The Influence of the Professional Sports Leagues - Research Paper Example

Professional team sport generates income to the society in the like manner as other commercial sectors. Many professional team sports employ principles in economics to compete favorable in order to win the attention of their audiences. Various professional sport teams source for competent players as input to the industry. Economic structures and principles help in developing strategic approach into the sport industry. A club has to engage another club in sporting activity in order to win market share. On the contrary, commercial industry competes for market share. It is evident that the best performing clubs attract many fans, which translates to the team’s revenue. This occurs through matches played against a rival team. In essence, best performing club has to triumph other clubs to win large number of fans. Profit is the reward in business enterprises, in like manner professional team sports strive to lure large number of fans in order to achieve the same (Preuss, 2004:2). This argument has influenced the decisions made by club owners and franchise on regulations and structuring of many leagues around the world. This paper seeks to identify and evaluate different approaches adopted by club owners and the general effects that these decisions have to the sports industry. Competition in the sporting industry is very crucial for the establishment and growth of the sport club (Downward & Dawson, 2002:13). This is unlike the commercial sector where monopoly of the business is the ultimate desire. Participation of more than one club in the Champions league is necessary because it influences the number of fans that would watch the football (Stefan, 2007:145). Many fans argue that the competitive arena between various teams influence their taste for sports (Rodney, 2004:116). Predictability of win against a certain team influences the number of fans who would watch the game. This in turn influences marketability of the team. Fans loathe teams, which constantly win with big margins. This is quite tricky in the industry because club owners would always want to command large number of fans. Sporting clubs have developed professional governing bodies, which regulate and develop structures that aim at making the sports industry interesting. The aim of the governing bodies is to increase optimum production in the sports industry (Késenne, 2007: 6). Sports leagues are competitive and are some of the most paying enterprises around the globe. Some of well-paid personalities are sports men. For instance, English Premier League, Champions League, and La-liga are some of the promising sports leagues that command a lot of profit in the globe. The income that these leagues earn contributes to the GDP of various countries. Rugby, Athletics, Golf, Baseball, Cricket etc are some examples of sports organization that contributes to the economy. The following graphical representation illustrates increase in revenue in the sporting industry. Retrieved from http://www.econweb.com/MacroWelcome/sandd/D-Shift_New_Equilibrium.gif Economists believe the future of the sporting industry has a bright future because the industry does not practice monopoly, which is responsible for poor quality products and high prices witnessed in other commercial sectors. Sports industry promotes a free market where competitiveness of the products influences the quality and prices. Analysts argue that competition in the sports industry is not healthy because of its impact in the labor market (Masteralexis & Hums, 2011:121). In this regard, the rich clubs use high wages to maintain top players in the club, thus gripping top positions in the league. This phenomenon makes favorable competition difficult for the less wealthy clubs, which are not able to buy top players at high market prices. This opportunity makes the wealthy clubs to source for the top players thereby hampering healthy competition in the industry. Sports economists further contends that this approach promotes oligopolistic cartels where teams in the first league is exclusive for the wealthy clubs whereas the less wealthy clubs play in the lower leagues which are not famous to the fans (Dobson & Goddard, 2011:102). It is important to note that generation of fans for a particular game is the core factor in devising marketing strategies in the sports industry. This means that fans would be flocking on the gates of the big clubs thus promoting the viability of the clubs at the expense of the less wealthy clubs. League entry charges depend on the number of fans that are willing to watch the match. The function of the league governing entities is not able to resolve issues of bias competition because of restrictions that influence the buying and selling of the players by the big teams (Kenneth & Scott, 2010:125). League owners will maintain sustain level of competitive balance, which will influence spending in the labor market. Argumentatively owners of various clubs strategize on policies that affect the profit margin of their clubs (Delaney & Madigan, 2009:56). During the buying and selling period, teams would apply for purchase of various players. Since the club owners are interested in wining titles, they would make all possible attempts to maintain or acquire a key player (Wladimir & Stefan, 2006:23). This will make their clubs to win large number of fans translating into huge profit. Ticketing strategy is crucial in realizing the above objective. The graphical illustration below indicates how wealthy teams spend in their quest for talents. Retrieved from http://static7.businessinsider.com/image/4d38ef524bd7c8392d4d0000/mlb-salaries-since-1970.jpg Club owners and franchises consider the following variables to influence distribution of key talent among different clubs profitability, ticket pricing, salaries to players, and fans. Sport economists believe that the profit is the determining factor in talent search in various clubs. Although the clubs have the contractual powers to dictate the wage on all players, in normal practice this does not apply since top talent is scarce. Talented players usually draw attention of many fans thus influencing the choice of players that club owners would source into the team. Largely, entertaining matches translates into number of fans and profits (Li & Eschenfelder, 2006:143). Clubs invest in players that would increase the total earnings (Rodriguez, Kasanne & Garcia, 2006:203). This factor often influences the bargaining power of the talented players. Club owners are able to maximize their profits by manipulating variables in the sports industry. For instance Max y = max (R-C) Where y is profit, R is total revenue in the season and C is the total cost in the season. According to the illustration below, a club would increase its profitability if the cost of talent acquisition were equal to revenue generated in the season. Retrieved from http://spot.colorado.edu/~kaplan/econ2010/tests/exam2_files/image002.jpg