Ronald Coase recently celebrated his 100th birthday. I read a few articles and posts from around the internet about Coase’s contributions to economic thought. One of his contributions was in the 1937 paper “The Nature of the Firm” in which Coase laid out a theory for why firms exist.
So, naturally, I thought about sports and I started thinking about why sports leagues exist. My thoughts became this blog post that I originally posted at Market Power. I thought I would share it here at TSE. So here goes…
Sports leagues are often considered to be economic cartels. In the US at least, leagues determine who gets to own member franchises, what territories teams can represent, and how many teams are in the league.
The textbook case of pure monopoly shows that monopolists restrict quantity and thereby can charge a price above marginal cost. Similarly, the monopoly league theory of franchise location holds that leagues keep some cities open so that league members can extract maximum rents in stadium subsidy negotiations. See Los Angeles and the NFL.
On the labor side, leagues have tried cartelization to monopsonize labor markets for playing talent. Successful forms of this type of cartelization are the NFL’s Rozelle Rule and Major League Baseball’s notorious Reserve Clause. The NCAA’s transfer limits in major college football and basketball monopsony power over the players on their teams.
Unsuccessful, at least in a legal sense, forms of cartelization were MLB’s Collusions 1, 2, and 3 in the mid 1980’s. Does the American Needle v. the NFL SCOTUS case belong in the unsuccessful cartel pile?
Economics and league history thus tell us that sports leagues are cartels to some extent. But cartelizaition does not explain why sports leagues exist in the first place. Sports leagues can exist without economic cartelization – members just won’t be as profitable. So there must be another reason for why leagues exist.
An explanation that may fit the necessary condition for why leagues form comes from Ronald Coase’s (1937) Nature of the Firm paper. 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.
I know I’m not the first sports economist to think of leagues as rule-making bodies necessitated by the “peculiar economics” of sports. Rod Fort notes this function of leagues in his Sports Economics text. But I don’t know of an association with Coase’s Nature of the Firm.
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