Major League Baseball Competitive Imbalance

Giorgio Varlaro
Submitted in partial fulfillment of the requirement of SPMG 67000
Spring 2011
Abstract:
Labor negotiations between owners and players have a critical effect on the image and

future structure of a professional sport. Normally included in these negotiations are agreements

on the number of games played, ability of players to move to other teams, amount of revenue

shared between franchises, player conduct protocols and the incorporation of a hard or soft salary

cap. Each of the agreed stipulations contribute to the future of competitive balance within the

league. With this known, this article examines whether league attendance, payroll and win

percentage from 1980-2009 predict concern for Major League Baseball and its current labor

practices. Based on the estimates received from the data, comparing leagues in Major League

Baseball provide more contradiction as to whether the current labor system is working, thus

individual teams need to be examined to determine the significance of this study when looking at

competitive balance.
Introduction:
Within the United States, the four major professional sports leagues (NBA, MLB, NFL

and NHL) use different models when it comes to competitive balance. Competitive balance

reflects the uncertainty of the outcome when consuming a professional sporting event

(Humphreys, 2002). In simpler terms, competitive balance allows fans who watch a game, either

physically or on television/Internet, uncertainty in regards to the outcome. It is believed that if a

league lacks competitive balance, fan interest in the weaker teams will fall and eventually fan

interest in the stronger teams will also decline (Humphreys, 2002). Thus greater competitive

balance should lead to greater demands.

Major League Baseball, like most professional sports leagues are hurting to sell tickets.

Some contribute this to the status of the current economy, while others contribute the loss of

interest to competitive imbalance. Due to the nature of this argument, this study will look to

examine whether Major League Baseball needs to change their current model if the league

expects to prosper in the future, or if other changes need to be made to restore baseball as

America’s most watched entertainment. To do this, information from Rodney Fort’s sports

business data page (http://www.rodneyfort.com/SportsData/BizFrame.htm) was used,

specifically comparing league differences in total attendance, win percentage and payroll from

the last three decades (1980-2008). League revenues from television contracts were also used to

justify the substantial increase in payroll between the American League and National League.

Labor Economic Theory:

The most commonly used measures of competitive balance in sports leagues do not

capture season-to-season changes in relative standings (Humphreys, 2002, p. 133). Because of

this, Humphreys (2002) created an alternative measure for competitive balance, the Competitive

Balance Ratio (CBR). The CBR model scales average team-specific variation in won-loss ratio
during a number of seasons by the average within-season variation in won-loss percentage

during the same period (Humphreys, 2002, p. 147). Won-loss, commonly known as winning

percentage, has been used by numerous researchers to measure competitive balance in baseball

(Scully [1989], Fort and Quirk [1997], Butler [1995], Zimbalist [1992] and others) (Humphreys,

2002). The measurement of a team’s win percentage has been used successfully by researchers

when trying to discover league balance or imbalance. Win percentage however has some

limitations due to its inability to track franchise values, which have proven to be more important

to a team’s success and ability to attract fans because it usually leads to a better sports brand

(Fortunato, 2008). With economic theory in mind and revenue sharing unlikely to achieve

competitive balance, other variables need to be researched to find if Major League Baseball

(MLB) is supplying a quality product (Burger & Walters, 2003). As Fort (2003) states,

“Competitive imbalance in baseball will eventually confront the internal and external politics of

league power over expansion and team location” (p. 280). Thus looking at the MLB from 1980-

2008 with attendance, win percentage and payroll in mind, will provide quantitative trends thus

justifying if Major League Baseball has a threat of competitive imbalance.

Literature Review:
Sports teams are an asset, and like other assets, the value of a sports franchise derives

from the expected stream of future income that occurs to the owner of the franchise (Quick,

1974). Helping the asset earn future income are gate receipts, television contracts, concessions,

parking, venue advertising, naming rights, licensing and merchandising (Alexander & Kern,

2004). Hindering the asset are player costs, pensions, travel, marketing, administrative, and

media expenses (Alexander & Kern, 2004). Combined, revenues and expenditures determine a

team’s value. The ultimate goal of an owner is to increase team value because it ultimately

derives more marginal revenue for each additional victory, thus increasing the worth of the team
as seasons accumulate (Burger & Walters, 2003). Team values also increase opportunities in

baseball, which induce competitive imbalance.

Due to Major League Baseball’s lack of a salary cap, teams which are successful in

increasing team values have the ability to sign better players, thus creating a system where some

teams simply cannot compete (Fortunate, 2008). Revenue sharing occurs in the form of a luxury

tax, which tries to create more competitive balance throughout the league, however franchise

owners do not have to invest the money given to them thus revealing a flaw in the model used

for this particular professional sport.

