A major business challenge of professional sports in the United
States is fostering competitive balance among teams in a league and
promoting the overall health of the team franchises and the league
itself. Effectively meeting this challenge is complicated by the basic
economic structure of American professional sports--namely, being more
of a market socialism system than a capitalistic system. Using the
market socialism paradigm as an analytical prism, this paper examines
revenue sharing--a prominent form of cross-subsidization--as a means of
encouraging competitive balance and league and franchise health.
Unfortunately, broadcast rights, gate receipts, and the luxury
tax--which are three common subtypes of revenue sharing--have not
produced the intended competitive balance and league and franchise
health. Two solutions are offered for addressing the failures of revenue
Keywords: Professional Sports, Sports Economics, Economic Systems,
Capitalism, Market Socialism, Cross-Subsidization, Revenue Sharing
Professional sports, especially in the United States, comprise a
major business institution which competes for its share of
consumers' entertainment dollars in an environment wherein
consumers have ever-increasing entertainment options. To draw a
significant share of consumers' entertainment dollars, professional
sports teams must develop and maintain fan interest by fielding
competitive teams within a healthy league. How to accomplish this is a
major challenge facing decision makers at both the franchise level and
the league level.
Perhaps the greatest detriment to professional sports as a business
enterprise is the existence of harmful, opportunistic behaviors by
owners and players. The failure to effectively control, if not
eradicate, these opportunistic behaviors is rooted in the basic economic
nature of American professional sports. Although American professional
sports exist within a capitalistic economy, professional sports are not
really capitalistic in nature. Rather, American professional sports
operate in a way that is more reflective of a socialistic economic
This paper discusses the use of cross-subsidization of weaker teams
by stronger teams as a means of maintaining competitive balance and
health within a given sports league. The paper also explores
cross-subsidization within a classification framework of economic
systems, arguing that cross-subsidization is perhaps best understood as
a form of market socialism. To support this argument, revenue sharing,
which is a prominent form of cross-subsidization, is analyzed with
respect to the defining organizational features of market socialism.
Particular attention is given to three major subtypes of revenue
sharing: broadcast rights, gate receipts, and the luxury tax.
Unfortunately, these major subtypes of revenue sharing have fallen short
in producing sustainable competitive balance in professional sports.
Finally, two potential solutions are offered for addressing the
shortcomings of revenue sharing. These solutions could help in
developing and maintaining competitive balance and long-term league and
franchise health within a market socialism system.
2. PROFESSIONAL SPORTS ECONOMICS
From a governing perspective, the structure and operation of
professional sports embraces a number of unique economic ideas that,
while not revolutionary to the collective human society, stand in
contrast to those economic principles embraced by the capitalist
economic system of the United States. Fort and Quirk (1995, p. 1265)
provide a primary example of this in describing the collective decision
making in professional sports leagues as "classic, even textbook,
examples of business cartels." They also point out the unique
nature of a sports league's product as the competition on the
field, rather than a tangible good (Fort and Quirk, 1995, p. 1265).
Given the nature of the product then, it would seem to follow that the
overall health of the league, and the individual teams, depends on
maintaining fan interest by providing competition that is highly
desirable as entertainment. However, the league must help to engineer
this competition in some way, or risk losing one or more weak teams due
to waning interest in their perpetual "cellar-dweller" status
(Szymanski, 2003, p. 1140).
While a myriad of economists have attempted to understand the
formula for achievement of competitive balance, none has successfully
developed a widely agreed-upon and workable method for league
implementation due to their collective lack of an adequate definition of
competitive balance. Buzzacchi, Szymanksi, and Valletti (2003, p. 168)
illustrate the shortcoming: "The measure widely cited in the
existing literature is the standard deviation of winning percentages in
a season. According to this measure, the greater the variance in
outcomes in a season, the less balanced is the contest. The principal
weakness of this measure is that it takes no account of the identity of
the teams across seasons." Thus, the argument is made that a
team's ability to remain consistently competitive in terms of
winning percentage over a period of years is a better measure of balance
than is the number of teams in close competition during a single season.
In an effort to achieve greater competitive balance, several common
initiatives have been undertaken by multiple American professional
sports leagues. Cross-subsidization of weaker teams by their stronger
counterparts has arguably been the most common tool in this effort, with
systems of revenue sharing, salary caps, reserve clauses, collective
bargaining, and luxury taxes being implemented in various forms.
