The huge salaries of some top athletes from an economic perspective - Essay Example

The Economics of Sport Introduction In the opinions of many researchers and media personalities, the salaries of athletes are too high. However, judging from a series of empirical studies and economic theory arguments, the opposite of this notion is true. Few players earn extremely high wages, most likely due to the innate characteristics of the sport labour markets both on the production and on demand sides. Through the introduction of broadcasting channels in the second half of the 20th century, the salaries of players have substantially grown, as people have exhibited exceeding interest in the need to watch sports as a preferable entertainment mode. Looking into the wages of the highest earning players, boxing produced the top two earners. Floyd Mayweather and Manny Pacquiao top the list with the latter earning $160million, $140 less than that earned by the former. Soccer had the third and four largest earners Cristiano Ronaldo and Lionel Messi, who pocket $79.6million and $73.8million respectively. Roger Federer and Lebron James become the highest paid tennis and basketball players, earning $67 million and $64.8million respectively (Forbes, 2015). Peculiarities of the sports labour market The demand for labour in the sport market is a derived demand, which depends on the final product’s demand produced by the labour. The rigid supply of sport stars explains why the wages of professional sport stars is relatively high. The quality of demand and production of professional sport stars is not dependent on the increasing or decreasing numbers of consumers, though the market has a structure that can prevent practices such as free riding. According to this analysis, if the demand increases in line with the quantity as opposed to quality, the increasing economies of scale are a likely occurrence under these situations. Figure 1: Bilateral Monopoly (2012books.lardbucket.org, 2015) The structure of the sports labour market One firm that bids up the price of labour, often referred to as monopsony characterizes the sport labour market. Under this market structure, the factor market has only one buyer. However, it represents a factor market counterpart to having single seller or a monopoly in the production market. As such, the sports labour market has very few buyers, which operates as a monopoly in the product market and a monopsony in the labour market. Moreover, the bilateral monopoly distinguishes the labour market whereby the seller encounters one prospective buyer, as depicted in Figure 1 above. The monopsony structure distinguishes the sports leagues and the player’s union. Figure 2: Monopsony Sports labour Market (2012books.lardbucket.org, 2015) Based on the illustration of Figure 2 above, S represents the supply curve of the factor in the market; MFC is the marginal factor cost that represents the cost of hiring one extra unit of quality. The MRP is the marginal revenue product, which represents the additional revenue that the league receives from hiring an additional unit of quality. The economics of superstars The discussion about the superstars arises upon the mystery behind the high MRPs generated by superstars in entertainment, sports and art fields. The high earnings find their explanation in the economies of superstars, which explains the restrictions behind keeping the number of superstars definite. Herein, the production technology and the consumer taste exhibit imperfect substitution between the sellers of specific services. Besides, there is imperfect substation for the great talents that characterise the sport. Under the economics of superstars, the economies of scale in joint consumption are experienced from the large audience that can enjoy the service at the same time. In addition, the cost of production is not closely related to the size of the audience. The distorted distribution of earnings witnessed arises from the imperfect substitution between the internal diseconomies and the sellers. In a bid to account for the higher seller concentration, the joint consumption economies are applicable. The market under the economies of superstars is a natural monopoly, which assumes that the sizes of the audience do not limit the joint economies of consumption. According to this argument, one team or player cannot dominate the whole market due to the threats posed by competition and entry of other players, hence obligating the superstars to attain their high earnings through tailoring their operations at higher costs of low margins. Tournament theory According to this theory, many of the individual sports display elements of the rank order. The relative productivity exceeds the absolute productivity in line with this theory. A major assumption under this theory is that the quality of any individual is dependent on myriad of factors. Such factors as the weather, the playing surface, the size of the stadium and the ability of the opponents determine the extent to which a player will perform. In line with the above arguments, it is visibly difficult to measure the marginal revenue product, though the relative performance of individual players is easily measured. The tournament theory envisages a number of assumptions. First, the participants in a tournament maximize their utility, which decreases with effort but increases with leisure and income. In addition, the organizers of tournaments expect the best display from the players, hence using the prise incentive to initiate the efforts from the players. As such, in tournaments where the players are paid equally, the players will not exhibit their maximum efforts, as they experience leisure and equal income like their opponents. According to the illustration below, the MC slopes upwards when the costs associated with winning obligate the player to sacrifice and dedicate extra efforts. Application of the concepts in sports Considering the changing media and sports environments, the International Olympics Committee and the FIFA transactions in Korea explain