Competitive Balance in Sports Leagues

Competitive balance is like wealth. Everyone agrees it is a good thing to have, but no one knows how much one needs. Economic theory tells us that the optimal level of balance in a sports league is a function of the distribution of fan preferences, fan population base, and fan income across host cities. Profit maximizing teams will accumulate units of talent until the marginal revenue per win is equalized across all teams. This implies that in leagues with a fixed supply of teams (and monopoly or duopoly team rights to a territory), the league will maximize revenues when teams from large, rich, and fan-intense cities win more often. In his seminal 1956 article, Rottenberg, among other things, anticipated the relevance of the Coase Theorem (Coase, 1960) in understanding talent distribution across teams and argued that the profit motive would limit the accumulation of player talent on any single team. El-Hodiri and Quirk (1971), in the first formal modeling of a professional sport league, find that individual team profit maximization is inconsistent with equal playing strengths among the teams except in the special case of identical team revenue functions. Fort and Quirk (1995) focus on the problem of competitive balance in sports leagues and assess the degree to which different mechanisms create greater balance. Based on the Coase Theorem, they conclude that neither the reserve clause nor the reverse-order amateur draft aid balance. Explicitly assuming that gate revenue grows in proportion to the home team’s playing strength, that each team faces the same cost per unit of playing strength, and implicitly assuming that owner risk aversion is invariant to team revenue and that cross subsidies are proportional to team revenue and not team rent, Fort and Quirk also conclude that increased revenue sharing will not improve competitive balance. The only mechanism in their