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Revenue sharing in professional sports leagues: for the sake of competitive balance or as a result of monopsony power?

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  • Frederic Palomino
  • Jozsef Sakovics

    ()

Abstract

We analyze the distribution of broadcasting revenues by sports leagues. In the context of an isolated league, we show that when the teams engage in competitive bidding to attract talent, the league's optimal choice is full revenue sharing (resulting in full competitive balance) even if the revenues are independent of the level of balancedness. This result is overturned when the league has no monopsony power in the talent market. When the teams of two different leagues bid for talent, the equilibrium level of revenue sharing is bounded away from sharing of revenues: leagues choose a performance-based reward scheme. Finally, we argue that our model explains the observed differences in revenue sharing rules used by the U.S. sports leagues (full revenue sharing) and European soccer leagues (performance-based reward).

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Bibliographic Info

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 59.

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Length: 25
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:edn:esedps:59

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  1. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B 288, University of Bonn, Germany.
  2. Scully, Gerald W., 1995. "The Market Structure of Sports," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226743950, February.
  3. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
  4. Frederic Palomino, 2000. "Competitive Balance vs. Incentives to Win: A Theoretical Analysis of Revenue Sharing," Econometric Society World Congress 2000 Contributed Papers 0930, Econometric Society.
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Cited by:
  1. Palomino, F.A. & Rigotti, L., 2000. "The Sport League's Dilemma: Competitive Balance versus Incentives to Win," Discussion Paper 2000-109, Tilburg University, Center for Economic Research.
  2. Barajas, Angel, 2004. "Modelo de valoración de clubes de fútbol basado en los factores clave de su negocio
    [Valuation model for football clubs based on the key factors of their business]
    ," MPRA Paper 13158, University Library of Munich, Germany.
  3. Palomino, Frederic & Sakovics, Jozsef, 2004. "Inter-league competition for talent vs. competitive balance," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 783-797, June.

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