January 2004, Vol. 127, No. 1
Economics of baseball
Book reviews from past issues
Economics of baseball
May the Best Team Win: Baseball Economics and Public Policy. By Andrew Zimbalist. Washington, DC, Brookings Institution Press, 2003, 198 pp, $24.95/hardcover.
The 2003 baseball season was an exciting one for many reasons, including the fierce division rivalries, unprecedented television ratings, and intense playoff showdowns. However, despite the apparent health of baseball, Major League Baseball (MLB) suffers from several major problems, many of which are economic in origin. In his book May the Best Team Win: Baseball Economics and Public Policy, Andrew Zimbalist writes a thorough but concise analysis of the economic health of MLB. Zimbalist uncovers the source of baseball’s current problems—MLB’s monopoly power and anti-trust exemption—and provides reasonable economic policy initiatives to improve the vitality of the baseball industry.
Baseball is associated with many things, but not often is baseball associated with economic theory. Zimbalist convincingly argues that MLB suffers from inefficiencies because it is the only producer of professional baseball in the country. In a pure monopoly, there is only one seller in a market. This seller uses its market power to artificially reduce output to raise prices and profit. Along with the issue of monopoly power, Zimbalist addresses the competitive imbalance of the game (the Yankees were in the World Series again), rising ticket prices, and work stoppages.
A profit-maximizing monopolist always seeks to reduce output. This places upward pressure on prices. MLB attempted to reduce output in 2001 when MLB Commissioner Bud Selig called for the elimination of two teams. Zimbalist describes many reasons why the loss of two teams would hurt the sport. Most interestingly, Zimbalist discusses the issue of talent compression. The distribution of baseball skills in the entire population is normally distributed (a bell curve). Zimbalist says according to the theory of talent compression, the larger the number of people playing baseball, the larger the difference in skills between the best and worst player. Therefore, if the population increases, but the number of teams does not, then baseball talent is more tightly compressed and the difference in skills between the best and worst players becomes smaller. Zimbalist argues that talent compression is a main reason why so many baseball records were established in the early 20th century and not broken for many decades. As the world’s population grew, talent became more compressed from 1920 to 1960. Babe Ruth was such a dominant hitter not necessarily because he had superior skills, but because he played in an age when talent was widely dispersed, so he batted against a larger number of weak pitchers compared to batters in the 1950s. With the introduction of two teams in the early 1990s, talent became more dispersed again, offering a greater opportunity of success for contemporary players like Barry Bonds and Pedro Martinez. So if MLB reduced output by eliminating two teams, talent would again become more compressed, making it more difficult for players to excel.
Because talent compression affects the performance of each player, analyzing the performance of individual players is a matter of microeconomics. Microeconomics begins with the study of people’s behavior and the incentives that affect their behavior. One of the strengths of May the Best Team Win is the way the book uncovers the hidden disincentives that are hurting the game. For example, Zimbalist shows how the revenue-sharing system implemented in 1996 actually increased the competitive imbalance rather than create a more equally competitive environment. Under the revenue-sharing system, team owners have incentives to reduce team payroll, often resulting in lower team performance. In the downward spiral, poor performance leads to lower team revenue. Lower team revenue results in an increase in revenue sharing transfers from MLB. Therefore, a profit-maximizing owner has an incentive to lower team performance. As a result, in the wacky world of revenue sharing, poor performance is often rewarded. In addition, many owners may use accounting trickery to hide team revenue. Some team owners hide team revenue to reduce the amount of money they have to share with other owners.
Although there is a significant number of problems facing MLB today, Zimbalist is optimistic that reform of the game is within reach. True to economic theory, Zimbalist proposes that MLB split into two competing businesses. Eliminating MLB’s monopoly power would benefit consumers by increasing output (the number of teams) and decreasing prices (more affordable ticket prices). If some of the competitive pressures that brew on the baseball field spill over into the offices of MLB, then fans of the sport and economists everywhere may truly say, "May the best team win."
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