1. INTRODUCTION
A fundamental characteristic of modern sports is the adherence to a
fixed set of rules. Rules imply governance, and the structure of
governance in modern sports implies a set of relationships between those
who devise and administer the rules and those who are governed by them.
These relationships can be analyzed using the methods of political
science, using concepts such as power, legitimacy, constitutionality,
and so on. They can also be analyzed in economic terms as a set of
vertical agreements whose precise terms and conditions influence both
the efficiency of sporting competition (according to some agreed welfare
criterion) and the distribution of rents between the participants. The
scope for economic analysis along these lines is clear if we consider
the world of professional team sports, where clubs are constituted as
business units with costs and revenues, so that we can talk about
whether arrangements maximize joint profits and how the profits are
distributed. When we consider team sports where participants may have
not-for-profit objectives, economic analysis is sometimes deemed
controversial. However, even if we acknowledge not-for-profit
objectives, it is still possible to use economic principles to analyze
vertical agreements within sporting to analyze vertical agreements with
sporting organizations.
Both in the United States and in Europe, the governance of sports
leagues and organizations has been a subject of public policy debate. In
the United States, the debate has largely focused on the role of the
antitrust law in regulating competition and whether the contractual
arrangements entered into by professional clubs operated in the public
interest. In Europe, the debate has tended to focus on the relationship
between governing bodies and the competition law. Baseball's
notorious antitrust exemption originally rested on the premise that its
business was "giving exhibitions of base ball" and that
"the exhibition, although made for money would not be called trade
or commerce in the commonly accepted use of those words. "(1)
However, as the meaning of commerce applied in the U.S. antitrust law
has broadened, (2) few in America now doubt that baseball and the other
major league sports are businesses and that the antitrust law applies.
(The special exemption for baseball continues because of the Supreme
Court's view that baseball's "unique characteristics and
needs" require Congress to specifically legislate on the matter.)
Moreover, it is accepted that its rule extends into commercial
restraints agreed to by avowedly not-for-profit organizations such as
the National Collegiate Athletic Association. In Europe, however, the
governing bodies of the major sports have continued to press for
distinctive treatment within the European Union's Treaty of Rome.
Antitrust law, both in Europe and in the United States, is built
around a prohibition of the improper development or maintenance of
monopoly power and a prohibition of cartel-like behavior. When applied
to the world of sports, legal analysis has dwelt largely upon the issue
of cartels. If sports leagues are textbook cartels,(3) the question has
been whether horizontal agreements among the participants, such as
exclusive territories, are legitimate ancillary restraints which form
part of the league joint venture or means to capture economic rents from
consumers and players (see, e.g., Flynn and Gilbert, 2001). However,
Ross and Szymanski (2006) argue that it is important to consider the
vertical aspect of sporting organizations. In both theory and practice,
there is a distinction between the contest organizer, who fulfills
functions such as designing the prize (which gives the contestants
incentives to compete) and setting the rules, and the competitors who
aim to win the prize. Given the distinction between organizing a
competition and participating in a competition, Szymanski (2003) argues
that the peculiar structure of professional team sports--whereby clubs
have agreed to integrate the function of championship organization under
their joint control--represents only one, possibly inefficient, means to
run a competition. (4)
Ross and Szymanski (2006) argue that a vertical separation, such as
is found in individualistic sports such as tennis and golf or in motor
sport championships such as National Association for Stock Car
Automobile Racing (NASCAR) and Formula One, may be a more efficient
organizational form. They identify three principal benefits:
* The ability to draw up rules and regulations that meet the best
interests of the league as a whole (consumers, owners, and players)
rather than the interests of any particular group or faction.
* The ability to market products of the league that are truly
joint, such as national broadcast rights, in such a way as to maximize
the return to the league as a whole.
* The ability to facilitate Pareto-improving entry into the league
through the adoption of systems such as promotion and relegation.
The NASCAR example illustrates the point. Here, a variety of auto
racing competitions are organized by a closely held corporation, which
enters into agreements with racetrack operators and racing teams to host
and participate in contests. NASCAR's history demonstrates founder
William France's vision that the sport "would require a
central racing organization whose authority outranked all drivers, car
owners, and track owners" (Hagstrom, 1998). NASCAR has demonstrated
a remarkable ability to respond to dynamic changes in technology and
consumer demand to enhance the sport's popularity, including
successful strategies to maintain manufacturer subsidies for racing, to
restrain those achieving innovative advantages from so dominating the
competition as to lessen fan appeal, minimize excessive costs to
maintain a large number of competitors, and increase speeds and
excitement while maintaining the image of "stock''
racing. These policies would have been significantly hindered if
stakeholders with a temporary advantage had a veto over changes, as is
the case in traditional leagues.
