Like football in England, baseball has always drawn nationwide attention in Taiwan, especially after the victory of the gold medal in the 2006 Quarter Asia Games. But when it comes to the professional market, the low attendance rate shows the dilemma of the league operation. As a monopoly in the professional sports market, the Chinese Professional Baseball League(CPBL) did have its glory days in the past 17 years. The total attendance reached its peak in 1995 and then declined in the following years. There are several reasons to explain this phenomenon but they can not change the fact that the league is suffering from economic loss and fan support. One major reason is the lack of faith in the game. The most obvious example is the “Black Eagle Scandal” which occurred in 1996. Half of the China Times Eagles players were involved in throwing the games (unfair play) under the threats of gamblers. This scandal deeply damaged the belief of baseball fans and the uncertainty of the game, which is the key element of sports. In the year 2004, CPBL seemed to recover from that dishonorable incident and tried to rebuild its image for fans. Unfortunately, similar scandals happened during the year 2005. This time baseball fans used their actions to show their anger with the low attendance in the Stadium. Meanwhile, with the globalization impact and some outstanding performances of Taiwanese baseball players in Major League Baseball (MLB) recently, baseball fans have begun to change their attention to the foreign baseball market and so have several sponsors. Many potential young players choose to go to America instead of starting their careers in Taiwan. A radical restructuring of the league is required if Taiwan baseball is to prosper in the future. Much research has been done to discuss the operation strategy for CPBL, but only the free agency system has been never touched. This represents a gap in the literature and needs to been discovered.
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At this difficult moment, some people argue that there should be a free agency system in CPBL if they hope to retain those young players and operate themselves as a long-term business. Usually, CPBL players sign a 1-year contract with their team by the limitation of the “reserve clause” and the payrolls are decided by the team owner only. Players do not have the right to transfer unless their team releases them. However, teams will do the release only if players are getting old or determined to be uncompetitive. Their careers are dominated by the team and there are no trade unions that might be able to protect their rights. Some players involved in the scandal confessed that the low pay during their short player career was the major reason for them to accept the temptation from gamblers. Taking the bribe is wrong but we can understand those player’s motivations if we step further to know their situation. Though we can not assume that high pay will guarantee high performance on the field, players should have the right to negotiate their salaries and decide their future team. CPBL is the only league without a free agency system in Asia Professional Baseball. It has become a hot issue in the press for months and I believe this will be a good chance to evaluate the feasibility of free agency in CPBL through my research.
- To review the development and history of the free agency system in MLB.
- To analyze the relationship between payroll and player performance after the implementation of a free agency system in MLB.
- To evaluate the mechanisms of the MLB players market and the impact on competitive balance.
- To compare the other Asian professional baseball league’s responses with the impact of MLB globalization.
- To generate the different perspectives of the feasibility of free agency system in CPBL through in-depth interviews.
- To provide suggestions and practical recommendations for CPBL.
History and Development of Free Agency in Major League Baseball
Before 1976 baseball players in the major leagues were subject to the reserve clause. This contract provision granted team owners the rights to a player’s services, thus, giving owners monopoly power over players. In 1976 this provision was eliminated, giving free agents the right to negotiate with any team. Applications of migration theory to free agency in major league baseball (MLB) have found that income is a significant factor in determining the migratory decision (Cymrot, 2006; Cymrot and Dunlevy, 1987). Since large-city teams are generally able to pay the most for players, it has been argued that the change in property rights that occurred with the free agency will lead to a concentration of the best talent in these teams.
MLB has been in development since the mid-1970s, which was a result of an antitrust law, which was formulated during that period. The history of the institution of free agency in MLB is well documented. In brief, without the benefit of antitrust law, the Major League Baseball Players Association (MLBPA) engaged labor laws to obtain free agency. In 1975, the MLBPA challenged the perpetual renewal interpretation of the reserve clause through arbitration as agreed upon by the policies stipulated in the 1968 collective bargaining agreement (CBA). The arbitrators ruling in favor of the players forced the negotiation of a new CBA. Although the new agreement did not allow a completely free market, players with six years or more of major league service could become free agents at the expiration of their contracts. Despite several minor changes in the compensation requirements to teams losing free agents, the six-year provision has remained unchanged in all subsequent MLB collective bargaining agreements. The CBA also included a provision for final offer salary arbitration to settle contractual disputes for players with two to three years of MLB service. Salary arbitration has also remained part of all subsequent agreements.
