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Rinkonomics, Ultimate Frisbeeconomics, and Spontaneous Order

2013 November 29
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by Phil Miller

Can sports be played without referees?  Can life be lived without “referees?”  Ultimate Frisbee is often played without officials, but why not other, more high-stakes sports.  These are some of the interesting questions that is explored in this Freakonomics podcast.  Via Sports Law Blog.

The NFL to Member Teams: All Your Los Angeleses are Belong to Us

2013 November 15
by Phil Miller

When the most recent print version of the Sports Business Journal arrived at Chez Miller, an above the fold headline read:  “NFL: We Have Final Say in L.A.” with a subhead reading “Teams warned not to do own stadium deal.”  Here’s the online version of the article.

The NFL has reiterated to its 32 clubs that Los Angeles is the league’s market and that any franchise seeking to negotiate its own stadium deal in the city could threaten the best economic result for the sport, according to team and other sources familiar with the matter.

The league outlined its points in a memo sent to clubs last month. In that memo, the NFL also cautioned that a team buying real estate in Los Angeles would not preclude the league from moving forward on its own stadium deal. There has been some concern in league circles that a team might squat on Los Angeles through buying land for a potential stadium.

The reason given in the article?

The NFL has shepherded the effort to return the league to Los Angeles almost since the Rams and Raiders departed the city after the 1994 season. Owners have sat through countless updates at meetings on Los Angeles and on the league’s perspective on what it will take to get a deal done — so a wild-card club moving in on its own is enough to spark some unease. The potential revenue of the Los Angeles market is another key element, because if a team were to strike a poor economic deal, it would mean less shared money for the rest of the league.

But we can’t ignore the elephant in the room:  Los Angeles is a great, credible threat point that individual teams can use for leverage in stadium and lease negotiations with their local and state governments.  This threat was effectively played, at least through the local press, when the Vikings negotiated for their new stadium.

Full collusion among NFL teams gives the best outcome for the league as a whole (monopoly is preferred to competition), but each team has an incentive to strike out on its own and negotiate its own deal.   This should surprise none of our readers here at TSE, but sometimes the members of the cartel have to reminded of this.

Proposed Changes to the Japanese Posting System

2013 November 14
by Phil Miller

The Nippon Professional Baseball players’ union has agreed to some changes in the Japanese Posting system that allows some NPB players to negotiate with MLB clubs.  The posting system is on hiatus for this year while changes are hashed out.

The posting system allows NPB players not yet eligible for free agency a way to negotiate with MLB clubs.  It was developed after Hideo Nomo and Alfonso Soriano exploited loopholes that allowed them to leave their NPB club to play in the states.

As it is currently structured, a NPB club may unilaterally post one of its players or a MLB can inquire about a particular player between Nov. 1 and March 1.  Once the player is posted, MLB teams may make sealed bids which are given to the MLB commissioner.  If no one bids, the player returns to his NPB club.  If teams submit bids, then the MLB commissioner notifies the NPB commissioner of the amount of the winning bid, but not the team that made the bid.  The NPB team has four days to accept or reject the bid.  If the bid is rejected, the player returns to his NPB team.  If the bid is accepted, the winner gets a 30 day window to negotiate with the player.  If no agreement is reached, the player returns to his NPB club, but the MLB team does not have to pay its bid.  If an agreement is reached, the player goes to the states and the MLB team pays its bid as compensation to the NPB team.

Under the proposed changes, if negotiation rights are awarded and the two parties can’t reach an agreement, the MLB team would pay a fine, although I haven’t seen how high the fine would be.  However, if an agreement is reached, then the MLB team would only pay the average of the top two bids.  I presume that if there were only one bidder, that team would still have to pay its bid if negotiations were ultimately successful.  The union has agreed to these changes for only two years.

There are a couple of potential reasons for the changes.  One is they will keep MLB teams from setting ridiculously-high bids to block other teams from getting players.  As currently structured, the posting system does not penalize bad faith bids.

A second reason suggested at Baseball Reference is that the changes will lower the costs for MLB teams, especially when highly-regarded players are posted.  In 2011, the Texas Rangers bid $51.7 million for the right to bargain with Yu Darvish and the Dodgers bid $25.7 million to bargain with Ryu Hyun Jin.  This year, highly-regarded pitcher Masahiro Tanaka is expected to be posted (if the revisions are accepted by the NPB).

