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Teaching how private enterprise works using professional sports: a brief note on the case of individual NHL players' salaries.

Article Excerpt
I. Introduction

In the free enterprise system, profit maximization for the firm involves a complex set of considerations. Some of these are rather easily obtained (for example, demographic information on one's potential customer base), whereas other considerations (such as the complex nature of market demand and its shifts over time and space) are more elusive. Furthermore, from the production/cost side of the profit-maximization endeavor, issues such as labor productivity measurement are not always immediately obvious and easily quantifiable. Yet, efficient operation of firms in a private enterprise system requires some form of systematic measure of productivity to compensate employees in a manner consistent with their marginal revenue products.

This educational note demonstrates for the student how owners of National Hockey League (NHL) teams (of which there are 30) use quantifiable information about players' individual performances to help them systematically compensate each individual player according to his own specific productivity level and, in effect, because of the inclusion of a variable reflecting home team attendance, according to his own specific marginal revenue product. It is assumed that NHL team owners seek to maximize profits within the private enterprise system of professional sports. This assumption is consistent with the empirical study by Ferguson, Stewart, Jones, and Le Dressay (1991, p.297), who find that "The results in large measure support the hypothesis that hockey teams are profit maximizers." The case of the NHL is adopted simply because its economic and market characteristics have been less extensively studied than most other major professional sports enterprises in the U.S., e.g., the NBA, MLB, and the NFL (Cebula and Belton, 1996).

This study identifies four categories of NHL player: centers, wingmen, goalies, and defense-men. In addition, it includes several measures of player productivity, a variable for home team attendance (to indirectly reflect team revenues), and a variable to reflect whether there may be wage discrimination. The next section of this note provides the definition of each of the variables in the analysis and the empirical results, as well as background relevant to the structure of this study. Since this is an educational note, a separate table of descriptive statistics is not provided; however, certain pertinent descriptive statistics are provided in either the text or in Table 2. In addition, it is noted that estimating the model in semi-log form generally resulted in the same conclusions as those shown in Equation (1) and Table 2. Although not presented here, these results may be obtained from the author.

II. The Framework and Empirical Results

A hockey team consists of six players. Three are classified as offensive players or "forwards" (the center, the right wing, and the left wing), and three are classified as defensive players (two defensemen and a goalie). An interesting trait of modern hockey is that all but one of the players must be aware of and involved in whatever is transpiring all over the ice rink. For example, forwards are...