The Baseball Economist: The Real Game Exposed (30 page)

Given that baseball is the only major sports product in the United States not protected by antitrust laws, it stands to reason that MLB’s output and pricing ought to differ from the other professional sports leagues. Table 36 compares the price and output of the four major sports leagues. According to the standard analysis of monopoly, without competition a monopolist producer will choose to restrict output and raise prices. Leagues can restrict output through several means, but the most obvious way is to limit the number of teams per league, the games per season played by each team, and the temporal length of the season. As the data in Table 36 indicates, MLB produces more of its product at a lower price than any major sports league in the country.

In terms of teams, only the NFL has more than MLB, while MLB, the NHL, and the NBA all have thirty teams. Baseball certainly does not seem to be using its antitrust exemption to restrict output to fewer markets in comparison to the leagues that have no exemption.

MLB could restrict output in the number of regular season games. Baseball is the clear leader, with almost twice as many games as produced by the NBA and NHL and ten times more than the NFL. However, this might result from another factor: baseball is a less physical game than the other major sports. Baseball is not a contact sport; it is played at a slow pace, and involves a lot of sitting down. It is no accident that the only professional athletes that use tobacco during athletic contests are baseball players. As former Philadelphia Phillies All-Star John Kruk once said in response to a fan who questioned his tobacco and alcohol vices, “I ain’t an athlete, lady. I’m a professional baseball player.” The less physically demanding nature of baseball, relative to other sports, allows its participants to play more games. Therefore, maybe the nature of the game allows baseball to produce more games than other sports but still produce fewer games than it could.

However, it is hard to imagine baseball adding more games to its schedule given the constraints of the game. Baseball is primarily an outdoor sport, unlike basketball and hockey, which makes it vulnerable to the weather, particularly seasonal weather. Football is also an outdoor sport, although a larger fraction of the teams play in indoor domed stadiums. Also, football is played with constant motion and players covered in safety pads, which keeps them warm. The intermittent and often slow pace of baseball makes it ill-suited for play in the cold. The regular season begins in early April and ends in late September, six full months. Out of the 181 days available for baseball, a player can expect to have twenty-one days off during the regular season (this is not taking into account doubleheaders). A typical five-day-a-week worker gets forty-eight days off just for weekends over this same span. And that is not all. Spring training begins in mid-February, when teams travel south to warmer American locales ranging from Florida to Arizona, to ensure maximum preparedness for the upcoming season. Also, the postseason playoffs can extend into November, giving the possibility of nine months of player effort. In sum, it is hard to imagine baseball extending its season any more than it currently plays. If baseball is restricting its output, it is not in terms of games played.

On price, baseball is cheaper to fans than any of the major sports. In terms of the average regular season ticket, baseball fans pay about 40 percent of the price for NBA basketball and NHL hockey games and 50 percent less than for NFL football. However, baseball games are of a different character than these other sports, which might push the profit-maximizing price downward. A single game in an NFL season represents 6.25 percent of the football played by a team in that season, while a game in baseball represents 0.62 percent of the baseball played by a team. Each game represents a smaller slice of the total season in baseball, therefore fans may be less willing to pay for the single game experience than they would in other sports. To account for this, I adjust the average ticket price relative to the total amount of the regular season observed with a single ticket purchase, listed in the last column of Table 36. For example, you would have to attend ten regular season MLB games to see the same percentage of the regular season as you would if you attended one NFL game. By this metric NFL football has the cheapest price as a percent of the regular season seen per dollar paid, but MLB still has a lower adjusted price than the NBA and NHL. It is hard to find evidence of the antitrust exemption altering the output of MLB in the price relative to the other leagues.

There is no strong evidence that the antitrust exemption provides any monopoly privileges to MLB other than protecting it from expensive lawsuits. These lawsuits, which the NFL, NBA, and NHL all endure due to the scrutiny of antitrust laws, do not seemed to have fostered any more competition in these sports. And the output of these leagues indicates that the threat of antitrust sanctions has not led the leagues to produce a greater output than MLB, which does not face such legal regulation. Perhaps the fear of losing the antitrust exemption keeps MLB honest, not wanting to look too different from its sister leagues. But, if this is the case, then the antitrust exemption is benign.

MLB’s similarity to the other major sports leagues in output and prices does not necessarily mean that baseball is not a bad monopolist, ultimately destined to give customers a bad deal. The price and quantity differences may reflect something unique about fans’ willingness to pay for baseball. And this outcome is also consistent with the failure of antitrust laws to enforce competitive environments in the other sports leagues. In fact, baseball may be acting just like the other leagues exactly because they all behave as monopolistic producers. We need to investigate further to determine if competitive behavior is responsible for the similar price and output of the leagues. But what is clear from the analysis is that calls to reform the competitiveness of baseball that focus on removing the antitrust exemption are misguided. As best we can tell, the antitrust exemption does very little to make MLB more monopolistic than any other major professional sports league.

15

Bud the Benevolent

—ADAM SMITH
⁸⁴

THOUGH THE STRENGTH of baseball’s monopoly power is overblown, we shouldn’t ignore it. Let’s apply a different model of monopoly to MLB. Even if baseball is a monopoly, it is an unusual one.