These ideas are not entirely new of course, in the sense that we
can find other examples of leagues that have achieved efficiency gains
through some form of vertical separation. In Europe, the role of
national federations as governing bodies of sport is often held up as a
good example of vertical separation, where the clubs compete and the
governing body sets the rules and runs the competition in the best
interests of all. In the United States, the creation of the role of
commissioner, with a responsibility for the "best interests"
of the league, has similarly created a kind of vertical separation, and
it is possible to cite examples of efficient decision making through the
agency of the commissioner.(5) However, thus far economists and legal
theorists have said relatively little about the vertical aspect of
sporting organizations. The aim of this paper is to set out a framework
for this kind of analysis and to suggest some of the more important
theoretical issues which arise from it.
Vertical relationships arise not merely in context of the internal
organization of leagues. In all sports, there exist hierarchies of
leagues, recognized tacitly or explicitly, that affect the economic
possibilities of both players and clubs. For example, when we talk of
"organized baseball," we are really referring to a set of
contractual agreements established between baseball clubs operating at
different levels (e.g., AAA, AA, A). These contracts establish a set of
vertical relationships not so much from the point of view of the
consumer (from the consumer's perspective, AAA baseball and AA
supply-independent products and teams at each level do not contribute to
the final product of teams at any other level) but from the point of
view of the player, whose career consists in a set of moves between
hierarchical levels in the sport. So, for example, baseball's
famous Reserve Clause, which restricts the right of a player to move to
rival teams and is thus normally characterized as a horizontal
restraint, also possesses the character of a vertical restraint in the
sense that it restricts the movement of players between hierarchical
levels of the sport. Thus, we may perhaps speak of vertical restraints
affecting "intraleague" and "inter league"
competition, just as the analysis of vertical restraints is typically
interpreted interms of their effect upon intrabrand and interbrand
competition.
The principal debate in economic analysis of vertical restraints
has been between the Chicago school, which is associated with the view
that vertical restraints are created to enhance efficiency, for example,
in pricing (avoiding double marginalization) or investment (avoiding
free rider and holdup problems), and its critics, who identify vertical
restraints that can undermine market efficiency by deterring entry
(e.g., by contractual restrictions) or retarding interbrand competition
(e.g., by exclusive dealing, tying, or bundling).(6) In the world of
professional sports leagues, the analogous debate has focused on whether
arrangements such as territorial exclusivity and limitations on player
mobility have been mechanisms to enhance efficiency or to extractrents
from consumers and players.
The rest of the paper is structured as follows. In the next
section, the development of modern sporting organizations is discussed
and the difference between United States and European systems is
examined. Section III considers intraleague restraints and Section IV
interleague restraints. Section V concludes.
II. THE ORGANIZATION OF CLUBS
The fundamental political and economic unit of modern team sports
is the club. The first sports clubs were formed in England and Scotland
in the 18th century. These early clubs were responsible for formulating
laws of the game--for example, the London club laid down the first laws
of cricket in 1744; the Jockey Club (established around 1750) came to
rule over the organization of horseracing; also in 1744, the Gentlemen
Golfers of Edin-burgh set down the first rules of golf.(7) Similarly,
Alexander Cartwright took it upon himself to lay down the rules of
baseball for the first baseball club, the Knickerbocker Club of New
York, around 1845. As others imitated the lead taken by these
organizations, they entered voluntarily into interclub competitions
voluntarily into interclub competitions according to the rules laid down
by them. Other clubs accepted the authority of these founder clubs or
their successors, such as the Marylebone Cricket Club founded around
1787, which governed cricket until the early 1990s, or the Royal and
Ancient Golf Club, which to the present day lays down the laws of golf.
When it became clear that the Knickerbocker Club was unwilling to take
on the mantle of leadership in baseball, the leading clubs agreed to the
creation of the National Association of Base Ball Players in 1857 to
legislate over the rules and conduct of the game.
We tend nowadays to take for granted the idea that a group of
individuals might get together and organize in accordance with a set of
rules chosen and agreed among themselves without any interference from
the state. However, such ideas were revolutionary in the 18th century,
not much accepted outside of Great Britain and the United States in the
19th century, and only became a fundamental characteristic of the
liberal democracies in the 20th century. Under communist and fascist
regimes, military juntas, and personal dictatorships, sporting
organizations, along with most other forms of associative activity, have
been controlled by the state. In many cases, even in the liberal
democracies, the state has taken and continues to take a role in
nominating members of bodies set up to dictate the rules and
organization of sport, including nominations for international
organizations such as the International Olympic Committee (IOC). For
example, in France, all sporting organizations are licensed by the state
and granted monopoly powers in controlling their sport. Thus, in some
cases, the organizational structures are created by the state with its
own objectives in mind. However, the principal team sports (soccer,
cricket, baseball, basketball, rugby, and American football) developed
in the Anglo-Saxon world, and their organizational structures evolved
entirely out of voluntary agreements between clubs.
In each case, these sports developed first as games played by
amateurs and only later evolved into professional sports.(8) For the
purpose of playing amateur sport, little more was needed than agreement
over the rules. The concept of the championship race and the structure
of competition was generally quite fluid, since in the end, there was
little at stake. Moreover, the ethic of gentlemanliness and fair play
which the participants in these early contests espoused mitigated
against excessive emphasis on the competition. In most cases, amateur
clubs were, as many remain today, organizations founded upon the idea of
sociability rather than competition. The interest of spectators, the
commercial opportunity that this presents, and the incentive to hire
professionals to attract more spectators generated a new set of
challenges for established amateur team sports.
