Baseball Economics 201

STUDENT'S VERSION

This lesson printed from:
http://www.econedlink.org/lessons/index.php?lid=865&type=student

INTRODUCTION

stadiumAs many baseball fans can tell you, the New York Yankees usually have a great season record, make the playoffs and make a run towards to the World Championship each year. The Yankees' success--as well as the success of other big market, high revenue teams--has led many to question whether smaller market teams can compete in Major League Baseball (MLB). In fact, in 2009, the Yankees had revenues of $441 million, the most of any team in sports--and more than the revenue of four other MLB teams (Florida, San Diego, Pittsburgh, and Washington) combined!

Many baseball writers (who may or may not know very much about economics) have written that our national pastime may be threatened by the big market, high revenue teams like the Yankees (or the New York Mets, Chicago Cubs, Boston Red Sox, etc.) and that smaller market teams (e.g., the Florida Marlins, San Diego Padres or the Pittsburgh Pirates) cannot compete for the high salaried free agents (e.g., Alex Rodriguez, Manny Ramirez) necessary to win championships. In fact, some writers claim that many MLB teams are actually not profitable for the team owners. Are these claims true? Are MLB teams losing money? Are MLB owners looking to dump unprofitable teams on unsuspecting investors? Are MLB players grossly overpaid? This lesson will help you answer these and other questions.

(NOTE: this lesson updates a 1997 NetnewsLine activity titled "Underpaid Millionaires?" (www.econedlink.org/lessons/index.php?lid=146) which focused exclusively on players' salaries.)

Pre-Test

Before beginning the lesson, please take the short Pre-test to see what you already know about the economics of baseball. Print out your answers and save them to compare with your answers on the Post-test.

TASK

In this lesson, you will find the average salary of a Major League Baseball (MLB) player, identify MLB revenue sources in addition to ticket sales, and use economic reasoning to discuss the argument that MLB players are overpaid. You will also describe how MLB team owners are acting in their own self-interest by not selling teams that appear to be losing money.

PROCESS

Activity 1

MLB Salaries and Wins and Losses

In 1991, the average MLB player's salary was $1 million. What is the average today? Does paying high salaries always translate into championships (or even winning seasons)? This activity will shed some light on these questions.

First, you will need to print out this Worksheet (Excel Version). Next, use the 2009 payrolls (mlb.mlb.com/news/article.jsp?ymd=20090408&content_id=4170640&vkey=news_mlb&fext=.jsp&c_id=mlb ) of all 30 MLB teams to fill in the worksheet. Be certain to use the "average team salary" in the worksheet. Next, fill in the 2009 win-loss records   for the 16 teams in the National League and the 14 teams in the American League (mlb.mlb.com/mlb/standings/index.jsp?ymd=20091031 ). Finally, enter the salary data and the team won-loss records into your worksheet. Are the teams with the largest payrolls the most successful? Do larger market teams (with the high revenues needed to pay high salaries) have an advantage over smaller market teams? Go back to the Worksheet Excel Document (if available) you created with team salaries, wins, and losses. You are going to rank teams in each league by the number of wins in 2009 and then compare their average salaries. Follow these instructions carefully:

  • First, use your mouse to highlight the "Wins (2009)" column for just the American League (AL).
  • Next, use the "Data" command menu (at the top of the Excel window) to select "Sort."
  • You will be prompted to "expand the selection." Answer "yes" and choose "descending order" from the menu. (NOTE: If you have done this correctly, the New York Yankees--with 103 wins--should now be the first team on the AL list.)
  • Repeat this process for the National League (NL). (NOTE: If you have done this correctly, the Los Angeles Dodgers--with 95 wins--should now be the first team on the NL list.)
  • You may want to print out your Excel worksheet and refer to the printout as you answer the following questions:
  1. Only two of the top seven teams in the American League had an average player salary lower than the MLB average. Which teams were these? 
  2. Only one of the bottom seven teams in the American League had an average player salary higher than the MLB average. Which team was this? 
  3. Only three of the top eight teams in the National League had an average player salary lower than the MLB average. Which teams were these? 
  4. Only two of the bottom eight teams in the National League had an average player salary higher than the MLB average. Which teams were these?
  5. What do these results seem to imply?

Activity 2

Valuations

gameThe number of games (or World Series Championships) a team wins is just one measure of success for MLB team owners. Most MLB team owners, like other business owners, are concerned about a great many things including bottom line profitability. While it is important to win games (as this puts fans in the seats at stadiums), teams receive revenue from a number of sources in addition to ticket sales. Use Forbes sports team valuations page (www.forbes.com/2010/04/07/most-valuable-baseball-teams-business-sportsmoney-baseball-valuations-10_land.html ) to identify some other forms of MLB teams revenue. Use the table in the Forbes article to answer the following questions. 

