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Is parity good? Externalities in professional sports

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  • Biner, Burhan

Abstract

In professional sports there are externalities. If one team acquires too much talent then that may impact the quality of the competition negatively. This means that the league can improve social welfare by distorting the competitive equilibrium allocation. This idea has been used to explain that there should be parity among teams to improve social welfare. We develop a theoretical model based on Biner's (2009) empirical results to capture the effect of this externality on the revenue levels and wages when local fans care about winning only. Social Planner's Problem for stadium revenues implies that it is possible to increase the total revenue made in the league compared to competitive equilibrium levels by increasing big market teams' talent level, therefore less parity. In other words due to externalities competitive market allocation is too equal compared to SPP allocation. We show when local audience is mainly interested in seeing their local team dominating the visiting team and national audience only interested in watching a close game on TV, the only way in the model for it ever to be efficient to enforce parity is if we introduce a national TV market into the analysis. For the national TV market, parity is going to lead to a wider TV audience. The greater the weight on this revenue stream, the more likely it is a parity policy can increase league revenues.

Suggested Citation

  • Biner, Burhan, 2013. "Is parity good? Externalities in professional sports," Economic Modelling, Elsevier, vol. 30(C), pages 715-720.
  • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:715-720
    DOI: 10.1016/j.econmod.2012.10.003
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    References listed on IDEAS

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    1. 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.
    2. Helmut M. Dietl & Markus Lang & Stephan Werner, 2009. "Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 375-396, October.
    3. Rodney Fort & James Quirk, 1995. "Cross-subsidization, Incentives, and Outcomes in Professional Team Sports Leagues," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1265-1299, September.
    4. El-Hodiri, Mohamed & Quirk, James, 1971. "An Economic Model of a Professional Sports League," Journal of Political Economy, University of Chicago Press, vol. 79(6), pages 1302-1319, Nov.-Dec..
    5. Biner, Burhan, 2009. "Equal Strength or Dominant Teams: Policy Analysis of NFL," MPRA Paper 17920, University Library of Munich, Germany.
    6. Andrew S. Zimbalist, 2002. "Competitive Balance in Sports Leagues: An Introduction," Journal of Sports Economics, , vol. 3(2), pages 111-121, May.
    7. Sonia Falconieri & Frédéric Palomino & József Sákovics, 2004. "Collective Versus Individual Sale of Television Rights in League Sports," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 833-862, September.
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    Cited by:

    1. Narayan, Paresh Kumar & Rath, Badri Narayan & Prabheesh, K.P., 2016. "What is the value of corporate sponsorship in sports?," Emerging Markets Review, Elsevier, vol. 26(C), pages 20-33.
    2. Biner, Burhan, 2014. "Parity in professional sports when revenues are maximized," Economic Modelling, Elsevier, vol. 40(C), pages 12-20.

    More about this item

    Keywords

    Competitive equilibrium; Social Planner's Problem; Efficient allocation;

    JEL classification:

    • H8 - Public Economics - - Miscellaneous Issues
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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