Numerous studies on MLB free agency have confirmed that the relationship between free agency and higher salaries exists in practice as well. For example, Scully (1974) demonstrated that the reserve clause system held player salaries significantly below their marginal revenue products (MRP). Post–free agency studies that find a significant increase in salaries are consistent with the predictions of economic theory. Specifically, Hadley & Gustafson (1991), Kahn (1993), Quirk & Fort (1992), Scully (1989), Sommers & Quinton (1982), and Zimbalist (1992) are among those providing empirical verification. Because arbitrators use free agent salaries for comparisons, free agency has also increased salaries much closer to MRP levels for arbitration-eligible players (Zimbalist, 1992).
Previous refinements of the second part of the Scully approach generally include the product of market size and team performance as an independent variable in a regression estimate of a revenue function. This allows for the possibility that a larger market team might enjoy a revenue function with a greater intercept (in a plot of revenues against wins) and a steeper slope. As a result, larger market teams would attach a greater value to a player of given marginal productivity (in wins) than would smaller market teams—and, ceteris paribus rationally would bid more for available talent. (Quirk and Fort, P.387-416, 1997)
Recent extensions of theory and empirical tests yielded fewer conclusive results. Several studies show that competitive balance has slightly improved in MLB post-free agency (Fort & Maxcy, 2003; Quirk & Fort, 1992; Vrooman, 1996). Maxcy (2002) found when comparing the average SDWP and SRCC in the twenty-five years after free agency to the preceding twenty-five years that there is a significant improvement in competitive balance. Nevertheless, when controlling for other factors, including the draft, collusion, and league expansion, the positive effects of free agency were not statistically significant. Humphreysʼs (2002) decade-by-decade analysis found league-wide competitive balance ratio (CBR) measures to have peaked in the 1980s and have declined marginally since the mid-1990s.
Free agent performance in MLB
The implementation of free agency is positive to the player’s performance. Vrooman (1996) explained that the increased movement of free agents toward large markets was responsible for improving the competitive balance. For example, talent-rich small-market teams are broken up by a free agency and reduced to mediocrity, as poorly performing large-market teams are the most inclined to purchase free agents. (Cymrot, P.545-556, 2006) The result is improved measurements of competitive balance that may be detrimental to the overall product. Although the overall effect on competitive balance may be secondary, other studies found that free agency has altered the movement and distribution of talent.
Maxcy (2002) extended the Coasian analysis by proposing that the invariance proposition does not hold if transactions costs and income effects fluctuate when labor market rules are altered, and this is likely the scenario given the changes to MLB’s free agency market. Specifically, he found when tracking player transfers that productive players were significantly more likely to switch teams and leave winning teams since the implementation of free agency. Marburger (2002) hypothesized that free agency would increase the number of within-league or division (intra-conference) transactions. Specifically, the number of player transfers by free agent transactions was significantly greater than transfers by the sale of contracts before free agency.
The impact of free agency on competitive balance in MLB
According to the Coase theorem, the implementation of free agency will not affect competitive balance, so the free agency system should be encouraged. The improved measures of competitive balance in MLB since the 1970s may also be explained by other institutional changes implemented by the league. The traditional view of the reserve clause in major league baseball is that it was instituted by owners as a way of preventing rich teams from acquiring the best players, thereby maintaining competitive balance in the league. Rottenberg (1956), however, proved this assertion false when he debated that as long as player trades (or sales) are authorized, the allocation of talent ought to be the same despite the consequences of who holds the property rights to the players’ labour services. In light of this “invariance proposition” which is an illustration of the Coase Theorem (Coase, 1960), the only effect of the reserve clause should be distributional: Owners rather than players capture the return on the players’ abilities.
Previously unaccompanied in stature as America’s premier professional team-sport league, MLB has faced increasing competition from other professional sports, particularly the NFL, since the 1960s. Consequently, the more competitive market may have influenced MLB to improve its competitive balance. For example, although fundamental to the NFL and NBA, MLB finally instituted an amateur draft in 1965. Although an improvement in competitive balance through the implementation of a draft contradicts the invariance principle, Daly & Moore (1981) and subsequent scholars noted a marked improvement in competitive balance consistent with this 1965 modification. Organizationally, MLB subdivided each of its two leagues into two divisions in 1969 and then three divisions in 1994. With each change, including playoff expansions from two to four, then to eight teams, incentives for teams regarding talent procurement also changed.