However, I’m skeptical of this second reason because a lowering of the fee would just leave more money on the table to sign the player.  It’s not at all clear that this would lower the overall cost (fee + salary) of the winning MLB team.  Come to think of it, perhaps this is why the NPB players’ union signed off on the changes.

In any case, the NPB still has to sign off on the changes and until it does so, the posting system will be on hiatus until further notice.

Baseball Healthy In Spite of Declining World Series Viewership

2013 October 29
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by Brian Goff

While Yankees v. Dodgers would been MLB’s dream television matchup for the World Series, the Red Sox v. Cardinals setup is likely better than most.  When these same two teams met in the 2004 fall classic, they averaged the second most viewers of any Series since 1986. Unfortunately for overall viewership, the Red Sox swept the series in 4 games.  However, so far, viewership is well below that of 2004, in the 15 million viewer range versus 22-25 million per game in 2004.  Even at 2004 WS viewership levels, baseball’s premier event would draw only about the equivalent of an average Sunday Night Football regular season matchup. In years with lower profile teams playing, the viewership for MBL’s showcase looks more like an audience for each week’s Monday night game on ESPN. In contrast, the Super Bowl draws over 100 million viewers.

For many years, this kind of disparity between national television audiences for football and baseball led to concerns over the health of baseball along with discussions as to how baseball might “fix” the problem. Over time, however, it has become clearer that baseball’s future in terms of television revenues lay along a different path.

Before the late 1960s, there was no Super Bowl, and it took a decade for it to evolve into a major, primetime television event. Monday Night Football did not emerge until the early 1970s. College Football televised on or two games per Saturday. In this era of American sports history, the World Series stood at the pinnacle of sports consumer interest. By the 1980s, pro football had fully gained its television legs, and after a key 1984 Supreme Court decision, college football’s television footprint began expanding.

Baseball appeared relegated to the minor leagues. As the figures above indicate, in terms of national television audiences, the World Series barely matches up a run-of-the-mill NFL prime time game. The lesson MLB has learned is that a pie doesn’t have to come all in one pan. The big for numbers for MLB are not found in national audiences for a single game or series, but, instead are tied to regional telecasts. Beyond the Yankees, the Dodgers, Angels, Rangers, and teams in much smaller markets draw thousands of television fans per game over the course of the 162 game season. This Forbes article on Baseball’s Biggest Deals provides details. The overall pie is split into a lot of smaller pans. The aggregate numbers for TV revenues are still below the NFL but are sizable.

While NFL fans have regional team interests, they also watch games involving other teams. Consumers care about the NFL’s product at both a team-specific and league-wide level. In contrast, baseball consumers exhibit much more limited league-wide interest than NFL consumers and much less than MLB consumers of 60 years ago. The bulk of baseball consumer interests center on a specific team. It took baseball quite a while to fully grasp that evolution, so even though the World Series may not be what it once was to sports consumers, it really isn’t an accurate indicator of baseball’s health anymore.

BP Oil Spill Funds to Be Invested in Biloxi Ballpark

2013 October 25
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by Skip Sauer

The WSJ reports that Governor Phil Bryant is allocating $15 million from Mississippi’s share of BP oil spill damages to be invested in a minor league ballpark in Biloxi. The city itself has voted to issue $21 million in bonds backed by stadium revenues, but the deal apparently hinged on the state’s investment of BP funds.

Biloxi’s population has declined 10% (to 45,000) since Hurricane Katrina in 2005, and the 2010 oil spill must have added to the economic destruction. But BP’s oil spill didn’t ruin baseball in Biloxi — it damaged the beaches, the livelihoods of fishermen, and so on. It’s a stretch to take BP’s settlement money and pour it into new stadium construction.

A counter-argument might be that building a baseball stadium is the most effective way to stimulate economic development in Biloxi, and generates a higher return on public investment than alternative projects. But it is well known that stadium building is an effect, not a cause, of economic development — see Coates and Humphreys (2000) for example. Nevertheless, the city council’s 5-2 vote approving the stadium project was cheered by “most of the 150 residents and business owners” attending a recent meeting.

No doubt there are real benefits to be realized from this project, although the fact that outside funding is required suggests they may total less than the costs. I’d wager that the Beau Rivage Resort and Casino, on whose land the stadium will be built, is the primary beneficiary, and an active political player in the deal to approve it.