the concept of bilateral monopoly. The transactions for the International Olympics Committee and the FIFA contents in Korea belonged to the bilateral monopoly similar to the broadcast markets in Europe and Asia. Therefore, broadcasters in Asia, Japan, Europe and Korea formed their individual buyers’ cartels among the free-to air broadcasters. These were the European Broadcasting Union (EBU, the Japan Consortium (JC), the Asian-Pacific Broadcasting Union (ABU) and the Korean Pool. Through these buyers’ cartels, the FIFA and IOC negotiate for the broadcasting rights. Under this illustration, the bilateral monopoly relationship is evident from the single seller of the broadcast rights and the single buyer of these rights. In a bid to spread the Olympic values, the IOC tailors its broadcast policy to ensure the most inclusive coverage from the different media and to reach the widest audience in the world. The bilateral relationships between the transactions of the International Olympics Committee and FIFA contents have shifted to adopt the supply-side monopoly with the introduction of broadcasting rights. Under this structure, there is a single dominant holder of the sports rights, and several buyers for the sports rights. Massive competition characterises the demand for the broadcasting rights, hence leading to an escalation in the price. For instance, in the year 2006, the Korean Pool purchased the broadcasting rights from IOC at US$ 63 million, a deal, which would enable the KP to broadcast the Olympic Games from 2010 to 2016. While analysing the economics of superstars, an analysis of the figures at the introduction of the paper will help. It is evident that some profession are much better paid than most others are. While Manny Pacquaiao and Floyd Mayweather represent the best-paid athletes, they display huge differences between the ranges of their wages, as Floyd Mayweather earns almost double of what Pacquaio earns (Forbes, 2015). In addition, while looking at the list, no other professional boxer appears. This illustrates that even among the highly paid professionals; there exist huge differences between the top earners. Consequently, the superstar phenomenon depicts the fact that few individuals in chosen professions enjoy massive salaries. While looking at the list, certain sporting activities such as athletics and rugby do not feature, hence illustrating the fact that the choice of sport determines the salaries paid to the superstars. Therefore, certain geographical and cultural factors influence the superstar effects. For instance, in Australia, it is difficult to find superstars in such sports as ice hockey, skiing and ice-skating. However, these sports have superstars in some locations such as Europe, US and Canada. When signing Cristiano Ronaldo from Sporting Lisbon in Portugal, Manchester United spent less than $5 million. Later at Manchester United, Ronaldo developed into a superstar. Wealthy clubs were willing to give over $50 million for the player. Competition between the teams presented several contracts for the player. There are limits, however, that the salary would not exceed certain amounts. Primarily, the salaries of superstar players relate to the marginal product. The high marginal product of Cristiano Ronaldo over his stay at Manchester United was a clearer indication of the superstar he became. Moreover, the tournament theory is best illustrated in tennis, whereby the Association of Tennis Professionals (ATP) hosts over 60 tournaments in 32 countries around the world (Silverman & Seidel, 2011). The number of competitors at the ATP tournaments ranges from 32 to 128. The competitions have different forms of incentives, such as monetary prizes and ATP points, which are the basis of the professional rankings within the ATP. The highest ranked players often get automatic qualification to high profile tournaments, unlike the lower ranked players who must succeed in the qualifier rounds if they want to participate in the ATP tournaments. Consequently, the total points awarded, the field size and the total payout decide the largest tournaments in the ATP. Looking at The French Open (Rolland Garros), the Australian Open, US Open and the Wimbledon, each tournament has 128 players, 32 of which are seeded. The US Open, for instance, awarded a total of $2.9 million, with the payouts being awarded on a sliding scale, and the prices roughly double upon the qualification to the next round (Silverman & Seidel, 2011). According to the reward schemes illustrated in the ATP grand slams, it is evident that most players put more efforts in the grand slams, as opposed to the minor competitions that have few competitors and slimmer monetary prises. The reward schemes, nevertheless, align with the tournament theory and the claim by Rosen that large marginal rewards are characteristic of the higher position of a player. Such incentives obligate the players to put in extra efforts, and invest adequately in the competition knowing that failure to win the tournament can be catalysed through attaining maximum points. Conclusion From the analysis above, the sport, market is more complicated than many people think it is. The market structure adopted by sports labour markets is not only unique but also complicated. In addition, this paper highlights the factors that make players superstars, and the factors leading to the disparities between the salaries and wages of the top earners in each sport. In conclusion, the tournament theory explains the strategies employed by sponsors in ensuring that the players dedicate their maximum efforts for the benefit of the target consumers. Bibliography 2012books.lardbucket.org. (2015). 2012 Book Archive. Retrieved 16 November 2015, from http://2012books.lardbucket.org Forbes. (2015). World’s Highest Earning Sports People. Retrieved from http://www.forbes.com Silverman, J., & Seidel, S. (2011). Incentives in Professional Tennis: Tournament Theory and Intangible Factors. Duke University Durham, North Carolina. 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