Cross-subsidization refers to any system whereby one franchise's
economic resources are utilized to assist another franchise in the same
league. Cross-subsidization can occur directly when revenue sharing
programs tax a high revenue team and use that revenue to support a lower
revenue team. Or it can occur indirectly when an economically stronger
franchise's use of its own economic resources results in a positive
economic effect for an economically weaker franchise.
Rottenberg's (1956, p. 255) seminal work on
cross-subsidization yielded the generally accepted invariance principle
which claims, in essence, that the level of talent in a league will be
evenly distributed regardless of league restrictions designed to achieve
competitive balance. Vrooman (2000, p. 364) reaffirms Rottenberg's
theory and expands upon its assertions with an understanding that the
various cross-subsidization systems implemented over the years have
failed to achieve measurable and attributable success due to their being
based on the assumption that all owners of franchises will behave as
"pure profit-maximizers" and will have no win-maximizing
motivation. Zimbalist (2003, p. 507) further suggests that a league in
which all owners have the same motivations and objectives for ownership
does not exist, and that a generalization as such is flawed. Instead, it
is proposed that owner motivations be considered relative to how the
team is affected by and impacts the owner's other assets. Ferguson,
Jones and Stewart (2003, p. 422) believe that the desire to win is
present on some level in nearly every owner, and that this desire will
not be completely overshadowed by a profit motive, as evidenced by
free-agent bidding wars and salary trends in the last decade.
Although a majority of the expert economic opinions on the subject
of cross-subsidization have shared the opinion that an effort should be
made to curtail wildly opportunistic behavior that may damage
competitive balance (Mason, 1997, p. 215), many economists remain at
odds as to whether the players' or owners' opportunistic
behavior is more damaging to the league. Adams and Brock (1997, pp.
721-722) assert that, left unchecked, the profit motive in both the
player and owner cartels will pose a serious threat to league balance.
In contrast, Miceli and Scollo, (1999, p. 62) and Vrooman (2000, p. 367)
suggest that the reserve clause, labeled as a vehicle for owner greed
and player exploitation in the arguments supporting the successful fight
for free-agency, is a positive aspect of profit-motive behavior in which
the owners simply attempt to recover the cost of developing a player for
service at the major league level.
The application of the reserve clause in American professional
sports has varied by league. The underlying principle that defines this
clause across leagues grants lifetime negotiation rights to the
franchise that holds a player's contractual rights. In other words,
a player cannot, at the end of his contract, test the interest of other
teams in paying him a higher salary for his services. He is bound to his
current club, and cannot sign with another unless his contractual rights
are sold to that club or he is included as part of a player trade. This
practice results in significantly lower player salaries than a system of
free agency, thereby leading to higher owner profit.
The chairman of the San Diego Padres, however, laments the
difficultly that small market clubs have in retaining this talent after
the costs are recovered as the main factor behind the notable absence of
small market clubs beyond the first round of post-season play (Moores,
2002, p. A18). Despite a multitude of theories, it is apparent that no
model for identifying and eradicating the most damaging of opportunistic
behaviors has been successfully designed and implemented. The failure to
effectively control, if not eradicate, harmful opportunistic behaviors
rests, in part, on the fundamental economic nature of American
3. THE RELEVANCY OF ECONOMIC SYSTEMS TO PROFESSIONAL SPORTS LEAGUES
Baseball, long touted as the "great American pastime,"
was conceived in and continues to operate in one of the great bastions
of market capitalism. Yet professional baseball (MLB), like other major
professional-level sports, including football (NFL), basketball (NBA),
and hockey (NHL), do not themselves operate completely as microcosms of
market capitalism. Instead, these professional sports leagues have
socialistic policies and practices strongly embedded in their
To appreciate and embrace this assertion, it is necessary to have a
basic understanding of the comparative nature of economic systems and
how the defining and differentiating features of economic systems can be
applied to professional sports. Gregory and Stuart (1999, p. 14),
"classify economic systems in terms of the organizational features
that they exhibit." Four general organizational features--(1)
structure, (2) market and plan, (3) control and income, and (4)
incentives--can be used to differentiate among the traditional economic
systems of market capitalism, market socialism, and planned socialism
(Gregory and Stuart, 1999, pp. 10-28). Figure 1 shows how these four
features vary across the three market systems.
