Baseball's Competitive Balance

So while I was reading over the other blogposts and trying to think of something to write about, I noticed posts talking about the NBA and the NFL. I figured sports would be an interesting topic to talk about, and since I don’t know a thing about the economics of NASCAR or soccer, I decided to discuss the economics of Major League Baseball. I will discuss how the MLB attempts, and usually fails, to maintain a competitive balance between its teams and tries to prevent monopolies, i.e. the Yankees. Professional sports, as an industry, must be regulated to maintain a competitive balance because there are only a certain amount superstar caliber players. With this limited amount of high caliber players, the demand for them will raise salaries with no ceiling. Most professional sports such as the NBA and NFL maintain a competitive balance by implementing a salary cap, which puts a cap on the amount of money a team can spend on salaries. Baseball instead chooses a more complicated and less efficient system that uses a luxury tax and revenue sharing. The luxury tax taxes teams if their team salary is over a predetermined amount, which is $162 million for the 2009 season. The idea of revenue sharing is sort of a “Robin Hood” type deal, take from the rich and give to the poor. Revenue sharing works by taking the local revenue generated from baseball operations by the most profitable teams and giving them to the poorer teams. As good as these ideas may seem in theory, they are flawed. The major problem with baseball’s competitive balance system is that it doesn’t do its job. The luxury tax is almost completely useless because it doesn’t even redistribute the wealth. The money generated from the luxury tax goes toward player benefits and the promotion of MLB around the world. All this does is provide a slap on the wrist to the teams with the most money. Paying the luxury tax usually has a lower opportunity cost than not signing a player who will help win games, and therefore keep fans in the seats and the revenue coming in. The bigger problem with baseball’s system is the revenue sharing. While this “Robin Hood” system seems good, it really isn’t. Many proponents point to the fact a different team has won the World Series every year since in has been put into effect. However most of the teams from small markets are only able to obtain short spurts of success, instead of the desired long term success of the Yankees or Red Sox. This is because the teams with the lowest local revenue get the most money. As a low revenue team has success, more people go to the games, which increases their local revenue. This leads to a drop in their money from revenue sharing so they have less money to resign people, and therefore leads to less success. This vicious cycle is why teams like the Florida Marlins and Colorado Rockies can make the World Series one year and finish last in the division the next. Baseball’s collective bargaining agreement is up in 2011. As a baseball fan, I hope the MLB can finally realize how obsolete their competitive balance system is and switch to a salary cap.