The Economic and Social Costs of Vertical Integration by Horizontal Agreement in Minor League Baseball

Abstract

Prior to 1947, Baseball’s apartheid era resulted in a thriving infrastructure of player development and competition under the aegis of the Negro Leagues. After integration, Negro League clubs received no compensation for players under contract (despite rigid rules in that regard protecting clubs hiring for white players in “organized baseball”). To stay afloat, Negro Leagues asked for official status as minor league clubs, a proposal rejected by Major League Clubs. This rejection inspired a pre-retirement inquiry by Professor Emeritus Rodney Fort. His preliminary thesis is that this rejection was part of an anti-competitive strategy to maintain MLB’s monopoly. Inspired by this inquiry, this paper looks at MLB’s control of player development from a different perspective. It summarizes and applies to baseball the literature popularized by Oliver Williamson’s make-or-buy analysis. Then, the paper applies Williamson’s insights to the decision to internally develop or acquire talent in MLB players, and describes how MLB clubs have agreed to use basically the same make-or-buy decisions: make the same number of players, and buy players only if they are surplus to requirements from other MLB clubs. The paper describes both the economic inefficiency of this decision as well as the social injustice that results: the absence of independent minor leagues as a source of supply precludes economic incentives for clubs to train and develop poor inner-city or rural kids. The paper proposes that MLB clubs be free to select their own number of players to internally develop (make) or acquire elsewhere (buy), and clubs should compete freely for players developed independently by minor league clubs not affiliated with an MLB partner.