Competitive balance in Major League Baseball began to spiral out of control between

1996 and 2005, with baseball’s largest payroll and smallest payroll increasing from $36.8 million

dollars to $178.6 million dollars (Albramowitz, 2007). Obvious contributors to this were large

market teams like the New York Yankees, Boston Red Sox, Los Angeles Dodgers and Chicago

Cubs (Wilner, 2008). The Yankees led the majors in 2008 with revenues of $327 million

(including $171 million from ticket sales; $98 million from local media; $60 million from

advertising/sponsorships; and $50 million from stadium income) (Wilner, 2008). The team value

of the Yankees in 2008 was $1.306 billion, nearly $500 million more than their local rival Mets

(Wilner, 2008). In contrast to the large market teams, the Florida Marlins, Tampa Bay Rays,

Pittsburgh Pirates, Kansas City Royals and Oakland Athletics are in the basement of Major

League Baseball. The Marlins team value in 2008 was $256 million, the Rays was $290 million,

the Pirates was $292 million, the Royals was $301 million and the Athletics was $323 million

(Wilner, 2008). Financial differences, like the ones shown between small market and large

market teams, provide valuable evidence which surmise the possibility of a labor model change

in Major League Baseball.

 With the average value of a major league franchise shown to have increased 143 percent

within the last decade, Major League Baseball seems to be doing well within the sports market at

the moment (Wilner, 2008). However, are the millions of dollars produced by large market teams

hiding the fact that competitive imbalance is becoming more of an issue between leagues (A.L.

vs. N.L.)? With team payrolls and values widening between franchises, research predicts it is.

Burger & Walters (2002) provide further evidence of a poor labor system by suggesting that,

“Team revenues are directly related to the clubs win percentage and the size of the market from

which it draws fans” (p. 109). This provides unique evidence which suggests that large market

teams will not fork over success on the playing field any time soon. Oppenheimer (2003)

reiterates this, revealing the need for doormat teams. “By having doormat teams, the other teams

in Major League Baseball are able to maintain a level of respectability and feel more secure

about the indirect value of their franchise” (p. 395).

Discussion:
Since the research reveals significant information regarding a lack of competitive balance

in Major League Baseball, comparing this information to statistics in Rodney Fort’s sports

business data page could either concur or suggest change to its current labor management model.

In referring to the following tables below, which look at league attendance, television

revenue, win percentage and payroll, Major League Baseball’s current labor model seems to be

working equally in the favor of both leagues. Despite differences in total attendance (1980-2009)

between leagues, winning percentages and payrolls appear to be competitive when averaged

against each other. When looking at winning percentage from 1996-2008 in Table #3, the

fluctuation between the American League and National League promotes competitive balance

since neither league can be seen to have an advantage over the other. The same can be assumed

for payrolls (1980-2009) in Table #4 since both the American League and National League take
turns through the 21st century in having the highest league payroll. Helping league payrolls reach

the billion dollar threshold after 2001 was television contracts, as seen in Table #2. With

revenues soaring from $1,827,000,000 from 1994-2000, to $3,351,000,000 from 2000-2006, the

league had a substantial revenue stream which allowed for increasing player salaries and new

state-of-the-art stadiums which included more luxury seating.

The issue of competitive imbalance and determining if Major League Baseball needs to

change their current system is not an easy one. When comparing research and sports business

data between the American League and National League, significant findings are not provided.

Due to the inability of this research to provide Major League Baseball with credible information,

future research needs to be done looking at individual team values, attendance, win percentages

and payroll. The scope of comparing the leagues in Major League Baseball provide only more

contradictions as to whether the current labor system is working when it relates to competitive

balance.

Table #1: Total Attendance by League, MLB, 1980-2009

Table #2: Revenue from Television Contracts, MLB, 1980-2006

Table #3: Win Percentage by League, MLB, 1980-2008

Table #4: Payroll by League, MLB, 1988-2009

Conclusion:
Very few things in society bring people together like local sports teams can (Johnson,

Mondello, & Whitehead, 2002, p. 125). Sports teams improve the quality of life for all residents

of the city, whether they buy tickets to games or not (Johnson, et al., 2002). With this known,

Major League Baseball since 2007 (as seen in Table #1) has lost a significant amount of fans

whom are willing to attend a baseball game. The inability of fans wanting to watch baseball has

been linked to competitive imbalance. This may be correct, and will be researched more in the

future, but branding could also be another reason for the leagues current inability to put fans in

the stands. Recently, the application of brand management theory became prevalent in the sports

environment (Gladden, Irwin, & Sutton, 2001). Brand management theory suggests that

consumers of sports form brand perceptions through sources such as advertising, media

coverage, and other promotional strategies (Ross, Russell, & Bang, 2008). The key for

professional teams will be to differentiate their brand by developing and/or strengthening

positive associations with team brands in the minds of their consumers (Gladden et al., 2001, p.
301). From this, sports teams have found data providing that 25 percent of customers state that

price does not matter if they are buying a brand that owns their loyalty (Fortunato, 2008). Until

more research is obtained on brand management within sports, competitive balance will remain

the primary factor which determines if a league’s current labor system is successful.

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