Rottenberg (1956) and Quirk (1992) have interpreted Coase’s Theorem to suggest that free agency would not affect the final distribution of playing talent because a player more valuable on another team should end up there regardless of who owns the property right. Under monopoly, the team owner is the seller and would trade the player to the highest bidder; while under competition, the player is the seller and would migrate to the highest bidder. In both cases, this highest bid would come from the team on which the player’s marginal revenue product (MRP) is greatest. The only difference is who receives the surplus-the player under free agency or the owner under the reserve clause. For example, assume player Ruth is worth $1million on his current team B, whilst he is worth $3 million on team Y. Under monopoly, the owner of team B would be $2 million better off if Ruth was traded to team Y. Under competition, team Y would be able to offer $2 million more for Ruth’s services. In either case, Ruth would end up on team Y. (Drewes, 2005)
In most applications of Coase’s Theorem, there is a transfer of property rights over the use of a resource between two parties. But in the case of free agency, property rights are transferred to the resource itself. Under free agency, the resource (i.e., the player) has preferences that will affect the trade agreement; while under monopoly, it is possible that these preferences will not be taken into account.
To summarize the MLB literature, empirical tests conclusively illustrate that free agency resulted in a significant redistribution of revenues from owners to players. In addition, although measures of competitive balance in MLB have improved, because of other market forces and institutional changes, the invariance principle cannot be refuted on this basis. Notwithstanding, there is evidence that free agency has altered the rate and type of player transfers, thus affecting the game. (Sandy et al., 376-378, 2007)
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The payroll and clubs revenue, revenue-sharing system, and luxury taxes
The relationship between payroll and club revenue is somehow positive but still needs the other mechanisms to restrict each club and make the whole league run healthily. As large market teams, able to pay high salaries to most of their players, can avoid wage disparity and are the more successful teams, ceteris paribus. On the other hand, a small market team that hires a ‘ringer’ at a salary above the team’s average salary necessarily increases wage disparity. The negative externalities caused by the increased wage disparity might outweigh the marginal impact of the ‘ringer.'(Miceli, P.213-222, 2004)
As large market teams bid for the best players in the league, salaries paid to high-skilled labor will continue to increase, forcing teams to spend more to field competitive teams. Indeed, no team participated in the 1998 playoffs without spending at least $30 million in player salaries. While some small-market teams occasionally play in the post-season, e.g., the 1998 San Diego Padres and the 1997 Florida Marlins, these teams face two distinct pressures to divest their high-wage players.
Indeed, the San Diego Padres lost money during the 1998 season even though they played in the World Series. Further pressure to divest highly paid players comes through the wage-disparity effect. (Jozsa, P.209-216, 2004) This offers support for the antagonism between large and small-market teams in baseball. As large-market teams find it easier to afford the higher salaries, payroll and clubs revenue, revenue-sharing systems, and luxury taxes for the best players in the league command, they maintain their relative competitiveness. (Downward and Dawson, P.88-109, 2000) On the other hand, small-market teams, who might affordably hire only one or two high-skilled, high-wage players, face the trade-off between higher marginal productivity and the negative impact on productivity introduced through increased wage disparity.( Krautmann and Oppenheimer, pp. 459-469, 1994)
It is not clear how MLB can solve this problem consistent with a relatively free labor market. Policies such as salary caps, further restrictions on drafts and free agency, luxury taxes, and revenue sharing do not address intrateam salary disparity. Indeed, anecdotal evidence from the National Football League indicates that payroll and clubs revenue, revenue-sharing system, and luxury taxes on salary caps did not reduce, and may have enhanced, wage disparity. The labor dispute that postponed the start of the 1998–1999 National Basketball Association season was caused by disagreements over player salaries even though the NBA operates under a salary cap.
One of the most important aspects of the feasibility evaluation of free agency in the Chinese Professional Baseball League that could be set up in Taiwan is the perception of the experts and the people who are involved in this industry regarding the game. As a result, the in-depth interview with some of the stalwarts would effectively help the cause. It is obvious that the popularity of baseball is rising in Taiwan but it should be noted that to establish a long term strategy for operation in a full-length professional league one needs to be sure of the success ratio because a huge amount of wealth would be poured into this industry and logically enough the stakeholders would like to be sure about the profitable outcome.
Qualitative research is a process that includes an interpretative paradigm under the measures of theoretical assumptions and the entire approach is based on sustainability that is dependent on people’s experience in terms of communication. It can also be mentioned that the total approach is based on the fact that reality is created on social formulations. It can also be mentioned that the basic target of qualitative research is instrumented towards a social context under normal circumstances where it would be possible to interpret, decode and describe the significances of a phenomenon. The entire process is operational under the parameter of interpretative paradigm that can minimize illusion and share subjectivity under contextualization, authenticity, and complexity of the investigation.
