Cross-subsidization, Incentives, and Outcomes in Professional Team Sports Leagues

TLDR

Professional team sports leagues offer a natural laboratory for studying the challenges of managing functioning cartels. The study analyzes incentives and outcomes in professional team sports cartels and presents new findings on salary caps, local TV revenue sharing, and cartel managers’ behavior toward rival leagues. The authors conduct an analytical review of the literature and derive new results on salary caps, local TV revenue sharing, and cartel managers’ responses to rival leagues. The analysis shows that, aside from revenue sharing and salary caps, cartel management aligns with league-wide revenue maximization and does not affect competitive balance, but it does predictably influence the profitability of strong and weak drawing teams.

Abstract

Professional team sports leagues provide insight into the problems facing the management of functioning cartels. This paper provides an analysis of the incentives and outcomes inherent in the management of professional team sports cartels. Except for revenue sharing and salary caps, league cartel management outcomes are consistent with league-wide revenue maximization and have no impact on competitive balance. However, there are predictable impacts on the profitability of strong- and weak-drawing teams within the league. While providing an analytical review of the literature, the work here also yields new results concerning salary caps, local TV revenue sharing, and the behavior of cartel managers in the face of rival leagues.