Sports Economics: Resource Market

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Sports EconomicsResource Market

• By Matt Goldstein

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Employment of Players

• Each of the major professional leagues (MLB, NFL,
  NBA, and NHL) have strict methods by which teams
  hire and fire players
• All of the leagues have basically two ways to
  hire a professional athlete.
• The Draft
• Free Agency

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Overview of a Draft

• What is the Draft?
• An annual event in which teams from a sport
  gather to take turns selecting athletes just
  entering the league.
• Why Draft?
• To promote a competitive playing balance among
  teams, sometimes referred to as parity.
• To prevent any single club from hoarding all the
  top prospects entering the league each year.

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The Draft

• Under league rules once a player is drafted by a
  team, that team has EXCLUSIVE RIGHTS to that
  player.
• No club can hire this player unless the team that
  drafted him first sells or trades away his
  rights.
• Thus, new players become the property of their
  employing club.
• Due to exclusive rights athletes had to either
  accept any contract offered by the club that
  drafted him or sit out.
• Players had little, if any, real bargaining power
  and provided owners the opportunity to pay their
  players low wages.

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Monopsony

• Monopsony-A market with only one buyer or
  employer.
• When league rules allow clubs to own the property
  rights to new player contracts, an imperfect
  factor market is formed or a monopsony
• Ex When only one club has the right to contract
  with a specific player, that club becomes a pure
  monopsony from a player perspective

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Two major factors that create Monopsony power for
pro sport teams

• The immobility of new players who have been
  drafted
• New draftees who wish to play are required to
  sign contracts that bind them to a team for a
  specific time period
• Players never have chance to sell services to
  highest bidder.
• New players become locked in to the team that
  drafted him.
• Because they are locked in the employing club
  becomes the only potential buyer of the players
  talents

• The highly specialized athletic talents and
  skills possessed by the players
• Most athletes specialize in one sport and train
  just for that sport.
• Skills are very specific and not transferable to
  other employment
• Athletes face limited opportunities for
  employment.
• Therefore they must accept sub par contract
  offers by there standards.

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Few Definitions

• Marginal cost of labor (MCL)-The change that
  occurs in a firms total labor costs due to hiring
  and additional worker, per unit of time.
• Monopsonistic Profit- The difference between the
  workers contributions to a monopsonistic firms
  receipts and their wages.
• Marginal Revenue Product(MRP)- The change in
  revenue experienced by a firm when it employs an
  additional worker.

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Wages and Employment in a Monopsony

• A monopsony has a slope supply cure
• So in order to attract additional workers it must
  increase its wage offer. This is seen in column
  two of the table
• Because wages rise with each additional worker,
  so does the total cost of labor. Indicated in
  columns 2 and 3.
• The change in total labor cost due to hiring one
  more worker is known as the MCL. Column 4
• The MRP falls as more pitchers are hired.
  Meaning each additional pitcher brings in less
  and less revenue. Column 5
• How many pitchers will they hire? They will
  continue to hire until MCLMRP. So four
  pitchers.

NOTE All wages and costs are 1000s. So when
wage reads 300 its really 300,000
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Graph of Wages and Employment of a Monopsony
(from previous table)

• Line SS represents columns 1( of players) and 2
  (wage)
• The MCL curve is plotted using numbers form
  columns 1( of players) and 4(MCL)
• The MRP (column 5) plots pitchers hired vs.
  revenue brought in.
• Point A represents where MCLMRP. The optimum
  quantity.
• Point B represent how much the 4 workers are
  paid.
• So when four pitchers are hired the MRP is 900
  and the wage per pitcher is 600. The difference
  b/w A and B is known as MONOPSONISTIC PROFIT.
• The difference is 300,000 x 4(pitchers
  hired)1,200,000 total profit
• Recall that in a competitive labor market,
  additional workers are hired until MRPWage.
  This is point C
• If it was competitive mkt, we would hire five
  pitchers

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The cause of monopsony power in MLB

• As we said earlier since players had no choice of
  who to play for they were asked to sign a basic
  playing contract by their franchise once drafted.
• It became known as the RESERVE CLAUSE
• The Reserve Clause gave clubs the exclusive
  rights.

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Players answer to the Reserve Clause

• In 1975, players organized and fought the owners
  in antitrust court.
• They realized the reserve clause gave owners
  monopsony power and kept salaries below what they
  could get if it were a competitive market.
• The arbitrator overturned the reserve clause in
  MLB and the players/ owners eventually reached a
  compromise.
• The compromise said the employing clubs could
  hold exclusive rights to a players contract for a
  specified amount of time after which the player
  could file for FREE AGENCY.

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FREE AGENCY

• A free agent is a player whose contract is no
  longer held exclusively by one team.
• This means that once they become a free agent
  they can sell there services to the highest
  bidder.
• The impact of Free agency on a players salary for
  MLB can be seen in the figure 9.3
• The other sports soon followed MLB and instituted
  Free Agency.
• Free Agency clearly reduced the amount of
  monopsonistic exploitation in sports

Free Agency was just starting in 1976. Most
players were still ran by a monopsony power.
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So Do Professional Athletes Earn Their Pay?

• Most athletes earn millions of dollars while the
  average households income is 42,000.
• People often argue that athletes are overpaid.
• However, economically, as long as an employer
  experiences an increase in revenue that is
  greater than the increase in costs due to hiring
  an additional worker, the employer can increase
  profits with a new hire.
• So a club can make a profit and pay its players
  millions of dollars if those players generate
  even more millions of dollars in revenues.
• Example In 1988 the Los Angeles Kings(NHL) paid
  15 million to the Edmonton Oilers for the right
  to hire Wayne Gretzky. The Kings then signed
  Gretzky to an 8yr/20 million contract. They
  paid a total of 35 million to get him but it was
  estimated that Gretzky increased revenue over the
  eight years by as much as 52.1 million. So they
  profited more than 17 million. So in this case
  it would be looked at as Gretzky earned his pay.

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Labor Disputes

• Players in all four major sports formed labor
  unions to help fight monopolistic team owners.
• LABOR UNION- A formal organization of workers
  that bargains on behalf of its members over the
  terms and condition of employment.
• Pretty much player unions negotiate with team
  owners to determine the standards that are
  applied to all player contracts.
• When owners and player unions cant come to an
  agreement it leads to labor disputes either a
  strike or a lockout.

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Strikes and Lockouts

• Strike
• A strike is a work stoppage initiated by labor
  (the players).
• Ex. In 1994, the players union in MLB called a
  strike that forced the cancellation of hundreds
  of games.

• Lockout
• A lockout is a work stoppage initiated by
  management.
• Ex. In 1994, NHL owners canceled half the season
  forbidding the players from returning.

In both cases the major points of disagreement
concerned the mechanics of how players would be
paid and the conditions necessary for players to
become free agents.