As Gregory and Stuart (1999, pp. 14-15) argue, organizations exist
in many different forms ranging from simple proprietorships to large
corporations to entire communities and societies, and ranging across
private and public domains. All of these organizational forms can be
characterized as possessing some degree of the dimensions of structure,
market and plan, control and income, and incentives. Just as these
features can differentiate among economic systems, so can they be used
to distinguish among less complex organizational forms. Although the
various professional sports leagues in America represent an
organizational form of lesser complexity than the economic systems of
nations and societies, these sports leagues still can be analyzed within
the context of the framework shown in Figure 1.
The authors of this paper submit that the control and income
feature is especially relevant to the analysis and understanding of
professional sports leagues in America--particularly in the context of
revenue sharing, which is a very important characteristic of the
operations of these leagues. The organizational feature of control and
income revolve around ownership, or property rights. Property rights
enable the owner to make decisions and take actions to: (1) dispose of
the property, (2) utilize the property, or (3) use the products and/or
services generated by the property. Property ownership may also be
private, public, or collective. Which rights are owned by who will
define the nature of an economic system as well the allocation of system
outcomes (Gregory and Stuart, 1999, pp. 21-22).
"Insofar as human capital and physical capital and natural
ability are not likely to be evenly distributed, especially when such
things can be passed from one generation to another, private ownership
of the factors of production raises the likelihood of an uneven
distribution of income and wealth among the members of capitalist
societies. Exactly how unevenly income and wealth are distributed will
depend on the distribution of human and physical capital and also on the
redistributive role of the state" (Gregory and Stuart, 1999, p.
109). We argue that the uneven distribution of human and physical
capital in professional sports has fostered the development of the
redistributive role of the leagues in the form of revenue sharing, and
as such has created, promoted, and reinforced these sports leagues as
socialistic enterprises. Jaroslav Vanek, an early advocate of the
cooperative or participatory form of market socialism, identifies five
characteristics that define this form, including one that is especially
relevant to the concept of revenue sharing in professional sports
leagues. Vanek (1971, p. 9) argues that in the cooperative or
participatory form of market socialism, income will be shared and such
sharing is to be equitable.
Indeed, as has been argued about socialism as an economic
system--namely that "one of the most critical features of socialism
was achieving a distribution of income more equitable than under
capitalism" (Gregory and Stuart, 1999, p. 24)--it can also be
argued that revenue sharing in professional sports leagues in America
serves to achieve a more equitable distribution of income. Later in this
paper, the authors will discuss how this socialistic objective of more
equitable distribution of income becomes problematic for the long-term
sustainability of truly competitive professional athletics. Although
planned socialism should produce the favorable outcome of distributing
income relatively equally among participants, it nonetheless is
inefficient in allocating resources, processing information, and
motivating participants (Gregory and Stuart, 1999, p. 132). Market
socialism, however, "offers the potential of combining the
'fairness' of socialism with the efficiency associated with
market allocation" (Gregory and Stuart, 1999, p. 138).
4. APPLYING MARKET SOCIALISM TO REVENUE SHARING IN PROFESSIONAL
Revenue sharing is the single economic vehicle that is most likely
to elicit comparisons of the governing practices of professional sports
league to those of socialism. As discussed earlier, the primary factor
in instituting a system of revenue sharing is the need to enhance
competitive balance through cross-subsidization of weaker teams by their
stronger counterparts. This will, in theory, lead to an even
distribution of revenues. However, this becomes problematic in a system
where the ownership of the franchises is, by and large, private. The
nature of private ownership can be most easily characterized by autonomy
in decision making. Yet, private ownership will naturally be at odds
with the league governing system--especially when the owners give the
league collective decision-making authority. Quite expectedly, not all
of the league's decisions will harmonize with the desires of the
individual private owners--the wealthiest of whom will sometimes view
revenue sharing programs as "welfare" for other owners not
willing to work as hard (Atkinson, Stanley, and Tshirhart 1998, p. 28).
The ongoing debate between league and franchise personnel as to the
ideal level (if any) of the cross-subsidization that is necessary to
maintain competitive balance is a clear illustration of this rift.
Across the four major American sports leagues various sub-types and
degrees of revenue sharing (or cross-subsidization) are being
implemented. Among these sub-types are the collective sale of broadcast
rights by leagues, gate revenue sharing, luxury taxes on excessive
payroll, salary caps, and a host of other niche programs too numerous
and varied to identify for the purposes of this article.