The basic advantages of qualitative measures are multifold. Firstly, it presents a completely realistic approach that the statistical analysis and numerical data used in research based on quantitative research cannot provide. Another advantage of qualitative measures is that it is more flexible in terms of collected information interpretation, subsequent analysis, and data collection. It also presents a holistic point of view of the investigation. Furthermore, this approach of research allows the subjects to be comfortable thus be more accurate as research is carried on by the subject’s terms. (Dos, 84-85).
Thus the most important objective of the interviews regarding this feasibility report concerning the professional baseball league would be building an impact regarding the profitability of this league for the stakeholder. (Cunningham, 24-5) For this important names from the field of administration and the game should be included. This would feature qualitative interviews of personnel and personalities that are well known to the arena of baseball and whose comments would certainly provide the difference between having and not having the league as these personalities would people who are regarded very highly in this context of evaluating the long term strategy for operation in a professional baseball league in Taiwan.
This would certainly include the Secretary of CPBL, Club Managers, Baseball experts (Scholar), senior commentator (Journalist or Anchorman), and Baseball players. The involvement of the Secretary of CPBL is a logical conclusion as this is the main executive who would be able to render the impetus of the league with his valued opinions. Thus the Secretary of CPBL would be a person who possesses complete knowledge of the details of the professional league and would be extremely helpful for the project.
Interviews of the Club managers would be very helpful as they are the person who directly understands the ground reality of the nature and feasibility of the game in Taiwan. (Dollard, 116-7) Baseball scholars and experts are also important for the basic strategy development these are the people who would be able to provide the theoretical framework of the entire project. Interviews of the senior commentators, Journalists, and Anchormen are very important because not only are these people well respected and their words highly valued, these are the people who can influence the structure of the league with their experience and insights. (Drake, 153-55) Lastly, interviews would also be taken from baseball players because they are the key objective of the entire scenario and these are the people who would present the game and would be instrumental in making the game worth watching. (Border, 375)
However, it should also be noted that there are certain limitations regarding the methodology of the interview aspect. History has shown that it is not always people revealing a context in a survey or interview that holds much truth in the long run in the general sense. (Bell, 271-3) This is one variable that can corrupt any well-formulated strategically set formulations. But this again is a possibility and not the general rule. In any case, it should be noted that all steps would be taken with utmost care so that such variables are not allowed to upset the basic feasibility test beyond a certain permissible limit. (Manning, 279) If all these parameters are well implemented there could be no reason why a long term strategy for operation in a full-length professional baseball league cannot be established
An outline of draft themes for the interview
- Background of the professional baseball experience.
- Evaluate the existing operation strategy of CPBL.
- Compare the foreign experience of the free agency system from American and Japanese baseball.
- Discuss the MLB effect in Asia and the win-win strategy for both MLB and CPBL market.
- Evaluate the feasibility of free agency system in CPBL.
Conclusion and Recommendations
The findings point to the deep-rooted problem that is related to ethics, financial condition, payment given to the players, conditions they play in, the treatment the sport gets, and certain other social and mental conditions. This chapter provides a conclusion for the findings that were presented in the section and a set of recommendations.
The findings suggest that baseball, as practiced in Taiwan, is fragmented, inadequately managed, no professional management techniques, and most importantly, the sport lacks finance. There is a certain level of domination by the larger clubs who tend to get a major part of the revenue that the game has generated. The skewed distribution of funds creates bitter acrimony among the privileged clubs and the lesser clubs that receive far lesser revenue. The infrastructure for the game also needs some improvement with the construction of proper stadiums and other infrastructure. Baseball in Taiwan seems to be losing its mass appeal and popularity and the fall can be attributed to several reasons such as the scandals of bribery and embezzlement, lack of grass-root participation, lack of revenue generation, and equitable distribution, inequalities in the pay structure, and so on.
A certain lack of maturity is evident among the players and the team management and it is clear that they lack direction and guidance. It must be noted that while the game has been played for more than 100 years in the US and close for 70 years in Japan but hardly for 17 years in Taiwan. There are several other sports in Taiwan and these offer competition to baseball. However, it must be noted that some of the best practices of the game can be easily used to shorten the learning curve, but no efforts have been put in this direction. By using the best practices of large US teams such as the Yankees and others, baseball in Taiwan can certainly reinvent itself, bring in revenue and become profitable. The conclusion also suggests that there is a lack of enforcement and discipline among teams with bitter infighting but then again, this is a malaise that has resulted because of insufficient revenue, which makes the team managers and directors protect their turf for petty financial and vested interests. Baseball is not taken seriously and the game is organized more like neighborhood teams rather than as MBL teams.
