Revenue sharing in professional sports leagues

We employ a model of n heterogenous profit-maximizing clubs to analyze the impact of revenue sharing in a professional sports league. Individual revenues depend on both talent demand and competitive balance. We identify three effects of revenue sharing. The revenue effect reduces talent demand of each club because a part of the revenues is generated by competitors. The asymmetric cost effect supports the first effect, and is even stronger for weak clubs. The competitive balance effect makes clubs more sensitive to competitive balance. We show that the asymmetric cost effect unambiguously dominates the competitive balance effect so that revenue sharing decreases both talent demand and competitive balance, and thereby aggregate profits and social welfare.UnpublishedBougheas, S., Downward, P. (2003), The Economics of Professional Sports Leagues: Some Insights on the Reform of Transfer Markets, Journal of Sports Economics, 4: 87-107. Cave, M., Crandall, R.W. (2001), Sports Rights and the Broadcast Industry, The Economic Journal, 111: F4-F26. Dobson, S., Goddard, J. (2001), The Economics of Football, Cambridge University Press, Cambridge. El Hodiri, M., Quirk, J. (1971), An economic model of a professional sports league, Journal of Political Economy, 79: 1302-1319. Falconieri, S., Palomino, F., Sákovics, J. (2004), Collective versus Individual Sale of Television Rights in League Sports, Journal of the European Economic Association, 2: 833-862. Feess, E., Mühlheusser, G. (2003), Transfer fee regulation in European football, European Economic Review, 47: 645-668. FIFA (2001), FIFA Regulations for the Status and Transfer of Players. Forrest, D., Simmons, R. (2001) and Szymanski, S. (2004), Broadcasting, Attendance and the Inefficiency of Cartels, Review of Industrial Organization: 1-23. Fort, R., Quirk, J. (1995), Cross-subsidization, incentives and outcomes in professional team sports leagues, Journal of Economic Literature, 33: 1265-1299. Humphreys, B. (2002), Alternative measures of competetive balance in sports leagues, Journal of Sports Economics, 3(2), 133-148. Horowitz, I. (1997), The increasing balance in Major League Baseball, Review of Industrial Organization, 12: 373-387. Késenne, S. (1996), League management in professional team sports with win maximizing clubs, European Journal for Sports Management, 2: 14-22. Késenne, S. (2000), Revenue Sharing and Competitive Balance in Professional Team Sports, Journal of Sports Economics, 1: 56-65. Késenne, S. (2004), The win maximization model reconsidered. Flexible talent supply and efficiency wages, mimeo. Késenne, S. (2005), Revenue Sharing and Competitive Balance: Does the invariance proposition hold?, Journal of Sports Economics, 6: 98-106. Marburger, D.R. (1997), Gate Revenue Sharing and Luxory Taxes in Professional Sports, Contemporary Economic Policy, 15: 114-123. Palomino, F., Rigotti, L. (2000), The sport league’s dilemma: competitive balance versus incentives to win, working paper, University of California, Department of Economics, 292. Palomino, F., Sákovics, J. (2004), Inter-league competition for talent vs. competitive balance, International Journal of Industrial Organization, 22: 783-797. Porter, P., Scully, G. (1996), The Distribution of Earnings and the Rules of the Game, Southern Economic Journal, 63: 149-162. Quirk, J., Fort, R. (1997), Pay Dirt: The Business of Professional Sports, Princeton University Press, Princeton. Rascher, D.A. (1997), A model of a professional sports league, in W. Hendricks (ed.), Advances in the economics of sport, Vol. 2, Greenwich: JAI press, 27-76. Rottenberg, S. (1956), The Baseball Player’s Labor Market, Journal of Political Economy, 64: 242-258. Szymanski, S. (2003), The Economic Design of Sporting Contests: a Review, Journal of Economic Literature, 41: 1137-1187. Szymanski, S., K´esenne, S. (2004), Competitive balance and revenue sharing in team sports, Journal of Industrial Economics, LII/1, 165-177. Vrooman, J. (1995), A general theory of professional sports leagues, Southern Economic Journal, 61: 971-990