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Cross-subsidization in professional sports: a socialistic omen for needed change.

Article Excerpt
ABSTRACT

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 sharing.

Keywords: Professional Sports, Sports Economics, Economic Systems, Capitalism, Market Socialism, Cross-Subsidization, Revenue Sharing

1. INTRODUCTION

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 paradigm.

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,...

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