Open Competition in League Sports

Abstract:     
The fundamental difference between the structure of team sports in the U.S. and in the rest of the world is openness. In the U.S., sports leagues are closed: membership of the league is in the gift of the existing members, who typically only grannt the right of entry in exchange for a substantial fee. Outside of the U.S., teams sports leagues are open: membership of the league is contingent on success. Sports are organized in ascending tiers (generally called divisions) and every year the worst performing teams are relegated to the nnext lowest division and replaced by the best performing teams from that division. This system operates in soccer, rugby (league and union), European basketball, cricket and almost all other team sports. Our main argument in this paper is that the institution of promotion and relegation tends to raise consumer welfare by increasing effective competition among the teams in a league. Because teams seek to avoid relegation as well as to win championships, they have greater incentives to invest in players than teams participating in closed competitions. For lesser teams in lower divisions tha allure of promotion to the top division enhances the inncentive to invest in players and provides added interest to junior league competition. Moreover, promotion provides a market-based means of permitting new entry to check the power of incumbent clubs to exercise market power - most notably their ability to secure tax subsidies for stadia. Promotion and relegation is in fact an ideal structure for surgical antitrust intervention to promote entry, since it involves replacing the least efficient (in terms of wins) incombent with the most efficient entrant. Moreover, entry is only conditional on continuing success, so that a relegated incumbent has an opportunity to recapture its position the following season. In this sense, promotion and relegation is analogous to the Baumol-Willig efficient components pricing rule (ECPR), which requires incumbents to grant than the incumbent can enter the market. We justify antitrust intervention through an argument that the decision by current clubs to maintain a closed-league structure constitutes an unreasonable restraint of trade.

Working Paper Series