Two-Sided Network Effects and Competitive Balance in Professional Team Sports

Abstract

This paper analyzes issues associated with network effects and two-sidedness in the market for professional team sports. Teams in professional sports leagues have to compete both for players (inputs) and fans (consumers). In this setting, we construct a theoretical framework where fans are more attracted to a team with a large portion of talented players from a fixed talent pool, at the same time that players want to show their ability in front of a large number of fans. We observe that either perfect imbalance or alleviated imbalance will prevail as an equilibrium. The outcome depends upon the relative magnitude of two opposite effects, the product differentiation effect and the wage reduction effect caused by externalities from the size of talented players and fans respectively. Furthermore, we incorporate asymmetric relative quality effects into consumers' utility in order to analyze its impact on competitive balance. This is shown to either exacerbate or improve the imbalanced distribution of talented players, depending on fans' sensitivity to the relative quality between teams. The policy implications of revenue sharing on competitive balance and the level of wage offers under the condition of two-sided network effects are analyzed.

Keywords: Network externality, Two-sided market, Competitive balance, Revenue sharing, Sports economics

JEL Classification: L83, L14, L15