4.1 Revenue Sharing from Broadcast Rights
The collective sale and even distribution of national television
broadcast rights is likely the most prominent of the revenue sharing
subtypes. This is a relatively clear example of the use of a market
socialism-based vehicle to achieve an equitable distribution of revenue.
This practice is spawned by a league-initiated desire to provide all
teams with a solid revenue base, and to prevent the most able owners
from grossly over-selling their own rights and using the funds to
escalate competitive imbalance. The control and income feature of market
socialism, as discussed earlier, is largely classified by collective
ownership of property rights. In this case the league, whose leadership
is collectively approved by the individual owners, is exercising control
of the most significant property of professional sports--namely, the
product of competition.
The NFL is the most proficient in this area, having negotiated mega
contracts with all but one of the four major networks (not to mention
ESPN and the NFL Network). The revenues generated by these contracts are
distributed evenly among the league's franchises, providing a
stable revenue base for all teams. Intuition might indicate an
improvement in competitive balance as a result of this distribution.
Although this significant inflow of revenues to each team is a cushion
to offer security in meeting team payroll, the even nature of the
distributions does little to stabilize revenue levels among franchises.
Indeed, the richest of teams remain that way--even in the NFL. Despite
Fort and Quirk's (1995, p. 1291) observation that, "[s]trong
drawing teams, which contribute more audience than weak-drawing teams,
certainly are subsidizing weak-drawing teams because each is receiving
an equal share of national TV revenues," this subsidy does not
appear significant enough to level the revenue playing field.
4.2 Gate Revenue Sharing
Another sub-type of revenue sharing that is debated among owners
and the league is gate revenue sharing. Each league has its own
standards for this type of sharing, with the NFL again leading the pack
in the most equitable sharing of these revenues with a 60/40 split in
favor of the home team. Unlike the more decisive economic classification
of the collective sale of broadcast rights as market socialism, the
sharing of gate revenues fits less cleanly into any of the three
economic systems discussed previously. In gate revenue sharing, the
control and income feature contains elements of both private ownership
and collective ownership. Although the revenues being shared are the
result of the sale of property rights (i.e., tickets to the contest on
the field) that is validated as official by the league, these revenues
are jointly owned only by the pair of franchises competing in that
particular contest. Thus, the collective nature of ownership of the
contest is classified differently, and can even be viewed as private
between the two teams, since these revenues are not shared beyond the
Economics experts differ considerably as to the effectiveness of
gate-sharing in achieving competitive balance. Marburger (1997, pp.
121-122) indicates that gate-sharing may result in the enhancement of
competitive balance, although the current enforcement capabilities of
each of the major sports leagues are insufficient for the true measure
of this positive impact to be realized. Bandyopadhyay and Bottone (1997,
p.18) second this finding in the assertion that "stricter
enforcement of the various control policies... will eventually eliminate
violations and establish true parity." In contrast, Fort and Quirk
(1995, p. 1289) and Vrooman (2000, p. 367) present models that indicate
the invariance of the impact of gate-sharing on competitive balance.
Finally, Szymanski and Kesenne (2004, p. 170) assert that gate-sharing
actually harms balance through the blunting of incentives for the weaker
team to win. The conclusion is drawn that, because the weaker team will
typically have lower margins and a lower threshold for achieving profit,
the reduced talent investment resulting from gate sharing will have a
greater impact and result in an even lower expenditure on payroll for
this team, thereby leading to imbalance in the contest. The impact of
gate revenue sharing on competitive balance is quite obviously a hot
button issue among sports economists, and its merits (or lack thereof)
are likely to remain anomalous until an effective measurement tool is
developed to isolate gate revenue sharing in order to study its true
4.3 The Luxury Tax as Revenue Sharing
Finally, a sub-type of revenue sharing exists that, although less
applicable to the focus of this article, will still be touched on
briefly. Some experts have harpooned the luxury tax in MLB, perceiving
it to be a penalty for success rather than a penalty for stifling
competition. Marchman (2003, p. 28) asserts that the luxury tax is
improper for achieving competitive balance because it takes from the
rich and rewards the poor, not because they are poor but because they
refuse to improve their own situation. The luxury tax, as an alternative
Robin-Hood-type mechanism, can be most adequately discussed as an
example of a control and income feature more akin to the design of the
market socialism system. The basis underlying this classification is
market socialism's state/collective ownership of control and income
elements--with the league assuming a state or government-like role as
the taxing agency. The similarities end, however, when the league
redistributes that revenue based not upon actual economic need, but
rather upon "perceived" inability to generate revenue. The
argument is put forth that "[this] revenue sharing plan penalizes
high-revenue teams and rewards low-revenue teams. To put it another way,
it rewards incompetence and punishes competence" (Marchman, 2003,
p. 28). Although this appears to be the case, the deeper motivation
behind a sharing of this type often lies more in the attempt to control
the renegade owner of the stronger team, than to reward the struggling
owner of the weaker one.