Liang (2007) has also argued that talented players are leaving Taiwan and taking up assignments abroad and gives the example of Wang Chien-Ming who is a pitcher with the Yankees club in New York Good talent flows from the region because of lack of appropriate opportunities. To revitalize the game, bring in more revenue and make the game popular, certain recommendations have been provided in this chapter. These cover recommendations to increase the gate collections, increasing the advertisement and sponsorship, reducing pay inequalities among the players. Measures have also to be taken to ensure that there is an overall development of the game at the club level and the game is played actively in schools and colleges.
The recommendations given here are based on extensive findings submitted by different researchers. While improving the payment mechanisms is important it should be remembered that attendance for baseball has been falling in the recent past and the fall in attendance would suggest that there would a financial crunch on the sport.
Sports Marketing and Management
The paper recommends that the promotion and marketing of baseball be done in an organized manner. A recent study has suggested that baseball must be marketed and not left to fend for itself. Currently, the advertisements, sponsorship, and promotion of the sport are limited when compared to other games such as Soccer. The market size of the sports industry in Taiwan is estimated to be 80.6 billion NTD. According to estimates made by the Council for Economic Development and Planning, the leisure and sports industry market in 2008 is expected to reach 380 billion NTD. Current trends however show that this rise in revenue is coming from sports other than baseball and the game is slowly decreasing in popularity. It is recommended that instead of a lone approach, baseball should be promoted as a part of the professional sports sectors, fitness and health club, increased participation from players of different categories, the introduction of more local level baseball tournaments and matches, and understanding the basic needs of the players (Hu, 2006).
It is recommended that advantage be taken from the fact the national baseball team qualified for the Athens Olympic Games in the 14th Asian Cup. In 2003, It is also recommended that measures be taken to increase the revenue from the 6 professional teams from the 454 million NTD in 2003, and more importantly, the income should be equitably distributed among the players and other clubs also. The attendance for the game has fallen by 8.4 percent from 2005 onwards and the total attendance for the 300 games that was 960,000 has fallen by about 3,204 visitors for each game on an average. The fall in attendance has had a direct impact on the revenue and gate collections. The gate collections have decreased by 140 million NTD from 2003 onwards. It is interesting to note that while the gate revenue has fallen, the income from merchandise and licensing revenue has increased to 58 million NTD in 2006. It is recommended that marketing of merchandise should be made more aggressive to obtain higher returns. Huang (2006) has pointed out that while the physical gate collections have decreased, polls show that the number of television viewers has gone up from 18.2 percent in 2001 to 25.6 percent in 2006. While the increase in the percent of viewers has increased, it has not benefited the players or the game directly since the TV broadcasting rights fell by about 3 percent in 2006 to reach a value of 240 million NTD. It is recommended that marketing efforts be focussed on highlighting the increase to potential advertisers as the figure of 25.6 percent is large and is a potential base for advertisers. Professional marketing and analysis are needed to show the benefits to product manufacturers as the TV audience represents a large potential market. The current strategy of expecting coaches, bureaucrats, or retired players and managers to negotiate with advertisement companies should be discouraged as advertisement, financial analysis, and creating audience models is not their expertise area. If required, MLB governing body can either hire full-time consultants for negotiating with advertisers and merchandisers e to identify and boost the advertisement revenue.
It is also proposed that professional teams from the US be invited to play exhibition matches in different cities. Baseball in Taiwan is heavily influenced by the game in the US and if professional teams from the US play more games, then the popularity and game attendance will rise. It is estimated that once the recommendations are implemented, professional baseball is will prosper and will help facilitate the overall growth of sports. Profits would increase through advertisement, sponsorship, endorsement, and licensed merchandise. Corporate bodies, product manufacturers, and service providers would become more interested in taking up sponsorship of events and even teams. The marketing strategy for sports would ensure that the baseball game in particular and the sports industry of Taiwan would be globalized.
Developing Baseball at the Primary Level
A likely fall out of adopting a marketing strategy for MBL is the positive impact on semi-professional and minor league baseball. With the growth in MBL, club-level playing would show increased participation and lead to overall growth in the sports industry. Besides offering opportunities for people, the semi-professional bodies can be more organized and work as a feeder mechanism for MBL. The current level of participation in baseball in schools and colleges is not very high as students are exposed to several sports activities. As per the sports participation model suggested by Cheng, there are six components. (Cheng, 1996). The components are demographic factors, perceived susceptibility to baseball and sport; perceived, implicit and explicit advantages of taking up a specific sport; the stimulus required for participation, and the possibility that baseball would be taken up as the preferred sport. It must be noted that students in schools and colleges have studies and a career to think of and again it may perhaps be improper to suggest that baseball should be promoted over other sports. So it is recommended that along with other sports, baseball should also be promoted as a team play event. It is estimated that with increased promotion and financial inflow in the game at the MBL level, sufficient synergies would be created to make baseball more popular in schools and colleges and more and more people would participate in the game, either as players or as spectators. It is also recommended that personally perceived susceptibility for sports can be increased by the level of the needs of sports participation. Recommendations include increasing the experiences of baseball, increasing the knowledge and interest in baseball, and increasing the skill level. Development and promotion have to begin at the grass-root level to obtain a mass following and appropriately coaches have to be appointed to develop, nurture and spot the skill at the initial level. Such measures would ensure mass following and make the game popular, rather than a game for the elite such as golf or polo.