Szymanski and Zimbalist (2005) contrast the way in which this
challenge was dealt with in the United States and in Britain. The
problem first arose in baseball, when the Cincinnati Red Stockings
became professionals in 1869. The amateur clubs soon decided that they
were unwilling to play alongside professionals, and in 1871, the amateur
and professional game split. Following the collapse of the cha-otic
National Association of Professional Base Ball Players, the National
League (founded in 1876) quickly established the pattern of organized
baseball: a closed major league controlled by owners of participating
clubs, with formal and informal agreements with other player development
leagues. This pattern has been largely followed by the other North
American sports. In England, amateur soccer clubs agreed to set up the
Football Association (FA) in 1863 and faced the same dilemma, the
introduction of professionals into the sport by teams seeking a
commercial advantage, in 1885. However, instead of splitting, the FA
remained as governor of both the amateur and the professional game.
Unified governance allowed professionals to continue to compete in
popular open knockout tournaments and shielded them from the risk of
easy entry by rival leagues.
The decision of the amateurs and professionals to remain together
under a unified governance structure had momentous implications since it
became the model of sporting organization in almost every country
outside North America. The reasons for this decision are complex (see,
e.g., the discussion in chapter 2 of Szymanski and Zimbalist, 2005). As
with baseball, it was the amateurs who controlled the governing body at
the time, but unlike their baseball counterparts, they decided that they
would be willing to play alongside professionals. One reason may have
been that the amateurs were largely concentrated in London and the
professionals in Lancashire (about 200 miles away), and therefore, they
did not think that they would meet that often.(9) Less than 10 yr later,
the amateurs and professionals playing rugby football (itself a variant
of football that separated from Association Football in 1871 and was in
many ways the model for the American version of football) split in two,
the professionals forming Rugby League and the amateurs playing Rugby
Union. In this case, a significant fraction of the amateurs played very
close to the professionals and felt that this proximity threatened the
integrity of their game. For their part, professional soccer players,
unlike the professional baseball players, had much to lose from leaving
the established association since it would have excluded them from
participating in the Football Association Cup, an extremely popular
competition that had been established in 1870. The professional clubs no
doubt calculated that they would be better off remaining within the fold
rather than moving outside it. Whatever the true reasons, this scheme
now prevails in almost all sports in Europe and the rest of the world
outside of North America.
The decision on whether to split the amateur and professional games
had momentous implications. The professional sports which separated
themselves from the amateurs were able to design their own commercial
organizations and devise rules that suited the business interests of the
team owners. In sports where amateurs and professionals remained united
within a single hierarchy, business interests have been subordinated to
the interests of those who control the game. In the 20th century, these
sports became organized in a hierarchical system that the European
Commission calls the "European model of sport." In this model,
there exists a hierarchy of governance from local to national to
international level. At the apex of the pyramid stands the global
governing body (e.g., Federation Internationale de Football Association
[FIFA] in soccer or the IOC for the Olympics). Affiliated national
federations select representatives onto the global body and administer
the sport played nationally, both at the club level and at the national
representative level. The national associations sanction the
organization of domestic leagues and competitions and require that clubs
release their employees to play for the national team.(10).
This form of integration has two commercial implications. First,
the governing body may tax clubs or leagues in order to divert resources
to areas which they consider in long-term interests of the game (e.g.,
subsidies to the grass roots). When resources are diverted in this way,
the expenditures may or may not have a commercial return. For example,
Union of European Football Associations (UEFA), the governing body of
European soccer, uses some of the funds generated by the highly
lucrative UEFA Champions League competition (involving the large
commercial soccer clubs) to subsidize the national associations of
smaller nations whose teams are unlikely ever to appear in the
competition. To the extent that these funds may help develop interest in
the game and the training of young players, it is possible that the
clubs participating in the Champions League would choose to invest their
profits in this way if they controlled the distribution. However, in
part these funds are probably devoted to activities that have little
long-term commercial benefit (even if they are not used corruptly, as
has been frequently alleged).(11)
Second, this form of integration may lead to choices that would not
be made if leagues operated on purely commercial lines. For example, in
2001, a number of leading clubs from smaller soccer nations, including
Celtic and Rangers from Scotland, Ajax and PSV Eindhoven from The
Netherlands, Anderlecht from Belgium, and Benfica from Portugal,
explored the idea of creating an "Atlantic League," which
would have been capable of generating larger broadcasting revenues for
these teams than competing in their domestic competitions.(12) UEFA,
reflecting the interests of several of its national association members,
threatened sanctions against any teams that might join this new league.
