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Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs

Author

Listed:
  • Helmut Dietl

    () (Institute for Strategy and Business Economics, University of Zurich)

  • Markus Lang

    () (Institute for Strategy and Business Economics, University of Zurich)

  • Stephan Werner

    () (Institute for Strategy and Business Economics, University of Zurich)

Abstract

This paper develops a contest model to compare social welfare in homogeneous leagues in which all clubs maximize identical objective functions with mixed leagues in which clubs maximize different objective functions. We show that homogeneous leagues in which all clubs are profit-maximizers dominate all other leagues whereas mixed leagues in which small-market clubs are profit- and large-market clubs are win-maximizers (type-I mixed leagues) are dominated by all other leagues. In addition, we show that, from a welfare perspective, large-market clubs win too often in (purely) win-maximizing and type-I mixed leagues whereas small-market clubs win too many games in (purely) profit-maximizing leagues and in mixed leagues in which large-market clubs are profit- and small-market clubs are win-maximizers (type-II mixed leagues). These results have important policy implications: Social welfare will increase if clubs are reorganized from non-profit members associations to profit-maximizing corporations. Moreover, it is socially desirable to reorganize large-market clubs first because, in mixed leagues, it is better if large-market clubs maximize profits instead of small-market clubs. Finally, we show that the invariance proposition does not hold in any league. In mixed (homogeneous) leagues, revenue sharing decreases (increases) social welfare. Given these results, homogeneous leagues should introduce revenue sharing; mixed leagues should not.

Suggested Citation

  • 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.
  • Handle: RePEc:iso:wpaper:0090
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    References listed on IDEAS

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    Cited by:

    1. Grossmann Martin & Lang Markus & Dietl Helmut, 2011. "Transitional Dynamics in a Tullock Contest with a General Cost Function," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-26, August.
    2. Paul Madden & Mario Pezzino, 2013. "Sports League Quality, Broadcaster TV Rights Bids and Wholesale Regulation of Sports Channels," The School of Economics Discussion Paper Series 1304, Economics, The University of Manchester.
    3. Helmut M. Dietl & Markus Lang & Stephan Werner, 2010. "The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues," International Journal of Sport Finance, Fitness Information Technology, vol. 5(1), pages 41-51, February.
    4. Oliver Guertler & Markus Lang & Tim Pawlowski, 2011. "On the Release of Players to National Teams," Working Papers 0046, University of Zurich, Center for Research in Sports Administration (CRSA).
    5. Markus Lang & Martin Grossmann & Philipp Theiler, 2011. "The Sugar Daddy Game: How Wealthy Investors Change Competition in Professional Team Sports," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 557-577, December.
    6. Helmut M. Dietl & Markus Lang & Alexander Rathke, 2011. "The Combined Effect Of Salary Restrictions And Revenue Sharing In Sports Leagues," Economic Inquiry, Western Economic Association International, vol. 49(2), pages 447-463, April.
    7. Helena Fornwagner, 2017. "Incentives to lose revisited: The NHL and its tournament incentives," Working Papers 2017-07, Faculty of Economics and Statistics, University of Innsbruck.
    8. Biner, Burhan, 2013. "Is parity good? Externalities in professional sports," Economic Modelling, Elsevier, vol. 30(C), pages 715-720.
    9. Paul Madden, 2012. "Welfare Economics of "Financial Fair Play" in a Sports League With Benefactor Owners," The School of Economics Discussion Paper Series 1221, Economics, The University of Manchester.
    10. Helmut M. Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2012. "Salary Cap Regulation In Professional Team Sports," Contemporary Economic Policy, Western Economic Association International, vol. 30(3), pages 307-319, July.
    11. Dietl Helmut & Duschl Tobias & Franck Egon & Lang Markus, 2012. "A Contest Model of a Professional Sports League with Two-Sided Markets," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 232(3), pages 336-359, June.
    12. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2008. "Revenue Sharing, Reserve Clause and Salary Caps in Professional Team Sports Leagues," Working Papers 0100, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2009.
    13. Helmut Dietl & Carlos Gomez-Gonzalez & Cornel Nesseler, 2017. " Are women or men better team managers? Evidence from professional team sports," Working Papers 364, University of Zurich, Department of Business Administration (IBW).
    14. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2010. "Organizational Differences between U.S. Major Leagues and European Leagues: Implications for Salary Caps," Working Papers 0122, University of Zurich, Institute for Strategy and Business Economics (ISU).
    15. Egon Franck & Markus Lang, 2014. "A Theoretical Analysis of the Influence of Money Injections on Risk Taking in Football Clubs," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(4), pages 430-454, September.
    16. Martin Grossmann & Helmut Dietl & Markus Lang, 2010. "Revenue Sharing and Competitive Balance in a Dynamic Contest Model," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(1), pages 17-36, February.
    17. Markus LANG & Alexander RATHKE & Marco RUNKEL, 2010. "The Economic Consequences Of Foreigner Rules In National Sports Leagues," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 31, pages 47-64.
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    20. Thomas Longden & Greg Kannard, 2014. "Rugby League in Australia between 2001 and 2012: an Analysis of Home Advantage and Salary Cap Violations," Working Papers 2014.53, Fondazione Eni Enrico Mattei.
    21. Helmut Dietl & Egon Franck & Martin Grossmann & Markus Lang, 2009. "Contest Theory and its Applications in Sports," Working Papers 0029, University of Zurich, Center for Research in Sports Administration (CRSA).
    22. Peter Sloane, 2014. "Club objectives," Chapters,in: Handbook on the Economics of Professional Football, chapter 1, pages 13-22 Edward Elgar Publishing.
    23. Helmut Dietl & Markus Lang & Alexander Rathke, 2009. "The Combined Effect of Salary Restrictions and Revenue Sharing on Club Profits, Player Salaries, and Competitive Balance," Working Papers 0909, International Association of Sports Economists;North American Association of Sports Economists.
    24. Helmut Dietl & Markus Lang & Cornel Nesseler, 2017. " The Impact of Government Subsidies in Professional Team Sports Leagues," Working Papers 366, University of Zurich, Department of Business Administration (IBW).

    More about this item

    Keywords

    Social welfare; team sports leagues; objective functions; mixed leagues; competitive balance;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D6 - Microeconomics - - Welfare Economics
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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