Ticket Prices and attendance
Attendance at MBL and other sporting events has been studied for quite some time and the paper gives some recommendations on the way attendance can be increased with the proper pricing strategy to increase the gate revenues. It must be emphasized that gate collection revenue also includes income from parking, sale of food and beverages, and others and these have a significant effect on attendance. As seen earlier, the TV audience has been increasing significantly over the past years and this audience does not physically contribute to the gate earnings and players revenues. Because attendance is a major source of revenue for all sports teams, the recommendations are based on theoretical and empirical research on the demand for attendance that has been an integral part of sports economics. Two earlier empirical studies of the determinants of attendance that were done in the 1970s by Noll (1974) have been used as the basis for the recommendation. The study accounted for a variety of factors that might shift demand by including control variables for income of the local population, stadium age, the availability of substitutes, franchise success, and the population in the local market. Each of these studies also found the effect of ticket prices on attendance to be problematic—imprecisely estimated or having the wrong sign. The attendance models have included similar control variables to capture demand shifts—population characteristics, stadium characteristics, team quality variables, and the availability of substitutes and price data. The recommendations follow the pattern and approach of using aggregate time-series data (Schmidt & Berri, 2001) and panel data sets containing annual average attendance by a team for several seasons, and game-by-game attendance during a particular season. Recommendations that are suggested include a detailed study that focuses on specific issues affecting attendance, such as the impact of roster turnover, the impact of the designated hitter rule, the impact of labor unrest, and the impact of the relative strengths of the teams. A general finding in these studies is that attendance demand is price inelastic. Fort (2004) shows that this is not inconsistent with the idea that professional sports franchises are monopolies, so long as the franchises have other sources of revenue. The recommendations build upon that of El Hodiri and Quirk (1974) and Heilman and Wendling (1976) by extending sources of revenue to include sales unrelated to attendance. Heilman and Wendling (1976) show that franchises may set ticket prices in the inelastic portion of attendance demand to raise revenues from other sources. It is recommended to develop a model of ticket pricing, concession pricing, broadcasting revenue, and revenue sharing in a professional sports league. The model can be used to motivate an unconditional analysis of ticket and concession prices that supports the idea that revenue-maximizing teams price tickets in the inelastic portion of the demand curve to maximize total revenues by increasing revenues from other sources like concessions. The paper makes a recommendation that we should consider a monopoly sports franchise that can set prices for tickets and ancillary goods and services like concessions and parking. Suppose that costs to the franchise are independent of attendance and sales of these ancillaries. In these circumstances, the objective of the franchises is to set ticket and concession prices to maximize revenues, given the constraint that attendance is limited by the seating capacity of the stadium or arena. The demand for attendance at professional sporting events is inelastic concerning the ticket price. This evidence appears to be at odds with the common idea that professional sports franchises are monopolists whose pricing behavior should be to set prices in the elastic portion of the demand. These results suggest at least two future lines of inquiry in this area. We devise a simple model of a multi-product sports franchise and derive implications for the pricing of each of the products of the team. The precise predictions depend upon whether the team sells out its entire stadium or whether there is excess capacity. In the latter case, the profit maximization conditions imply that when concessions prices do not affect ticket demand, concession prices are set to maximize concessions’ revenue.
To grow and become popular, the game of baseball needs funds and development of infrastructure for not only MLB games but semi-professional and other levels of games also. Given the huge costs of land and building a world-class stadium, the financial burden becomes prohibitive. Based on the studies done by William (et all, October 2006), certain recommendations have been done for infrastructure financing and this is a very important aspect of the management. To arrange to finance for the stadium, strategies need to be used to overcome the fiscal and legal constraints affecting stadium financing. As per the current tax laws, there is a limit on the ability of municipal, sports authorities, and sports franchises to use tax-exempt bonds to finance large major league stadium projects unless such stadiums are financed with tax revenues or similar public sources of funds. Often municipalities and franchises contemplating stadium construction projects are left with a difficult choice of either financing stadiums at conventional interest rates, or increasing local taxes to pay for a stadium project. The first alternative is financially unpalatable for a sports franchise owner and the second alternative is politically unpalatable for a municipality. The paper recommends that financing be done by using cost-effective tax-exempt municipal bonds without increasing local taxes. The key to the financing structure is the use of payments instead of real property taxes or Pilots as the source of repayment of the new stadium debt. The use of tax-exempt municipal bonds would substantially reduce financing costs, but tax-exempt municipal bonds are typically secured by local tax revenues. Levying new local taxes to pay for the construction of the stadium is difficult.
