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Why Study Sports Economics?

2007 October 18
by Phil Miller

I am a bit late to the party on this. About two weeks ago, Justin Wolfers wrote his thoughts on why people study sports economics. Summarizing Wolfers’ key points:

  1. Sports provide unique opportunities to test economic theories.
  2. Sports shapes broader national debates.
  3. Professional sports are an important part of the economy.
  4. Sports participation is an important activity.
  5. Sports provides a useful teaching metaphor.
  6. Doing research on sports is fun.

JC Bradbury at Sabernomics adds one of the primary reasons to study sports:

I agree with all of these, but I think he is missing one. Sports markets are themselves unique and interesting. For example, Simon Rottenberg’s curiosity about baseball’s reserve clause—how it affected the allocation of talent across a league—led him to discover (nearly) the Coase Theorem before Ronald Coase. Mohamed El-Hodiri and James Quirk were the first model the unique structure economic structure of sports leagues, which I think economists still do not fully understand. (There are other examples, but I am on my way to a meeting.)

Add to that Walter Neale’s 1964 QJE paper on the “peculiar” economics of sports. Neale noted that the best position for a typical firm to have is monopoly. In sports, a monopoly spells disaster (who will you play????). That peculiarity is interesting to think about and study.

Sports leagues are interesting per-se because they are, essentially, cooperative arrangements that blend single-entity styled cooperation with cartel-styled cooperation with a dash of economies-of-scale cooperation (for example, having the league handle team websites, as in MLB, to standardize their development and to avoid duplicating costs). These cooperative arrangements are also interesting to think about and study.

The labor market for talent is also interesting. Modeling the market as a competitive labor market gives us some insights on wages using a simple and familiar model, but it has its shortcomings. One of the shortcomings deals with the question of “does all the available talent play in the league?” In leagues such as the Bundseliga or the English Premier League, as I understand them, a lot of top-notch talent plays in other national leagues throughout the world. In that sport’s labor market, there are many teams competing for that talent and there are many top-notch players, so the competitive market model is at least a plausible way to think about labor market for soccer.

But what of leagues like the NFL? There are no other similar leagues anywhere in the world that play this game at this level. It is accurate to assume that all the best available football talent plays in the NFL and if a team wants to sign additional players, it must lure them from other teams in the league. That raises some interesting questions on competitive balance, among other issues.

So why study sports? Wolfers makes valid and useful points, but his list is incomplete. Many of us study sports because they are simply interesting.

Dave Berri has some thoughts here.

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