Economics of Sport
The Relationship Between the Objectives of Owners of Professional Clubs and Franchises and League Structures
Introduction
In the literature related to sports economics there is a strong debate regarding the objectives of clubs and franchise owners and their implications on league regulations. As Sandy et al (2004) state, ‘there is a conflict between the interest of the league in having most teams win half of the games to maximise competitiveness and those of the individual teams which maximize income through winning as many games as possible’ (2004:158). Models have been developed by Scully (1995), Sloane (1971) and Dietl et al (2011) in the attempt to explain how sports organisations’ behaviours affect competitive balance and club profits. The reminder of this paper is structured as follows. The Market Structure section assesses the debate on market structure. The Club Objective section makes an overview of club objectives and outlines the two major notions of profit and utility maximisation, which it then compares and explains using the above-stated models in the subsequent section. The Empirical Evidence section highlights authors’ perspectives. Finally, the Conclusion summarizes the paper and concludes.
Market Structure
Classical economics theory states that the best industry that a given firm can be in is a monopoly. Here, a firm can maximise its profits without having to engage in competition. However, the sport industry is bizarre in this sense. The Louis – Schmelling Paradox, as defined by Neal (1964:3), emphasises the need for competition as a requisite of existence, the complete opposite of orthodox economics concept. The paradox revolves around the example of a fighter who can only maximise his profits by engaging in combat with a contender (the stronger the contender, the higher the profits).
Neal (1964) argues that, from an economic perspective, the league is, in fact, ‘the firm’ in the case of professional sports and that the teams not only
Introduction
In the literature related to sports economics there is a strong debate regarding the objectives of clubs and franchise owners and their implications on league regulations. As Sandy et al (2004) state, ‘there is a conflict between the interest of the league in having most teams win half of the games to maximise competitiveness and those of the individual teams which maximize income through winning as many games as possible’ (2004:158). Models have been developed by Scully (1995), Sloane (1971) and Dietl et al (2011) in the attempt to explain how sports organisations’ behaviours affect competitive balance and club profits. The reminder of this paper is structured as follows. The Market Structure section assesses the debate on market structure. The Club Objective section makes an overview of club objectives and outlines the two major notions of profit and utility maximisation, which it then compares and explains using the above-stated models in the subsequent section. The Empirical Evidence section highlights authors’ perspectives. Finally, the Conclusion summarizes the paper and concludes.
Market Structure
Classical economics theory states that the best industry that a given firm can be in is a monopoly. Here, a firm can maximise its profits without having to engage in competition. However, the sport industry is bizarre in this sense. The Louis – Schmelling Paradox, as defined by Neal (1964:3), emphasises the need for competition as a requisite of existence, the complete opposite of orthodox economics concept. The paradox revolves around the example of a fighter who can only maximise his profits by engaging in combat with a contender (the stronger the contender, the higher the profits).
Neal (1964) argues that, from an economic perspective, the league is, in fact, ‘the firm’ in the case of professional sports and that the teams not only
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