Pilots that are received are paid over to the respective City to offset tax exemptions granted by the agency. For large projects, Pilots are a dependable revenue stream to the city, which is calculated and payable much like real property taxes and is ripe for securitization. Securitizing Pilots to pay for the new stadium through the issuance of municipal bonds, backed by the stadium’s Pilot revenues offer an attractive alternative to either raising taxes or issuing non-structured bonds at conventional interest rates. Pilots are also a particularly flexible financing tool. As with real property taxes, they provide a reliable source of revenue that gradually increases over time, but that is not encumbered by the municipality’s general pledge of faith and credit. A stream of Pilot payments may be pledged to repay a quasi-municipal obligation. But the key advantage of Pilots is that, for federal income tax purposes, they look and act like taxes of general application much the same as a real property tax. Interest on bonds that are backed by taxes of general application and concerning which there is no private security or private payment for the use or the bond financial property are exempt from income taxation. Financing rates relating to such obligations are also substantially lower than conventional financing rates. A Pilot is considered to be a generally applicable tax if payment of the Pilot is commensurate with and not greater than amounts imposed by a statute for a tax of general application, and payment of a Pilot is designated for a public purpose and is not a special charge. The Pilots can be derived from and measured in contemplation of ad valorem taxes that are otherwise applicable to the stadium. In addition, Pilots charged concerning the stadium are not permitted to exceed generally applicable property taxes otherwise due and are therefore not greater than amounts imposed by a statute for taxes of general application. Furthermore, using Pilots to finance the construction of the stadium as a key component in the city’s economic development plan satisfies the requirement that payment of a Pilot is designated for a public purpose. Since Pilots are typically charged for substantially all economic development projects they do not constitute a special charge and are therefore exempt from state and local income taxes. The one substantial wrinkle to Pilot bond financings is that the bonds may not be secured by any non-public or private source of revenue, and may only be secured by Pilot payments. The bonds may not be secured by a pledge or guarantee of a sports team owner or a pledge of broadcast or advertising revenues. For a Pilot bond financing to work, holders of a Pilot bond must be certain that payments will continue to be paid. In stadium financing, this requirement is not particularly problematic. The failure to pay Pilots, like the failure to pay real property taxes, can result in a tax lien foreclosure or, in the case of a Pilot, a Pilot lien foreclosure.
A Pilot lien foreclosure of a Stadium would result in the loss of the rights to use the new stadium. Given the fact that broadcast revenues, ticket revenues, endorsement revenues, and concession revenues are all dependent on the teams continuing to play baseball and the only venue for baseball is the new stadium, it is reasonable for a Pilot bondholder to conclude that the team will continue to make Pilot payments to maintain access to the new stadium.
Nourayi (2006) has provided a detailed study and research into increasing the profitability of specific teams and the sport in the NBA and based on this study, the paper suggests some recommendations. As profit-driven entities, sports franchises try to increase revenues from various such as ticket sales and television contracts. Winning more games will increase the demand for tickets, allowing an increase in ticket prices. Winning more games provides long-term income potential through demand from advertisers and sponsorships, as well as creating excitement around the team. Professional sports such as baseball are profit-driven institutions in the intensely competitive entertainment industry and professional sports executives manage their operations in much the same way as business executives. Increased attendance and viewership for the games will enhance the franchise’s negotiation and contracting position. It is further expected that an increase in attendance will cause an increase in the revenues from related businesses such as advertising, sponsorship, concession sales, parking fee, and sales from merchandising. Identification of the best game plan and underlying players’ capabilities may be helpful in determining necessary changes in the roster, hence, drafts, trades and contracting decisions. While fans’ loyalty and attendance at sporting events are influenced by many factors nothing seems more influential than the team’s performance. Professional sports fans expect “their” team to win a respectable percentage of times. Winning appears to be the most defined service quality in such a setting. Achieving the expected quality, by winning games, is only possible if the appropriate complement of players, with optimum skill level, is contributing towards that objective. In this setting, the performance of a given professional sports team can influence the franchise’s strategy through public subsidies of facilities. The paper recommends that continuous improvement methods be used to optimize the team’s operations and management. Certain accepted industry benchmarks can be followed to bring about changes in the manner of accounting, business transactions, negotiating with advertisers, and other business-related activities. Benchmarking inherently relies on the assumption of availability and use of information about competing organizations. More often than not, benchmarking is accomplished through the cooperative efforts of benchmarking partners. Benchmarking with direct competitors requires a willing partner.