The standard single-priced monopolist I discussed above produces an output lower than a perfectly competitive market would provide. This is harmful because some consumers are willing to pay a price that is high enough to cover the cost of producing additional units, but no trade takes place. If there is only one thing that economists agree on, it’s that trade is good. Two parties will exchange their wares only if each party values what the other party has more than what he has. Therefore, trading must be mutually beneficial, and the world is a happier place after every voluntary exchange. Trades that should take place but don’t are bad, because trades are a benefit both to buyers and sellers.

It is the desire to maximize profits that forces the monopolist to underserve its market. It’s the same motivation that causes firms in competitive markets to provide the products consumers want. When a monopolist can only charge one price to all customers, it must make a trade-off between selling many units at a lower price or fewer units at a higher price. If the monopolist tries to sell products to everyone willing to pay a price greater than the cost of production, the monopoly forgoes some higher-priced sales to consumers who are willing to pay more for the product. But, if it sells only to customers willing to pay a very high price, it forgoes selling some units to individuals who value the product less. Which method yields more profits? It turns out that a monopolist earns more revenue from selling fewer products at a higher price than it would in a competitive market.

To judge whether or not this model is appropriate for baseball, we must identify what quantity baseball is restricting and the price that baseball is charging. The price of baseball is very easy to measure. It is the ticket price fans pay for games plus the implicit price fans pay in the form of watched advertising during broadcast games. As shown in Table 36, baseball’s average ticket prices are not higher than in other sports leagues. The quantity is a bit more complicated. The quantity of baseball provided to fans can be expanded or contracted along two metrics: the quantity of games played by all teams or the quantity of baseball teams. We know that the former is pretty much fixed, but the latter is a metric that MLB often discusses adjusting. MLB began with the eight original teams of the NL and has continued to expand until it reached its current thirty teams.

While expansion has been the general trend in baseball output, there has been much recent talk about contracting the league. In 2002, Commissioner Bud Selig announced the MLB was considering contracting two teams related to financial problems; however, the storm of contraction blew over, and as part of the 2002 labor agreement, contraction decisions were to be postponed. Certainly, contraction is consistent with monopoly behavior. Monopolies restrict output, MLB was trying to restrict output; hence, MLB wants to restrict output to earn monopoly profits.

I believe the contraction threat was a noncredible bargaining chip wielded by the commissioner in his negotiations with the players union. It seems odd that baseball would expand by two teams in 1998 and then reverse course only a few years later. The owners are not that shortsighted. When MLB decided to move the Montreal Expos to Washington, DC, there were numerous suitors. Why would MLB want to neglect the revenue from cities willing to cough it up? No wonder Commissioner Selig has announced that contraction is no longer on the table. In a single-price monopoly, contraction makes sense, but MLB faces some conditions very different from most single-priced monopolists.

If MLB is a monopolist, it is a multi-price monopolist. A multi-price monopolist can sell its output to different consumers at differing prices. This detail changes everything. The multi-price monopolist does not face the price-quantity trade-off of the single-price monopolist. Selling output at a low price to individuals with a low willingness to pay does not force the monopolist to trade off high-price sales to individuals with a high willingness to pay. This monopolist can
price discriminate,
which sure sounds bad. Price discrimination is simply the selling of the same goods at different prices to different consumers. Now, again, some readers may balk. How is selling the same product at different prices morally acceptable? I will get to that in a moment. First, let’s see why MLB is more likely to act as a price-discriminating monopolist than a single-price monopolist.

The ability to price discriminate is not as common as you might think. A firm must meet three very stringent conditions for price discrimination to be a sustainable business practice.

First the producer must be a monopolist in the market. In a competitive market, if a firm tries to price goods above the price of the production costs, a competitor will enter the market and steal away that business. Whether or not baseball has monopoly power is up for debate. While I think MLB’s monopoly strength is much less than many people believe, I think that MLB does have a small cushion—sometimes known as “market power”—to engage in monopolistic practices without encouraging entry from competitors.

Second, the monopolist must be able to accurately identify what different individuals are willing to pay for a product. For example, if wealthy people all wore top hats and walked with canes, while poor people wore barrels held up by straps, it would be easy to identify, and separate out, the high- and low-paying customers. If such detection is not possible, the monopolist will not be able to know whom to sell to at what price. If the monopolist offers the wrong price to the wrong market segment, the low-valuing consumers of the product will not purchase the product at the high price and high-valuing customers will receive the product for less than they are willing to pay for it.

MLB adjusts its output by the number of teams in the league. We know the league would be hard-pressed to provide more games played per team. Right now, thirty teams serve twenty-five metropolitan statistical areas. If baseball were to expand to a new market, and it is a multi-price monopolist, it could charge a franchise fee to the new owner equal to his/her willingness-to-pay to put a team in the area. Because an owner’s willingness-to-pay for a team will be governed by the potential revenue stream of baseball sales in the new market, the price that the league can charge for the team is easy to determine. Using demographic data to identify the new community’s demand for a baseball team, the league can estimate the value of the new team and then demand the maximum from any owner in that area. Simple measures of consumer preference for baseball, population, wealth, and other demographic factors are readily available to owners as they try to determine their expansion price. There is little danger of MLB owners failing to extract the maximum price for any new team; therefore, MLB clearly meets the second condition.