For those with a WSJ subscription, here is the gated link to the story. This link to the WSJ stream may be accessible for a while as well.

Is Peyton Manning Immune to Age?

2013 October 15
by Brian Goff

Six games into the season, Denver Broncos quarterback Peyton Manning has thrown for 22 touchdowns and only 2 interceptions. If he continues at or near his present pace, he will generate the best statistical season of his career and one of the best by any quarterback ever, while at the age of 37. How long can he sustain this level of performance?

Sometimes, sports commentators let their sentiment run wild when it comes to long-lived and well-liked players like Manning or the Yankees’ Derek Jeter and make statements to the effect that they can continue as long as they have desire.  A less enthusiastic consideration from sports and life suggests otherwise.  Time and age inevitably diminish athletic performance. Yale economist, Ray Fair, supplies extensive data on running and field event performances by age along with swimming and even chess. Masters running records indicate that by age 50 runners, whether in the 100 meters or mile, drop off by about 10 percent relative to world records. Of course, the incentives driving these records are not nearly as substantial as the open records and may not attract the most talented performers. During the height of PED use, particularly in baseball, 40 became the new 28, but even the modest enforcement policies of MLB have curtailed the drug-enhanced career lengths.

How long can Manning keep it up? After all, it’s the skill in Manning’s head and arm more so than his ability to run 100 meters that makes him great.  Evidence collected specifically for NFL quarterbacks by Advanced NFL Stats offers clues. QBs over 35 tend to drop off with another precipitous drop after 37. These data indicate that the drop-off does not happen gradually. Instead, it’s usually quite sudden. As their analysis points out, however, the sudden drop-off could be an artifact of the data. All QBs experience up and downs in their careers, only to bounce back toward the mean in subsequent years. With a QB in his late 30s, the down year frequently leads to retirement and may accompany an injury, which imposes a selection bias on the data. Another selection issue with the data is that most (starting) quarterbacks who continue playing into their late 30s are among the league’s best, which makes for a small sample.

Best Coaches in NFL Since 1960s

2013 September 23
by Brian Goff

With the NFL kicking off Thursday, I thought it a good time to consider the best coaches ever.  A couple of observations in advance:
— these coaches aren’t the screamers;  they may be “in charge” guys but see that managing/coaching is a lot more than mantras and yelling;
— these rankings aren’t based on my opinion; they take into account the team’s winning percentage during the coach’s tenure, the performance of the team before the coach arrived, the GM, the owner, the city, and expansion teams (the academic piece behind them is available here);   they aren’t perfect, as no such statistically-driven results are, but they are transparent and data-driven;
— small differences in rankings matter little; readers sometimes get worked up over “how that guy can be ranked above this guy” when they differ by two spots; the point is, both are highly rated;
— the rankings are based on data up through the 2011 season and impose  a 10-year minimum tenure requirement to make the list

1. John Madden (Oakland Raiders 1969-78):  known to many younger fans as only an announcer and by-gone coach, he boasted a 76% winning record.  His teams reached the AFL/AFC Championship game 7 times and won a Super Bowl.  By current accounting, reaching the Championship game so frequently without more Super Bowl appearances can count as failure.  My method doesn’t incorporate any such silly punishment for success.  By these methods, Madden’s contribution netted the Raiders about 2 wins more per season than an average coach.

2. Tom Landry (Dallas Cowboys 1960-88): Landry’s business apparel, stoic demeanor, and winning ways with the team that people loved or hated made him both a respected and reviled figure in his coaching prime among fans and media, although mostly universally respected by the end of his tenure.   From 1966-1982, his teams reached the NFL/NFC Championship Game an incredible 12 times, visited 5 Super Bowls and won two of them.  Along with GM Tex Schramm, Landry can be credited with some of the earliest uses of data-analytic methods to evaluate talent and opponents —  methods that are now in widespread use.  He likely stayed on a bit too long as his innovative ideas and evaluation skills began to wane, lowering his career winning percentage by the end.

3. Tony Dungy (Tampa Bay Bucs 1996-2001, Indianapolis Colts 2002-08): In Tampa Dungy took over a club without a winning record in 14 years and turned it into a regular playoff team (and a Super Bowl winner after his departure).  The Colts went to the AFC Championship 3 times during his tenure and brought Super Bowl trophy back to Indy in the 2006 season.  He is the antithesis of the maniacal-screaming coach.  Thoughtful, controlled but smart, hard-working, and forceful in a quiet way.