Similarly, it has long been argued that a European Super-league that
enabled the top teams to meet each other regularly in competition would
be revenue enhancing, but the national associations, individually and
collectively through UEFA, have consistently opposed the idea (see,
e.g., Hoehn and Szymanski, 1999). In economic terms, money is being left
on the table in order to pursue what the governing bodies argue is the
wider good of the sport and others believe is the narrow self-interest
of association bureaucrats and the less successful clubs that dominate
national associations. These issues are clearly related to the question
of inter-league restraints. Before turning to these in more detail, we
consider the nature of intra-league restraints.
III. INTRALEAGUE RESTRAINTS
In American professional sports, the major leagues are controlled
by their member clubs who determine the rules, the rewards, and the
general running of the league competition. Under the European model,
many of the rules are dictated by the governing bodies. For example, in
the case of soccer, the rules of the game are determined by a committee
of the global governing body, FIFA, and the schedule of games played
must be consistent across all competitions. Leagues are not free to
admit clubs from outside the national association (e.g., a French club
could not play in the English leagues), and it is unlikely that any
league would be permitted to abolish the promotion and relegation system
which requires it to admit teams from lower ranked leagues to replace
poor performing teams.
Despite these important differences, the most striking intraleague
restraint is the reserve system, which was invented by baseball's
National League in 1879, adopted by the English Football League in 1890,
and thereafter became part of the international soccer system. The
reserve rule is essentially a horizontal restraint, an agreement between
teams not to compete for each other's players, thereby creating
monopsony power in the hiring of talent, reducing costs, increasing
profits, and potentially affecting the optimal allocation of player
talent. However, the leagues soon found that the reserve rule was of
limited value if it related only to clubs within the league. The
extension of the reserve rule to the minor leagues was the cornerstone
of organized baseball, and this is discussed in the next section.
Other horizontal restraints include agreements such as the draft
system and salary caps. However, such restraints are only feasible
because of the existence of a vertical restraint in the American system,
namely the control of league rules and regulations by the clubs that
compete in the league. Essentially, a sporting contest consists of two
main activities: the playing of games by the contestants and the
management of the contest by some organization. In many sports, the
organizers decide to create a competition and then invite competitors
(consider, e.g., a tennis championship or a marathon race). One might
therefore ask the question, why would a group of tennis players or
marathon runners decide to organize their own competition?
Following the Chicago School, one should first look for an
efficiency-enhancing rationale to explain this vertical integration. The
most plausible explanation would relate to the threat of holdup, either
on the part of the contest organizer or on the part of the participants.
Preparation for a marathon, for example, takes several months and
demands considerable commitment from the athlete. At the last moment,
the organizer has an incentive to renege on commitments since the runner
is still likely to be willing to participate. Even if commitments are
contractual, there are likely to be elements of the contract that are
nonverifiable and therefore may be subject to holdup. Such a problem did
in fact arise in 2006 FIFA World Cup in relation to the participation of
the Togo team. The Togo FA had agreed to pay bonuses to the players
contingent on their performance, to be paid out of Togo's share of
the income generated from the tournament. However, during the
competition, the players became fearful that the Togo FA would renege on
this promise, and the players threatened to strike. The situation was
only resolved when FIFA agreed to pay the players directly rather than
through the agency of the Togo FA. (13)
By the same token, a contest organizer might fear holdup on the
part of the participants. In this case, there are clearly
non-contractible elements in any agreement to participate in a race or
competition, most notably in relation to fitness. Athletes can easily
declare themselves unfit without fear of sanction, and therefore,
organizers are at risk that this kind of threat will be used at the last
moment to extract higher payments.
Despite the logic of vertical integration, we in fact see
relatively few examples in the world of individual sports. However, in
many sports, we have seen associations of players becoming more involved
in the management of their sport as they seek to take a greater share of
the rents. Perhaps the best example is the Association of Professional
Tennis Players (ATP), which was created in 1972 to bargain over payments
for participation in major tournaments such as Wimbledon, and has since
1990 organized the ATP Tour for professional players.
The logic of vertical integration to avoid the threat of holdup is
even greater in the professional team sports since the commitments on
the side of the participating clubs are likely to be much larger. Thus,
investing in assets such as stadiums and committing to paying the
pay-roll of players make a team owner vulnerable to the possibility that
the competition organizer reneges on commitments. From the point of view
of the league organizers, the threat from the clubs is that they will
refuse to play games which are not economically profitable because they
fail to internalize the cost to the league as a whole of failing to
complete the fixture list. These problems were specifically recognized
by William Hulbert and the other founder members of the National League,
who established the system of territorial exclusivity and the commitment
to play all games agreed in the schedule, following the chaos that
surrounded the operation of the National Association between 1871 and
1876.
These might seem to provide a plausible economic basis for vertical
integration. However, one might also ask why such benefits cannot be
achieved by arm's-length contracting. Such an alternative remains
necessary, even in vertically integrated leagues, to solve holdup
problems when clubs behave opportunistically vis-a-vis the league and
with regard to players and separate television rights purchasers. While
holdup is a recognized issue in the wider economy, it has not led to the
universal adoption of vertical integration as a solution even if
vertical integration is wide-spread and often motivated by concerns for
the holdup problem. Moreover, one can identify a number of problems that
emerge when the participating clubs jointly own the league itself. Most
significantly, clubs that control a league have an incentive to minimize
effective competition so as to raise joint profits, and the existence of
significant transaction costs can result in a failure to reach agreement
on Pareto-improving reforms.
