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A Contest Model of a Professional Sports League with Two-Sided Markets

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Author Info
Helmut Dietl () (Institute for Strategy and Business Economics, University of Zurich)
Tobias Duschl () (Institute for Strategy and Business Economics, University of Zurich)
Egon Franck () (Institute for Strategy and Business Economics, University of Zurich)
Markus Lang () (Institute for Strategy and Business Economics, University of Zurich)

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Abstract

This paper develops a model of a professional sports league with network externalities by integrating the theory of two-sided markets into a contest model. In professional team sports, leagues function as a platform that enables sponsors to interact with fans. In these league-mediated interactions, positive network effects operate from the fan market to the sponsor market, while negative network effects operate from the sponsor market to the fan market. Clubs react to these network effects by charging higher (lower) prices to sponsors (fans). Our analysis shows that the size of these network effects determines the level of competitive balance within the league. Traditional models, which do not take network externalities into account, under- or overestimate the actual level of competitive balance, which may lead to wrong policy decisions. Moreover, we show that clubs benefit from stronger combined network effects through higher profits. Finally, we derive policy recommendations for improving competitive balance by taking advantage of network externalities.

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Publisher Info
Paper provided by International Association of Sports Economists in its series Working Papers with number 0912.

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Length: 29 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:spe:wpaper:0912

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Related research
Keywords: Competitive balance; contest; multisided market; network externalities; team sports league;

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Recreation; Tourism
M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics

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  2. Paul Belleflamme & Eric Toulemonde, 2009. "Negative Intra-Group Externalities In Two-Sided Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 245-272, 02. [Downloadable!] (restricted)
    Other versions:
  3. Scott E. Atkinson & Linda R. Stanley & John Tschirhart, 1988. "Revenue Sharing as an Incentive in an Agency Problem: An example from the National Football League," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 27-43, Spring. [Downloadable!] (restricted)
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  5. Mark Armstrong Author-Email: mark.armstrong@ucl.ac.uk, 2006. "Competition in Two-Sided Markets," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 668-691, Autumn.
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  6. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  7. Martin Grossmann & Helmut M. Dietl, 2009. "Investment Behaviour in a Two-Period Contest Model," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(3), pages 401-417, September. [Downloadable!] (restricted)
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  8. Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
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  15. Helmut Dietl & Markus Lang & Stephan Werner, 2008. "Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs," Working Papers 0090, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Jul 2009. [Downloadable!]
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  16. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December. [Downloadable!] (restricted)
  17. Helmut M. Dietl & Egon Franck & Markus Lang, 2008. "Overinvestment In Team Sports Leagues: A Contest Theory Model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 353-368, 07. [Downloadable!] (restricted)
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  18. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
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  19. Helmut M. Dietl & Markus Lang & Alexander Rathke, 2009. "The Effect of Salary Caps in Professional Team Sports on Social Welfare," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 9(1). [Downloadable!]
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  20. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
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  27. David S. Evans & Andrei Hagiu & Richard Schmalensee, 2004. "A Survey of the Economic Role of Software Platforms in Computer-Based Industries," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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