5. POTENTIAL SOLUTIONS FOR ADDRESSING THE SHORTCOMINGS OF REVENUE
Clearly, revenue sharing as a means of cross-subsidization has
fallen short--far short--of achieving substantial and sustainable
competitive balance among the franchises of American professional sports
leagues. Although a myriad of arguments have been offered both for and
against the various sub-types of cross-subsidization through revenue
sharing, there is little accord between experts as to the most effective
system design for the achievement of both competitive balance and
long-term league and franchise health. However, two points that appear
quite often in the literature suggest potential solutions to this
perplexing and persistent dilemma.
First, though economists differ as to the severity of the problem,
and on the immediacy with which a change must occur, a consensus
nonetheless exists that the trends evident in the current system
indicate the necessity for a change if the future is to remain bright
for the industry. Bandyopahdyay and Bottone (1997, p. 8) suggest that if
the current polarization of revenue distribution in all leagues
continues as it is at present, then small market franchises will be
forced to relocate. However, this cycle cannot continue, as there are
not enough new markets capable of supporting professional franchises.
Ultimately, with more non-sporting events competing for consumers'
limited entertainment dollars, saturation will inevitably occur. This
will lead to the folding of many small market franchises. Although this
outlook is clearly alarmist in the outcomes it predicts in the absence
of change, it serves to illuminate the critical nature of the problem
and should push those in power to consider changes that are based on a
concern for long-term sustainability.
Second, stricter enforcement of revenue sharing policies is needed,
as is a clearer definition of what revenues are susceptible to sharing.
Many loopholes in the existing system have allowed the large market
teams to cop-out of much of the sharing through the reduction of taxable
(shareable) revenues, thereby resulting in less subsidization for the
small market teams and more imbalance in the league (Mientka, 2005, p.
34). Appropriate subsidy of small market teams is mandatory if
competitive balance is to be attained. Without such subsidy,
professional sports will likely be dominated continually by a few strong
teams, and the leagues and many franchises will suffer as consumers
spend their entertainment dollars elsewhere.
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Dr. Michael K. McCuddy earned his Ph.D. at Purdue University in
1977. He holds The Louis S. and Mary L. Morgal Chair of Christian
Business Ethics and is a Professor of Management at Valparaiso
University. He served as editor-in-chief for The Challenges of Educating
People to Lead in a Challenging World, published by Springer and
sponsored by Educational Innovation in Business and Economics (EDiNEB).
He is actively involved in a variety of research projects on ethical
issues and educational innovation.
Michael L. Meyer earned a Bachelor of Arts from Marquette
University in 2002. He is a J.D. and Masters of Science candidate at
Valparaiso University, scheduled to complete his degrees in 2009. Prior
to his studies at Valparaiso, he worked in marketing and corporate
affairs with the Milwaukee Brewers of Major League Baseball. He also
worked for two years as Director of Corporate Partnerships for the
Kansas City T-Bones of the Independent Northern League of Professional
Michael K. McCuddy, Valparaiso University, Valparaiso, Indiana, USA
Michael L. Meyer, Valparaiso University, Valparaiso, Indiana, USA
FIGURE 1. THE CLASSIFICATION OF ECONOMIC SYSTEMS
ORGANIZATIONAL MARKET MARKET PLANNED
FEATURES CAPITALISM SOCIALISM SOCIALISM
Structure (i.e., Primarily Primarily Primarily
Decision-Making Decentralized Decentralized Centralized
Market and Plan Primarily Primarily Primarily Plan
(i.e., Mechanisms Market Market
Control and Income Primary State and/or Primary State
(i.e., Property Private Collective Ownership
Rights) Ownership Ownership
Incentives Primarily Material and Material and
Market Moral Moral
Source: Adapted from Figure 2.3 in Gregory and Stuart (1999, p. 26).