Teams sell competition, and the quality of competition depends in
part on the effort contributed by the participants. For this reason,
contest organizers typically offer large prizes to give incentives to
participants to win. In professional team sports, however, we typically
see club-run leagues arguing that it is necessary to minimize such
incentives. Almost since the foundation of the National League, clubs
have argued that it is necessary to impose restraints on competition to
ensure that the outcome of competition is sufficiently balanced (see,
e.g., Eckard, 2001). The competitive balance debate has dominated the
economics of sports leagues. While there is much disagreement about the
value of competitive balance in a league (compare, e.g., Berri, Schmidt,
and Brook, 2006, and Sandy, Sloane, and Rosentraub, 2004), economists
are unanimous in agreeing that the restraints justified on the grounds
of competitive balance raise profits at the expense of players and
possibly consumers.
In a world of zero transactions costs, there is no
efficiency-enhancing arrangement that might be designed by a contest
organizer that would fail to be adopted by a club-run league. In
reality, however, club-run leagues might fail to adopt a number of
efficiency-enhancing arrangements. Even the clubs themselves have
recognized the need to create an authority to control certain decisions.
The most notable example is the Office of Commissioner for Baseball,
created after 1919 Black Sox scandal, with a remit to look after
"the best interests of baseball." The other major league
sports have also created commissioners. The precise extent of the
commissioner's powers has varied both within and between sports. It
seems clear that baseball clubs did not intend the commissioner to have
powers that went much beyond the control of gambling and corruption
(see, e.g., Zimbalist, 2006). But in some sports, the role of the
commissioner has been expanded significantly, most notably in the case
of the National Football League, where the role played by Commissioners
Rozelle and Tagliabue are often given a large share of the credit for
that league's meteoric rise. In part, these visionary executives
receive credit principally for their ability to overcome transactions
costs and to persuade self-interested owners to approve league-enhancing
innovations, skills that are only necessary because of the integrated
structure of North American sports leagues. Full vertical separation
would go further still and give the league organizer the power to
control the entire structure of competition in the league independent of
the clubs.
This situation may be said to be approximated by the system of
national federations which govern sport in the European model. One of
the principal advantages of the European league system that has been
noted else-where is the possibility that existing member teams that are
not performing well can be replaced by teams from lower leagues that are
performing well (e.g., Noll, 2002; Ross and Szymanski, 2002; Zimbalist,
2003). Benefits of the promotion and relegation system include:
* Exciting competition until the end of the season as clubs compete
both for championship honors and to avoid relegation.
* The possibility that all cities can have one, if not several,
major league teams at some time or another.
* Greater ties between teams and locations (relocation is not a
credible threat since every city can have its major league team by
buying good players and winning promotion; they do not need to buy
someone else's team).
Critics may point to possible weaknesses of the system as well: for
example, underinvestment in facilities because tenure in the major
league is so uncertain, financial instability caused by overinvestment
in playing staff, and the adoption of excessively risky strategies.
However, the main reason that the major leagues would be unlikely to
introduce the system voluntarily is, more than anything else, the fear
that they will lose the relocation threat by means of which clubs have
been able to extract substantial subsidies from local taxpayers. The
restraint that the incumbent clubs control the organization of the
league means that they can prevent entry by new teams that would
diminish the economic rents that can be extracted.(14)
This argument is reminiscent of contracts for exclusive dealing
between an upstream and a downstream firm. The Chicago School argument
is that such contracts could only be efficient since the monopoly rent
that would accrue to the downstream supplier would never be as great as
the total surplus that could be gained by the upstream firm through
down-stream competition. Applied to the context of a league, the league
organizer should be unwilling to agree to an exclusive contract with
existing clubs since there is potential to realize a greater surplus
through downstream competition. (15) Vertical integration may therefore
be seen as a way for clubs to foreclose competition from potential
rivals.
Antitrust lawyers have long been uncomfortable with this argument
since it seems to imply that league organizations are a kind of
"essential facility" to which courts must mandate access. This
seems to many observers excessively interventionist; moreover, viewed
from the perspective of the American system, there is a limit to the
number of franchises that can participate in a league (see, e.g.,
Weiler, 2000, chapter 19). However, the alternative route to dealing
with the competitive harm that appears to be caused by foreclosure,
namely the creation of a rival league, seems even less likely to be
feasible.
There have been a small number of cases where new leagues have
tried to challenge the market power of incumbent leagues, but for the
most part, these attempts have been labeled failures (see, e.g., Quirk
and Fort, 1992). The obvious reason for this is that entering on the
scale of an entire league involves huge capital investments when the
incumbents have mostly sunk their costs. In addition, many new leagues
have faced predatory conduct by incumbent leagues, who were determined
to bid salaries up to nonre-munerative levels that could only be
economically justified by the prospect of exclusion or merger with the
entrant (see, e.g., Ross, 1989). Incumbents have placed particular
emphasis on challenging competitor leagues in the large markets where
they experienced head-to-head competition, in the knowledge that failure
in the major markets would cause the entrant league to fold. They have
also proved adept at following a divide-and-rule strategy, offering
entry to a small number of critical franchises and thereby destroying
the unity of their rival.
