high concentration of championships (1991-2002: just 4 teams)

– increasing standard deviation of win percentages since 1980

The English Premier League (PL; soccer)

• League membership not fixed (non-monopolistic)– no territorial rights

• London: 9 PL teams since 1990

• Within the league, a hierarchy of divisions– bad high-division teams are relegated (demoted)

– good low-division teams are promoted to higher ones

• Comp. balance is mixed– good in terms of low standard deviation of win

percentages, high upward mobility of teams

– high championship concentration (Manchester United)

How can be MLB’s competitive balance be increased?

• Payroll cap / luxury tax?– Payroll cap might work, but is not feasible -- players’

union willing to strike to prevent one– MLB has a luxury tax on large payrolls, but threshold is

too high to be binding for most teams• Increased revenue sharing?

– Could work, but details are key:• What if teams use accounting tricks to hide revenues?• Incentive for low-revenue teams to improve themselves?

– Part of 2002 and 2006 Collective Bargaining Agreements (CBAs)

• 2006 CBA keeps revenue sharing high, while supposedly providing better incentives for teams to improve themselves

Competitive balance in the 2000s, as measured by playoff appearances

(Last revised 29 Oct. 2009)

How varied are the AL and NL playoffs in the 2000s?

• Is it pretty much the same teams in the playoffs each year? Not really.– 2000-2009: Both leagues:

• No team made the playoffs in all 10 years. • Most teams made the playoffs at least once.

– Only 4 AL teams and 3 NL teams failed to make the playoffs at all.

10 of the 14 AL teams, and 13 of the 16 NL teams made it at least once.

• So far, looks pretty good for competitive balance.

AL playoff appearances, 2000-2009,by team

• NYY – 9 times – (Last WS championship was 2000, of course.

A perfect Goliath. Since 2001, the WS winner has had to get past the Yankees somehow.)

• Boston, Minnesota – 6 times– (Big-market team.)

• No other team made it to the playoffs more than half the time.

AL, cont’d

• LA Angels, Minnesota, Oakland – 5 times• Chicago White Sox – 3• Cleveland, Seattle – 2• Detroit, Tampa Bay – 1

• Blue Jays, Orioles, Royals, Rangers – 0– Of those, only the Royals are a true small-

market team. Rangers are the ones who gave A-Rod that $252 M deal.

NL playoff appearances, 2000-2009,by team

• St. Louis – 7• Atlanta – 6

– Only two NL teams to be in playoffs more than half the time.

• LA Dodgers – 4• Philadelphia, Arizona, Chicago Cubs, Houston,

San Francisco – 3• Colorado, San Diego, NY Mets – 2• Florida, Milwaukee – 1

NL, cont’d

• Pittsburgh, Montreal/Wash., Cincinnati – 0– Pirates and Reds are small-market teams, more

or less, and new stadiums don’t seem to be helping much.

– Expos’ move to big city and new stadium hasn’t helped yet.

In sum

• Glass looks a lot more than half full.– Vast majority (23/30) of MLB teams have been to

playoffs at least once in 2000s.• Except for Expos, teams that didn’t make it look like victims of

bad management.

– Only one team (NYY) has been in more than 2/3 of the playoffs, and they have only one WS championship to show for it.

• (Knock on wood!)

– Even the two-time WS winner (Red Sox) has missed the playoffs almost half the time.

Questions for further research

• Has competitive balance changed much during the decade (especially after the 2002 or 2006 CBA)?– Did the distribution of playoff appearances

change much?– Did the standard deviation of payrolls change

much?