NFL Economics

Like many people, I have an unhealthy obsession with NFL Football. Recently, it dawned on me that there are many interesting economic principles that can be seen in the football business. The NFL is pretty unique in the fact that they try every year to level the playing field in a way that even a team that went 1-15 one year can be a Playoff team the very next season. They achieve this in a variety of ways.

The first is the draft, which gives the worst teams from that year the ability to get the best players coming out of college. This functions as sort of a controlled auction, as the teams with the highest value for these players are able to get the first shot at signing them. The draft also allows teams to trade picks, which also allows teams with the highest value for a certain player the ability to trade up and sign him.

Another way the NFL achieves a level-playing field is their revenue-sharing policy. The league distributes all revenue from TV/Radio contracts and League-wide sponsorships/licensing agreements evenly among all 32 teams. This is done in order to avoid the teams from major markets, like New York and Dallas, from consistently dominating the smaller market teams, like Green Bay and Buffalo. Teams are able to generate their own revenue from other avenues such as through the outside use of their stadium, merchandise, ticket sales, and team sponsorships. This keeps the big market teams happy since they are able to rake in a considerable amount more, but also keeps the “Any Given Sunday” mentality alive.

Most of this shared revenue goes toward paying the players’ salaries. The NFL tries to level the playing field in this regard as well with the Salary Cap, which essentially acts as a price ceiling in the NFL labor market. This also keeps the major markets from being dominant, unlike MLB where the Yankees can basically buy their way into the World Series almost every year. After this season, however, the NFL’s Collective Bargaining Agreement with the NFLPA is up. This means that the 2010 season will be uncapped, making the market for player talent no longer binding. Without the cap, it will be interesting to see whether or not the major markets completely dominate and how much player salaries inflate as they move toward more of an equilibrium.


Also, on a somewhat unrelated note, I recently found this really interesting article: http://www.slate.com/id/2209436/

It basically argues that the coin toss to determine overtime possession should be replaced by an auction system to become more fair. It works like this: “The referee would auction of the ball in the game’s natural currency – field position. The team that was willing to begin closest to its own goal line would receive the privilege of possession.”

It’s a very interesting concept, however the author also points out that: “This "privilege" turns dubious about 15 to 20 yards away from your own goal line. That is, the expected value of having the ball so far back is negative—it's more likely that your opponent will score before you do.”