IV. INTERLEAGUE RESTRAINTS
The Reserve Clause is commonly understood as a horizontal restraint
among the member clubs of a league. However, this restraint on its own
would do little to discourage the emergence of rival leagues or limit
the pay of players. We have already observed that the National League
created the Reserve Clause in 1879. But even before this, the National
League had created the League Alliance in 1877, which involved an
agreement that clubs should respect each others' player contracts
and territorial rights.(16) In effect,, this agreement also established
the relationship between "major" and "minor"
leagues. The beginning of "organized baseball" is usually
considered to be the Tripartite Agreement of 1883 between the National
League, the American Association, and the Northwestern League. This
agreement specified that owners in each league would recognize contracts
signed in their rivals' league,(17) a contract described as the
"Magna Charta of professional baseball" by the historians of
the minor leagues.(18) While a precise definition of minor league status
is hard to find, it clearly refers to a league where the playing talent
is on average inferior to that of the major leagues, and this
inferiority was confirmed in the Tripartite Agreement by the lower
compensation required to reserve a player's services in the minor
league. Interestingly, a similar process underlay the development of the
Football League in England. This was the first professional soccer
league in England, but within months of its creation, rival leagues were
set up. By 1891, Football League clubs were agreeing with these leagues
not to poach each other's players, and gradually, the League's
equivalent of the reserve rule (called the retain and transfer system)
had been extended across all professional soccer.
Although the American system created by organized baseball and the
European system that followed the evolution of English soccer ended up
with quite different organizational structures, they often dealt with
quite similar problems in similar ways. Thus, the National League at
first extended its network of contracts to cover all the minor leagues
and developed the classification system (AA, A, etc.), mainly as a means
to fix prices for players traded between clubs. The system established a
hierarchy of leagues, such as exists within the European league system.
However, the American system ultimately led to a high level of vertical
integration as clubs recognized the benefits of direct control for
managing the rotation of players.(19) In England, the Football League
set out to expand its control by admitting more and more teams, so that
by the early 1920s, it contained 88 professional clubs (for a population
of around 40 million at the time). The promotion and relegation system
emerged as a way to hold together a league of this size (although
undoubtedly it was not the only way it could have been done). Moreover,
national federations banned the ownership of one club by another.
In both cases, the reserve systems meant that clubs were able to
trade players and that players could move up and down the hierarchy of
leagues, while at the same time holding down player wages. In the United
States, it was the militancy of the player unions that finally broke
down the reserve system and the artificial limitation on salaries; in
Europe, it was the intervention of European Court of Justice in 1995 to
rule such restraints on the free movement of labor contrary to European
law.(20)
In the American system, these interleague restraints significantly
restricted opportunities for rival leagues to enter. In the European
system, these restraints have done much to restrict the development of
existing leagues. The most important current example is the restriction
on teams entering national leagues other than their own. To take a
simple example, Celtic and Rangers, two Glasgow-based large market teams
that dominate the Scottish Premier League, would like to enter and would
be welcomed by most teams in the English Premier League. However,
because England and Scotland are, for the purposes of playing soccer,
separate nations with separate national federations, soccer's
international governing body will not permit this move. In recent years,
a number of proposals for teams in different European nations to form
cross-border leagues have been considered, but so far all these have
likewise been blocked by the governing bodies (see, e.g., Kesenne,
2005). Although the merits of specific proposals are beyond the scope of
this paper, the integrated structure of the governing bodies--who
comprise representatives of each national federation--makes it likely
that Pareto-enhancing reforms will not be approved because of the harm
to existing federations and the inability to negotiate appropriate
compensation.
Interleague restraints imposed by the governing bodies of sports
can be viewed as a means to pursue objectives considered to be in the
wider interests of the sport. Governing bodies tend to see themselves as
possessing a broad remit (see, e.g., the principles of Governance in
Sport, prepared on behalf of the European Olympic Committee and the
Federation Internationale d'Automobile, downloadable at
http://www.governance-in-sport. com/). These may include the creation of
new international competitions, cross-subsidies form rich leagues to
poorer leagues, as well as social/charitable goals often associated with
sporting activity. However, they may also limit the ability of leagues
to adopt innovative ideas and develop new markets. The rivalry that has
emerged between UEFA (the governing body of European soccer) and G14, a
lobby group representing the interests of the biggest clubs, is a good
example of the conflicts of interest that can emerge. UEFA serves as a
competition regulator (at the top of the "pyramid" that
characterizes the European model of sport), but it is scarcely a
disinterested party or even a residual claimant to revenues or profits
from all of European football. Rather, UEFA directly receives huge
revenues from its operation of the Champions League and the UEFA Cup,
two international competitions involving the best clubs of different
countries, and all UEFA members profit significantly from the efforts of
their national team. Thus, controversies continue when UEFA seeks to
achieve a balance between the interests of national team competitions,
European club competitions, and domestic competitions, all of which fall
within its jurisdiction.
