The Economics of Professional Sports: Underpaid Millionaires?
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Over the last century, professional baseball has grown to become one of the most popular forms of American entertainment. Indeed, the sport's nickname - "America's Pastime" - has become embedded in the nation's lexicon. More than 73 million fans attended major league baseball games in 2014. However, America's love affair with baseball is not without controversy. The perception that greedy owners who control huge television and merchandise revenues run the game has alienated many fans.
Recently, the United States Congress has considered several pieces of anti-trust legislation aimed at MLB that, if passed, might change the way the game is run and played forever. Most notably, fans and sportswriters around the country have criticized what many regard as grossly overpaid players. Indeed, many modern fans have difficulty justifying Los Angeles Dodgers player Clayton Kershaw's $31 million dollar salary over the next seven-years, $215 million deal signed last year. Newspaper accounts decry seven- and eight-figure salaries paid to grown men playing a boys' game.
Fans seem to hearken back to the days when baseball was a working- class sport and when working-class people could relate to a working-class baseball player. Critics claim that, because few working-class people can imagine making $1 million, baseball has lost its original fan base and has destroyed the fan-player relationship.
Are MLB players overpaid? Are the owners overpaying players and thus acting outside their own self-interest? Are owners paying players their true market worth? These are questions that economic analysis can shed light on. This lesson will help answer these questions and others concerning MLB salaries and the players' market
- Infer if the MLB is a competitive market.
- Determine whether or not MLB players are overpaid.
- Calculate percent change in average salary from year to year.
Read an excerpt from "A Pedestrian's Guide to the Economy " outlining the main points in the argument over professional athletes' salaries.
Read other on-line articles summarizing both sides of the issue.
Summarize arguments concerning salaries of MLB players. Use a two-column data-recording sheet to list examples of the argument that MLB players are overpaid as well as examples of the argument that MLB players may be underpaid.
Use an on-line glossary to define: market, competitive market, non- competitive market
What are the characteristics of a competitive market?
In competitive markets, factor inputs are sold at "market" prices. If market is not perfectly competitive, factor prices will be lower, all other things being equal, than they would be in a perfectly competitive case.
Use the reading from "Underpaid Millionaires" to learn about monopsony. What data do we have already that might lead us to believe MLB is a monopsony? If MLB is a monopsony (or other form of market failure) what does this imply for current players' salaries?
Plot the rise in average MLB salaries over the last 20 years. Calculate the percent change in average salary versus the percent change in minimum salary. Is one larger? Why might that be? What does it say about the "skills" of the superstars of MLB versus the substitute or occasional player?
Use the MLB: Perfect Competition? data retrieval chart to determine how MLB meets the criteria for perfectly competitive market.
- Limits on the number of buyers for players factor inputs (labor): only 30 teams in MLB; limits on the amount of factor inputs clubs can buy (25 player rosters)
- Uniform Player Contracts: amateur players must be drafted by MLB clubs. Players must sign with team that drafts them and play for 5 years. Cannot negotiate with other clubs while under contract. Free agency is only available after 3 full years in MLB.
- Binding arbitration - players cannot sell inputs to highest bidder.
- Owners' collusion - owners agree to keep salaries low; agree to consult other owners on pay scale.
- Limited markets for the skill players possess no substitution of skills across sports. (Monopsony argument)
If MLB was a truly competitive market, players would be paid up to nearly the amount of revenue they generate (economists call this a players' marginal revenue product). Read about how much great players are worth to their teams and determine what a "market" based salary for superstars might be. (www.usatoday.com/sports/mlb/salaries/ ).