The Law & Economics of Optimal Sports League Design

114 Pages Posted: 14 Oct 2003

See all articles by Stephen F. Ross

Stephen F. Ross

Pennsylvania State University, Penn State Law

Stefan Szymanski

Imperial College London - Imperial College of Science, Technology and Medicine

Date Written: September 30, 2003

Abstract

Rejecting the conventional wisdom that sports leagues must be run by the clubs that participate in the competition, we adopt the approach of Australian courts and view sports leagues as products created by the vertical integration of upstream "competition organizing services" and downstream "clubs participating in the competition." We detail the concern that, assuming that a league does not face reasonable substitutes (i.e., a rival league), a club-run structure leads to inefficiencies in the determination of the number and location of franchises, the sale of broadcast, marketing, and sponsorship rights, the effective oversight of club management, and the efficient allocation of players among teams. Specifically, we identify transactions costs as a significant impediment to efficient agreement in club-run leagues. We next identify the core function of a league as the organization of competition, and explain why key decisions relating to the identity, number, and location of participating clubs should be made by an economic entity independent of the participating clubs. We argue that a vertical separation between leagues and clubs, with responsibilities assigned in franchise agreements between the league and each club, provides the best way to facilitate the efficient organization and marketing of the competition. We illustrate this thesis with some predictions as to how a league organizing a sporting competition independent from its clubs might allocate responsibilities more efficiently, and identify some of the legal benefits to the league that would follow from such a restructuring. We predict that these efficiencies should result in an increase in the combined value of an independent competition-organizing entity (perhaps "NFL, Incorporated") and club-franchisees compared to the combined current value of the franchises in a club-run league. Although investment bankers and outside investors should find it profitable to seek to purchase the assets and rights necessary to become the competition organizer, the same transactions costs that preclude efficiencies among club-run leagues also operate to inhibit a voluntary restructuring resulting in a more efficient league. Thus, we address antitrust and eminent domain theories that might bring about the involuntary restructuring of sports leagues along the lines discussed in this Article.

Suggested Citation

Ross, Stephen F. and Szymanski, Stefan, The Law & Economics of Optimal Sports League Design (September 30, 2003). Illinois Public Law Research Paper No. 03-14. Available at SSRN: https://ssrn.com/abstract=452861 or http://dx.doi.org/10.2139/ssrn.452861

Stephen F. Ross (Contact Author)

Pennsylvania State University, Penn State Law ( email )

Lewis Katz Building
University Park, PA 16802
United States

Stefan Szymanski

Imperial College London - Imperial College of Science, Technology and Medicine ( email )

Exhibition Road
London, SW7 2AZ
United Kingdom
+44 20 7594 9107 (Phone)
+44 20 7823 7685 (Fax)

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