Having grown up in Cincinnati, the home of the first professional baseball team, I’m a natural baseball fan. During the baseball season, one of the first things I do each morning is check the standings to see how the Reds did the previous day.
But sadly, I have to say major league baseball is in trouble. The trouble is highlighted by the threat of a players’ strike that could end this year’s season without a World Series.
Yet, the team owners are rich, and most players are rich with average salaries above $2 million. So should we say “a plague on both your houses” and call each side greedy and selfish? Or, are there some economic lessons to learn from baseball’s current struggles?
People complain that baseball players receive large salaries for “playing a game.” Some go further and say the average player, without a college degree, isn’t deserving of a high salary.
Actually, economics can easily explain why baseball salaries are high. One simply has to look at supply and demand.
On the supply side, there are a limited number of individuals who have the talent and skill to throw, or hit, a 90 mph baseball. And, those skills and talents aren’t easily taught, so they can’t be readily replicated.
On the demand side, consumer interest in attending baseball games, watching games on TV, and purchasing baseball products such as hats and shirts means there are large revenues in baseball. Annual total major league baseball revenues easily top $1 billion.
So, with few suppliers (players) and large revenues, it’s easy to understand why revenues per supplier (translated, player salaries) are high. This is especially the case since the advent of free agency, which forced owners to compete for players.
Even though there’s big money being made in baseball, it isn’t evenly distributed among the 30 major league teams. With minor exceptions, each team derives revenue only from its own market. This is in contrast to the National Football League, where all revenues are put into one potand then equally distributed to each of the teams.
Although having baseball teams rely on revenue only from their own markets may seem fair and logical, notice what it does to the financial position of teams. Teams in large markets, such as the New York Yankees and New York Mets, the Atlanta Braves, the Los Angeles Dodgers, the Boston Red Sox, and the Chicago Cubs, have a monetary advantage over other teams. These big-market teams can bid for the best players and raise the salary bar. To try to keep pace, smaller-market teams also pay more for players.
In contrast, teams in the National Football League start each season from the same financial position. Although this doesn’t guarantee teams of equal quality, it does allow teams to compete for players from the same financial footing.
Major league baseball players love the system that allows large-market teams to set the salary standards. Not only does it push average salaries higher, but free agency increases the likelihood that very good players will end up playing for large-market teams and earn even more.
Smaller-market team owners obviously don’t like the current economic system in baseball. They would like some restrictions on the large markets, either by imposing a salary cap on each team similar to those in the NFL and NBA, or by forcing large-market teams to share revenues with small-market teams. Players’ opposition to such restrictions is a major source of contention in the current baseball labor talks.
So is the solution to baseball’s economic issues a restriction on what teams can pay players, or a “socialist” system as in the NFL where each team is given an equal bankroll regardless of its performance on the field?
No, these are just Band-Aids that don’t address the underlying issue. Again, economics can quickly provide the best solution. In a functioning competitive economic system, large markets with firms earning superior profits will attract new firms. That is, new firms will move to the large markets and divide those markets more ways until large-market firms are earning no more than small-market firms.
The best solution to the modern economic problems of baseball is to loosen restrictions on team movement and guaranteed markets. Allow unprofitable small-market teams to move to large markets. With the bigger markets split more ways, they will no longer have an advantage over smaller markets, and the big-market escalation of player salaries will end.
In baseball, greater competition off the field will lead to more competition on the field.
Michael Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar with the Locke Foundation.