It is evident from the graph that high marginal revenue creates an opportunity for the club to increase its profit margin, which would in turn influence its quest for new talents. Sports clubs prefer hiring best talents in the market since it leads the club to profit maximization. Budgetary allocation of various clubs dictates the expenditure of the clubs (Dobson & Goddard, 2011:118). By equating total revenue to total expenditures, the clubs are to establish their profit margin. In addition, expectation of the shareholders is another factor that influences profit maximization approach. Win-maximization model caters for season loses incurred by the clubs due to future strategies. The mathematical illustration of the model is as follows: Max w subject to: R-C = y0 where y0 is the target profit of the season and w is the seasonal winning percentage. Under the win maximization model, when a sports club takes capital stock as a constant variable for the short duration, it would mean that a fixed profit rate would lead to fixed profit amount. In this regard, the breakeven condition would be a special case when profit is zero. In win maximization model, breakeven condition would influence maximization of revenue provided club revenue and club percentage winning remain constant (Berri & Schmidt, 2010: 109). It is important to note that maximizing linear combination i.e. win and profit indicates that clubs employ utility maximization model as shown below: Max (y +aw) with a>0 The parameter a, varies with clubs, it is possible for a club to be win oriented or profit oriented. The utility model is comparable to the win maximization model because it allows for profit maximization in a certain rate. Notably, empirical test fails to be conclusive in rejecting or accepting maximization or the profit hypothesis. Economists have mixed views over professional sports clubs. Some argue that professional sports clubs promote monopoly or cartels. Monopoly refers to a system where a single firm provides products to the market (Barzilla, 2002:46). In this case, the firm would dictate the prices and the quality of product that it brings to the market. On the other hand, cartels are firms that collaborate to manipulate the market by setting similar prices or quality. The graph below explains this argument. Retrieved from http://media.wiley.com/Lux/01/9701.nfg001.jpg On the contrary, professional sports club do not view themselves as cartels because sport leagues comprises of several teams. Economists argue that professional sport clubs qualify as cartels because a single league is able to supply the entire market. Further, economists believe that there is lack of competition among sports leagues, which promotes natural monopoly (Groot, 2008:92). In addition, the teams coordinate some matches- inform fans about the location and date for the matches. The teams work with various agents, which negotiate terms of services with respective stadia. The success of the professional sports clubs depend on the number of games that the club is able to play in the home city. Economists contend that home support is a factor that influences the success of the team. The behavior of individual professional sports club projects the market trends that are likely to evolve. The current situation portrays the professional clubs as firms, which promote cartels or monopolistic ideas. Besides, the monopolistic characteristics of professional sports clubs are not a matter that has begun today (Alistair & Paul, 2002:59). The professional sports clubs must coordinate to produce fixtures and devise mechanisms of delivering various products they have to the market (Cox& Hess, 2006:103). It is evident that the leagues must work together in order to draw many fans. Professional sports clubs take measures through their governing bodies in order to eliminate conflict of interest. Drawing of talented players from less wealthy teams would be rampant if rules and regulation does not apply in the leagues. Arguments for the regulations indicate that wealthier teams would source the talented players watering the interest of the league. On the contrary, some economists argue that such restriction have less impact on competition. Firstly, the basis of the argument lies on the Coase theorem, which claims that since the parties lack transactions, focus of any contract would settle on efficient outcome. Secondly, based on the invariance thesis, the outcome would be the same. In this regard, talent distribution in the league would be identical even if the governing bodies of the league restricted the transfer of the players (Butenko, 2010:60). However, this does not influence the action of another team. In a bid to find a solution to some of these problems in the professional team sport, leagues issue restrictions, which seek to prevent dominance of one team from interfering with the interest of another team. For example, North America leagues have regulations, which create a competitive balance. Players sign contracts with their respective teams in order to avoid conflict of interests (Goodman (et). al 2010:186). In England, contracts signed by players ends when the legality of the contract ceases. Members of professional sports leagues discuss mechanism of pay to their labors as a means of enhancing professionalism in the industry. In the commercial industry, pay gap is not as large as in the professional sporting industry. Argument for the notion is that pay increases competitiveness balance in the industry (Barros, (et) al. 2002:113). In conclusion, professional sports club owners apply economic principles in developing objectives that influence the running of the professional sports leagues. Largely, profit maximization is a major factor that influences the approach taken by shareholders of the professional sporting clubs in making their decisions. Club owners consider variables such as running costs and profits to decide the salaries of the players. Although the sporting industry promotes a free market where market structures influence the prices of the products, competition pattern adopted by the sporting leagues promote cartels and monopoly. It is evident that wealthy sporting leagues control large market share. Sporting leagues have devised regulations, which aim at controlling conflict of interest among the teams. It is important to note that competition among the professional sporting leagues promote the products of the industry. This is in contrast to the commercial industry. Bibliography Alistair D. & Paul D. 2002. The Economics of Professional Team Sports, London: Routledge. Barros, P. C. et. al. 2002. Transatlantic sport: the comparative economics of North American and European sports. Massachusetts: Edward Elgar Publishing. Barzilla, S. 2002. Checks and imbalances: competitive disparity in Major League Baseball. North Carolina: McFarland. Berri, J. D. & Schmidt, B. M. 2010. 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