4. Bill Belichick: (Cleveland Browns 1991-95, New England Patriots 2000-present):  To NFL fans Belichick’s record requires little explanation — 3 Super Bowl victories and 3 more AFC Championship Game trips during his stay in New England.   His rating would likely be higher but for the fact that the Patriots were a decent team when he arrived and his record in Cleveland was less than stellar.  It appears he learned some valuable lessons in Cleveland, but, most importantly, he displayed the good sense to insert Tom Brady when Drew Bledsoe came up injured and never went back.

5. Don Shula (Baltimore Colts 1963-69, Miami Dolphins 1970-95): Shula’s coaching career mirrors that of Tom Landry in many respects but extended even longer.  His teams went to 8 AFC Championships, won two Super Bowls, and posted a perfect 17-0 season in 1972.  Incredibly, he suffered only 2 losing seasons out of 33.  That figure alone should put someone on the list who witnessed a variety of players as well as swings in rules and strategic philosophies on offense and defense.

Honorable Mention:  Marty Schottenheimer (the coach of many good but not great teams), Joe Gibbs (3 super bowls with 3 different QBs, likely higher had he not come out of retirement), George Allen (see Schottenheimer); Bill Cowher and Chuck Noll (two Pittsburgh icons).  To me, Noll’s record is a lot like that of Lombardi (or Madden for that matter), very impressive but his success was with one core group of players making it hard to assess relative to longer-tenured coaches.  (Note: George Seifert also ranks highly in the data but I’ve discounted him on this list because he really continued an existing dynasty).

The NFL and the Government Trough

2013 September 23
by Skip Sauer

Fall is the time for young men to battle on the gridiron, and for pigskins to fly through the air. It’s a tremendous athletic spectacle. But there’s another porcine angle to this feast of sport: the image of NFL owners as a bunch of hogs, lined up at the public feeding trough and gobbling up tax exemptions, stadium subsidies, and special legal treatment. These activities are well chronicled in Gregg Easterbrook’s piece in the October issue of The Altantic.

Easterbrook presents a several facts that are new to me, among riffs on familiar topics like stadium subsidies. It’s a good compendium of the ways in which public funds are lavished on the NFL, and other leagues as well. The story is written in a voice which asks “how can this stupid stuff — much of it involving transfers from regular citizens to billionaire owners — continue to go on?” The simplistic but correct answer is that it will continue to take place until political conditions change in a way which makes these transfers sufficiently unpopular. The recent stadium subsidy scorecard suggests that day may yet be a long way off.

A Few Words about the Late Ronald Coase and Sports

2013 September 9
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by Phil Miller

The Nobel laureate economist Ronald Coase died last Monday at age 102.  Coase’s important contribution to economics was in showing the importance of transactions costs in why people make particular choices.

He is most well-known by the “theorem” that bears his name, the Coase theorem.  Developed in his 1960 paper “The Problem of Social Cost“, Coase argued in his “theorem” (named the Coase Theorem later by another Nobel laureate, George Stigler) that when transactions costs are sufficiently low and when property rights are well-defined, then private negotiations can solve the problem of external costs.  He also argued something that he thought should have been obvious to economists:  factors of production tend to be employed where they are valued the most regardless of who has the final say in where they are employed.

In “Theory of the Firm“, published in 1937, Coase argued for the reasons why firms exist as economic units.  He argued that firms exist to minimize the transactions costs associated with being a seller in a market.

Both of these papers have a sports angle that I have touched on in the past.  Sports economists have noted that the basic arguments made by Coase in his “theorem” actually appeared in the seminal article in the field, Simon Rottenberg’s “The Baseball Players’ Labor Market” which was published in 1956.  When Rottenberg wrote his paper, there was no system of free agency in baseball as we know it today.  Instead, players were essentially perpetually bound to their teams by the reserve clause.  Once signed, players gave up the right to be the owner of their talent.  Their teams owned that right, only relinquishing the right when they released players.

The teams argued that the reserve clause was necessary in order to more-or-less equalize the amount of talent between teams and to maintain competitive balance.  Rottenberg, however, was skeptical that the reserve clause was anything more than a way to put a damper on player salaries.  In what we now call the Invariance Hypothesis, Rottenberg argued that whether players had the final say on where they player or if teams had that right, players would tend to play for the teams that valued them the most.  This is why, Rottenberg argued, the history of reserve-clause-era baseball is littered with dynasty teams such as the Yankees of the 30’s and 50’s.

