Equal Strength Teams or Dominant Teams: Policy Analysis of NFL

Abstract

In North America, professional sports leagues operate mostly as cartels. They employ certain policies such as revenue sharing, salary caps to ensure that teams get high revenues and players get high wages. There are two major hypotheses regarding the talent distribution among the teams that would maximize the total revenues; dominant teams rule and equal strength team rule. This paper examines the revenue structure of National Football League and proposes policy recommendations regarding talent distribution among the teams. By using a unique, rich data set on game day stadium attendance and TV ratings we are able to measure the total demand as a function of involved teams talent levels. Reduced form regression results indicates that TV viewers are more interested in close games, on the other hand stadium attendees are more interested in home teams dominance. Estimated demand for TV ratings and stadium attendance corroborates the findings of reduced form regressions, stadium demand and TV demand working against each other. We therefore propose a somewhat equal strength team policy where big market teams has a slight advantage over the others. Total revenues of the league is maximized under such a policy.

Keywords: Perfect Competition, Dominant Team, Cartels

JEL Classification: C14, C34, L52, L83