  1. How many MLB teams lost money (had a negative "Operating Income") in 2009?
  2. Year-to-year operating income is only one way to measure an owner's return on his or her investment. Look at the first and second columns of the Forbes chart. The first column indicates how much the franchise is currently worth. The second column indicates the percentage change (from 2008 to 2009) of the value of that franchise. How many teams increased in value from 2008 to 2009?
  3. Take the case of the Florida Marlins. How much money (Operating Income) did the Marlins gain in 2009?
  4. What is the estimated current value of the team (if sold now) for owners of Florida?
  5. Did the team's value increase from 2009?
  6. What was the team worth in 2008?
  7. The dollar value of the Marlins increased by how much from 2008 to 2009?

What does this analysis imply? Are owners crazy to keep holding onto teams that are losing money?

Activity 3

Player Salaries

What about those outrageous player salaries in the Major Leagues? Ten million dollars per year, and more —to play a kids' game. That's insane! Perhaps the owners are crazy after all! (NOTE: this activity will shed a little light on this complex economic problem, but if you are interested in reading more about this issue, please see the NetnewsLine activity "Underpaid Millionaires?" [www.econedlink.org/lessons/index.php?lid=146]).

The owners of businesses (in this case, the owners of baseball teams) buy factors of production   (www.investorwords.com/5566/factors_of_production.html ) from individuals who own these factors. For example, the owner of Tastee Tacos buys the factor "labor" (www.econedlink.org/economic-resources/glossary.php?alpha=l) from the high school students who assemble the tacos for her. The owner also buys the factor "capital" (www.econedlink.org/economic-resources/glossary.php?alpha=c) when she buys the grill used to cook the chicken for the fajitas. So it is with MLB owners; they buy various factors that go into the product (a MLB baseball game) they sell. MLB players possess a very specialized form of labor (hand-eye coordination, ability to hit a ball 500 feet) that they sell to the owners of their teams.

moneyAre these players overpaid for their labor? An economist would say that owners should pay employees close to the value of the employees' contributions to the company. Economists call contribution the "marginal revenue product" of an employee. This describes an employee's contributions to the final good or service (in this case, an MLB baseball game). What is a player's contribution to the "bottom line" of an MLB franchise? One way to measure this "marginal revenue product" is to examine the increased revenue a player brings to his team. This might be through more team wins or through the excitement generated by having a great player on your team.

Let's consider the case of Albert Pujols (mlb.mlb.com/team/player.jsp?player_id=405395 ) of the St. Louis Cardinals. Many people know that Albert has had a great career in MLB baseball so far with the all of the stats he has, all-star teams he has been named to and Most Valuable Player awards that he has won. In 2001, Pujols earned a salary of $200,000. But has he earned his salary from the Cardinals? Let's see.

  1. In 2001, Pujols was in only his second season for the Cardinals. What were the St. Louis Cardinals total team revenues for 2001?
  2. What was the Cardinals' franchise value  in 2002?
  3. Pujol's second full season with St. Louis was in 2002. The St. Louis Cardinals' total team revenues for 2001 were $243 million. What was the Cardinals' franchise value in 2002?
  4. How much did Cardinal revenues increase in 2001 over those of 2002?
  5. How much more was the franchise worth in 2002 versus 2001?

CONCLUSION

Has Albert Pujols earned his salary? Certainly he was not the only reason the Cardinals improved their revenues and increased their franchise value from 2001 to 2002, but Pujols accounted for some of this growth. Did he earn his "marginal revenue product?" In fact, Albert probably was paid much less than he has meant to the St. Louis franchise and its owners, making much less than his marginal revenue product. More than $600,000 is not enough! It would be hard to convince some people of this, but that's why a little economics is so helpful here. In fact, by 2004 the Cardinals began to realize the value of Pujols as his salary increased from $900,000 in 2003 to $7,000,000 in 2004, a 777 percent increase in one year! Today (2010), Albert makes over $14,000,000 a year, a 7,000 percent increase from his initial salary of $200,000 in 2001.

One question to ponder is, if a baseball team has nine players who make $1 million each, would they be better than a team that has one super player who makes $8.2 million and eight players who make only $100,000?

ASSESSMENT ACTIVITY

What have you learned? Retake the test you took at the beginning. After you are finished, pull out your pre-test and compare those answers with the interactive post-test.

EXTENSION ACTIVITY

Use this Correlation Co-efficient Calculator to figure out the correlation co-efficient for the entire league in 2009. Enter each teams win total for the "X Value" and then each team's average salary for the "Y Value". Show average player salaries by a rounded two digit number to represent total in millions (example, $1,314,786 would be 1.3) Then go this CBS Sports MLB Salaries page to see the average player salaries and percentage change for each year since 1989.

What does the correlation co-efficient, average player salaries, and changes from year-to-year say about Major League Baseball? Do you think this is the same for other professional sports? How would adding or removing teams from MLB affect these numbers? After seeing all of the economic statistics of Major League Baseball from this lesson, do you think players are underpaid, overpaid, or being paid the right amount? Why?