Here are some more of my thoughts on Rottenberg vs. Coase.

I also believe that Theory of the Firm has some insights for sports economists.  In this TSE post, I wrote:

Coase argued that firms, centrally-directed collections of resources, form as a way to lower transactions costs.  They facilitate the costs of searching, information gathering, bargaining, and enforcing contracts.  Firms form to lower the costs of making transactions and thus provide value to their customers.

Where this transactions-costs-lowering argument seems to fit the necessary condition for league formation is in the setting of the various rules that define a sport.  For example, games can be played when the playing rules are unknown beforehand and determined on the spot, but this will generally be uninteresting to fans and frustrating to players.  One can make similar claims about playoff determination and champion definition.  And don’t forget about setting a playing chedule.

Calvinball may be fun to read about in comics, but it would be frustrating to play and watch.

Coase didn’t write a lot of papers, especially compared to the number that some of today’s researchers produce.  He also eschewed the encroachment of math into economics, “blackboard economics” as he called it, believing that it took the human being as the subject of analysis out of the picture, along with the good and bad things that make us humans (see behavioral economics).  So rather than resort to using math to shorten his papers, he wrote words and was sometimes a bit verbose.  But his insights were profound, winning him a Nobel Prize in 1991.

Indeed, JC Bradbury once quipped on Facebook that if Coase had a Twitter account, he’d rarely post, he’d use all 140 characters each time, and they’d be the best posts in the world.

Surely his tweets would have been retweeted thousands of times and debated for a long time.

Coase is now gone, but he will not soon be forgotten.

The $70 Billion Fantasy Football Market

2013 September 6
by Brian Goff

I’m a traditionalist when it comes to my football tastes. I still watch NFL games because of an interest in the teams and the outcome of the game. For millions of others, their NFL interest centers in part or in whole on the statistical production of individual players that make up their fantasy teams. Any visitor to websites like Yahoo Sports or ESPN will find an extensive number of articles focusing on fantasy activities, especially at this time of year with NFL fantasy drafts around the corner.

How big is the market? In terms of actual expenditures, the Fantasy Sports Trade Association – yes, there is a trade association – estimates that 32 million Americans spend $467 per person or about $15 billion in total playing.  Roughly, 11 billion flows toward football. These figures don’t count ad revenue for fantasy hosting sites. The NFL’s annual revenue falls just under $10 billion currently. So the “derivative” market has grown larger than the foundational market.

My primary interest is on the value of time spent on fantasy football activities, which swamp the direct revenues and expenditures.  The FSTA estimates that the average fantasy gamer spends 3 hours per week managing a team(s), translating to 1.2 billion hours for 23 million players over a 17 week season. Of course, all of these numbers are a bit sketchy because of things like drafts addhours along with off-season reading and discussion. Anyway, combining these estimates with a $24 per hour average wage in the U.S. yields a time value of $29 billion per year. Using average income figures from the FSTA for players deconstructed to an hourly wage of $46 increases the estimate up to $55 billion. Added to actual expenditures and ad revenues, the industry amounts to at anywhere from $40 something-billion to over $70 billion per year in tangible and intangible activity.

Sports is unique in culture. There are no “Cereal Fantasy Leagues” with drafts of Wheaties or Grape Nuts. Even in other segments of entertainment, there are no “Movie Fantasy Leagues.” Beyond the fantasy leagues, the amount of time that fantasy leaguers and traditional fans spend talking, writing, and thinking about their times is not trivial.

The size of this market also shows how much the NFL, and other sports leagues, lost in potential royalty revenue when the Supreme Court refused to consider the 8th Circuit’s decision to deny Major League Baseball copyright status for the use of player names and statistics in fantasy leagues. While from a legal standpoint, the decision makes sense in that the data used is publicly available. Nonetheless, from an economic standpoint, the revenues and activities derive from the sporting activities, and even a 10% royalty would have generated a sizable new revenue stream for leagues. In the terminology of economics, this amounts to a “positive externality” – a benefit supplied by sports leagues for which they do not receive (full) monetary compensation.  The NFL does run fantasy leagues on its own site and any licensed use of NFL products generates revenue.  In addition, there is some evidence that fantasy activities increase viewership on the part of players, which, indirectly, benefits the league.