V. CONCLUSIONS
This paper has focused on the analysis of sports leagues in the
context of vertical relations. The paper suggests two types of vertical
relations that are important. The first are intraleague restraints, by
which member clubs in a league integrate the activities of competing in
a sport with the activity of organizing a sporting competition. This is
essentially the system of governance which emerged in the U.S. major
leagues at the end of the 19th century. The second are interleague
restraints, which often attract less attention but are perhaps more
important. The network of contracts between leagues that created the
system known as organized baseball enabled the clubs for many years to
hold down player salaries while maintaining some player mobility between
teams. In the European context, interleague restraints are administered
by governing bodies, which nowadays are generally formed as national
federations affiliated to international organizations that claim
jurisdiction over an entire sport. The restraints imposed by these
governing bodies often enable the creation of different kinds of
competition and can help promote the broader development of the sport.
However, restraints imposed by both governing bodies and vertical
interleague contracts can be used as impediments to entry and
competition. These trade-offs are clearly important and worthy of
further investigation.
REFERENCES
Berri. D., M. Schmidt, and S. Brook. The Wages of Wins: Taking
Measure of Many Myths in Modern Sport. Stanford, CA: Stanford Business
Books, 2006.
Eckard, W. "The Origin of the Reserve Clause: Owner Collusion
vs 'Public Interest'." Journal of Sports Economics, May
2001, 113-30.
Finch, R., L. Addington, and B. Morgan, editors. The Story of Minor
League Baseball. Columbus, OH: The Stoneman Press, 1953.
Flynn, M., and R. Gilbert. "An Analysis of Professional Sports
Leagues as Joint Ventures." Economic Journal, 111, 2001, F27-F46.
Fort, R., and J. Quirk. "Cross Subsidization, Incentives and
Outcomes in Professional Team Sports Leagues." Journal of Economic
Literature, XXXIII, 1995, 1265-99.
Hagstrom, R. G. The NASCAR Way: The Business That Drives the Sport.
New York: John Wiley & Sons, 1998.
Hoehn, T., and S. Szymanski. "The Americanization of European
Football." Economic Policy, 28, 1999, 205-33.
Kesenne, S. "The Organization of European Football and the
Competitive Balance within and between Nations." mimeo, 2005.
Accessed 28 September 2007, http://ideas.repec.org/p/ant/wpaper/2005001.
html.
Noll, R. "The Economics of Promotion and Relegation in Sports
Leagues: The Case of English Football." Journal of Sports
Economics, 3, 2002, 169-203.
Quirk, J., and R. Fort. Pay Dirt: The Business of Professional Team
Sports. Princeton, NJ: Princeton University Press, 1992.
Rader, B. Early Innings: A Documentary History of Baseball
1825-1908. Lincoln, NE: University of Nebraska Press, 1995.
Rey, P., and J. Tirole. "A Primer On Foreclosure." in
Handbook Of Industrial Organization, Vol. Ill, edited by M. Armstrong
and R. Porter. Amsterdam: North Holland, 2005.
Ross, S. F. "Monopoly Sports Leagues." Minnesota
Law-Review, 73, 1989, 643.
Ross, S. F., and S. Szymanski. "Open Competition in League
Sports." Wisconsin Law Review, 3, 2002, 625-56.
--. "Antitrust and Inefficient Joint Ventures: Why Sports
Leagues Should Look More Like McDonald's and Less Like the United
Nations." Marquette Sports Law Journal, 16, 2006, 213.
Sandy, R., P. Sloane, and M. Rosentraub. The Economies of Sport: An
International Perspective. Basingstoke, UK: Palgrave Macmillan. 2004.
Seymour, H. Baseball: The Early Years. New York: Oxford University
Press, 1960.
Sugden, J., and A. Tomlinson. Badfellas: FIFA Family at War.
Edinburgh, UK: Mainstream, 2003.
Szymanski, S. "The Economic Design of Sporting Contests."
Journal of Economic Literature 56, 2003, 1137.
--, "A Theory of the Evolution of Modern Sports." mimeo,
2006. Accessed. http://ideas.repec.org/p/spe/wpaper/0630.html
Szymanski, S., and A. Zimbalist, National Pastime: How Americans
Play Baseball and Rest of the World Plays Soccer. Washington, DC:
Brookings Institution Press. 2005.
Weiler, P. Leveling the Playing Field: How the Law Can Make Sports
Better for Fans. Cambridge, MA: Harvard University Press, 2000.
Winfree, J., J. McCluskey, and R. Fort. "Transaction Cost
Variation and Vertical Integration: major League Baseball's Minor
League affiliates," in International Perspectives on the Management
of Sport, edited by T. Slack and M. Parent. Boston, MA: Butterworth
Heinemann, 2007.
Zimbalist, A. May the Best Team Win: Baseball Economics and Public
Policy. Washington, DC: Brookings Institute, 2003.
--, In the Best Interest of Baseball? The Revolutionary Reign of
Bud Selig. Washington, DC: Brookings Institute, 2006.
ABBREVIATIONS
ATP: Association of Professional Tennis Players
FA: Football Association
FIFA: Federation Internationale de Football Association
IOC: International Olympic Committee
NASCAR: National Association for Stock Car Automobile Racing
UEFA: Union of European Football Associations
Szymanski: Professor of Economics, Tanaka Business School. Imperial
College London, SW7 2AZ. UK.
Phone (44) 20 7594 9107, Fax (44) 20 7823 7685. E-mail
szy@imperial. ac.uk
Ross: Professor of Law, Dickinson School of Law, Penn State
University; and Director. Penn State Institute for Sports Law,Policy and
Research, University Park, PA 16801. Phone 814-865-8995, E-mail sfr
10@psu.edu
(1.) Federal Club v. National League, 259 U.S. 200 (1922).
(2.) Zimbalist (2003, p. 17).
(3.) Fort and Quirk (1995, p. 1265).
(4.) The distinction between the two market functions fulfilled by
participants in a league championship organizing services and
championship participation services has already been recognized by the
Australian courts. See Ross and Szymanski (2006). footnote ll.
(5.) Although European national federations and American league
commissioners serve important roles and their utility illustrates the
benefits of vertical separation. our analysis below suggests that their
current powers are at best partial solutions to some of the structural
problems in organizing sporting competitions. This paper identifies a
variety of conflicting interests that arise when participants
collectively organize a competition using horizontal restraints. In
Europe, national federations regulate the sport and also manage, and
profit from, the success of the national team. Many international rules
appear to be more in the nature of horizontal restraints among
other-wise competing national federations rather than vertical
restraints imposed by a separate upstream firm in the best interests of
the global sport. In the United States, commissioners have traditionally
had very limited roles in dealing with the business operations of sports
leagues.
(6.) This is a very large literature but a good starting point for
a discussion of recent debates on the issue in Rey and Tirole (2005).
(7.) See Szymanski (2006) for a more detailed analysis of the early
evolution of clubs and rules in modern sports.
(8.) Cricket is slightly different in that paid professionals
played alongside amateurs even at the time the first known rules were
written. However, the amateurs clearly controlled the organization of
the game from its early days up until recent times.
(9.) It is important to note that the psychology of amateur sport
in the Victorian era revolved to a considerable extent around concepts
of "gentlemanliness" and that as long as social conventions
were observed, the prevailing atmosphere was liberal.
(10.) Typically without compensation for the club, an arrangement
which some of the larger European soccer clubs are currently challenging
in the European Court of Justice.
http:/www.euractiv.com/en/sports/ecj-rule-second-landmark-case-football/article-155382
(11.) For information on the distribution of UEFA Champions League
monies to national associations, see, for example,
http://www.uefa.com/uefa/keytopics/kind=16384/newsid=405660.html. Many
books have been written about corruption in national and international
associations; one example from the soccer world is Sugden and Tomlinson
(2003).
(12.) See, for example,
http://www.sportbusiness.com/news/136725/uefa-warn-clubs-over-atlantic-league
(13.) http://news.bbc.co.uk/sport
I/hi/football/world_cup_2006/teams/togo/5098446.stm
(14.) One referee asked why the professional clubs ever agreed to
such a system given the disadvantages. Since the system was first
adopted in England and then copied by other soccer playing nations, the
answer may have something to do with the incentives facing the Football
League during its early years. We argued above that the league chose to
stay within the governance structure of the FA partly because it wished
to benefit from participating in the cup competition sanctioned by the
FA. Likewise, the league may have wanted to placate strong teams that
were not original league members, fearing that otherwise they would
lobby for their expulsion from the FA and hence removal from the
competition. Since these other teams also had the option to form their
own rival leagues, the Football League members may have calculated that
their best chance of survival lay with the creation of an inclusive
rather than an exclusive system. Clearly, however, there are costs
associated with this choice.
(15.) Indeed, this was clearly the case in the evolution of rugby
league in Australia. A semi-independent competition organizer, the
Australian Rugby League, refused to grant clubs a permanent license to
participate in the sport, and only granted 5-yr licenses when a rival
league began operations and sought the wholesale defection of entire
clubs to the new competition.
(16.) For example. Sevmour (1960, pp. 98-103).
(17.) Rader (1995. pp. 128-30).
(18.) Finch, Addington, and Morgan (1953. p. 16).
(19.) For a recently published study of vertical integration in
baseball, see Winfree, McCluskey, and Fort (2007). The authors consider
possible causes of the different choices of full integration land
affiliation (where a major league team enters an exclusive relationship
with a minor league team). They find that none of the conventional
motives for vertical integration can explain the variation of
relationships although they do find that owners with media interests,
that form part of larger (vertically integrated) businesses, are more
likely to opt for ownership.
(20.) Court of Justice of the European Communities, Case C-415/93.
This is known as the Bosman case, after the player whose contract was
under investigation.