The partners need to share information and rely on such information gathered for benchmarking purposes. The major difficulty attributable to this approach is the identification of a “cooperative” partner given such partnerships require sharing of information about the partners’ operations. It is unlikely that companies share information that may be the source of their competitive advantage. Alternatively, required information may be gathered in a “unilateral” approach by collecting information without the benefit of cooperation by a target partner. This approach relies on data published or available from sources such as trade association or information clearinghouses. However, publicly available information is generally in aggregate form and may not be as detailed and refined as required for a benchmarking project. Control and performance evaluation in conjunction with benchmarking, relies on measures that are produced externally as targets. Such targets are meaningful and effective basis for comparison. The differences resulted from comparisons between a “practice” and the “best practices” also known as “performance gaps,” are meaningful. Measures for competitive evaluation purposes. Benchmarking is less likely to be subject to biases and arbitrariness than the traditional systems of standard setting, Standard Cost Accounting System, where measures are internally produced and may be sub-optimal. However, both benchmarking and standard setting have similar frameworks with their theoretical underpinning in scientific management field. Sports franchises are, by their very nature, structured on the pillars of intense competition and a desire for continual progress. Most professional players strive to achieve performance excellence. Consequently, professional sports franchises can benefit immensely from an effective method of implementing the continuous improvement principles. Franchises strive to improve their performance in order to gain the support of fans. Loyal fans’ have a significant influence on the short and long-term financial success of the franchise.
Pay Inequalities and Performance of Teams
Based on the study done by Frick (et all, 2000) on pay inequalities and performance of teams, certain recommendations are suggested. As discussed in the research findings, there were allegations and convictions of certain teams and team members who had been bribed or accepted money to lose a game. Such behavior not only spoils the game but drives away spectators who feel cheated. The success of a game depends to a large extent, not only on winning but also on the ethical behavior of their favorite teams. To a certain extent, team members are coerced to accept bribes because of the perceived lack of income and certain disparities in pay. The authors have examined the data of wins and losses of teams and studied the wage structures in these teams. They conclude that higher wage disparity is detrimental to team performance. Then the question arises that should talented individuals who perform well should be given a salary that is equal to what a non-performing player gets. The paper recommends that salary and wage should be based on a commonly accepted points grading system that would rate the player for a few games and a season. Players who play better would get a higher rating and a corresponding higher salary. The paper suggests that though wage inequalities would remain, the player who gets paid less has a chance to redeem himself by playing better and by earning more.
Leveling the Playing Field – Balancing the Haves with the Have Not’s
Solow (et all, April 2007) has made detailed research on how MBL factions are structured. The authors speak of imbalance in the organization of the teams and clubs and this leads to a disparity in salaries, decision making and creates a difference and discontent in the sport. It can be seen that the structure of Major League Baseball (MLB) is regarded as evolving into a league of haves and have-nots. On one end of the spectrum, we find a few large-market teams whose vast revenues allow them to accumulate the best talent and deepest benches. At the other end of the spectrum, we find several struggling teams whose ability to field a competitive team seemingly is hampered by the ability of their market to generate a sufficient level of revenue. Critics charge that this imbalance in revenue potential is leading to a domination of the sport by the large-market teams. To successfully address the problem of imbalance in the leagues, redistribution must affect teams’ marginal revenue functions. The extent to which such redistribution equalizes competitive balance depends on whether the effect disproportionately lowers the marginal revenue of large market teams. Previous theoretical work has also shown that redistributing revenues from rich to poor teams will lower the marginal value of winning of all teams, thus reducing the payments to labor (Fort 2003). Different revenue sources are likely to respond differently to current and lagged winning percentages. While a team’s share of the league’s national television revenues is not sensitive to its performance, gate receipts and concessions are likely quite responsive to both current and lagged winning percentages. Local television and radio revenues can be expected to respond to lagged performance and will respond to current performance if the number of games that are televised depends on performance or if payments are linked to ratings. From a theoretical perspective, it remains an open question whether and which kind of redistribution improves competitive balance. While Quirk and El-Hodiri (1974), Fort and Quirk (1995), Vrooman (1995), Kesenne (2000), and Fort (2003) provide models in which gate revenue sharing does not affect competitive balance (the so-called ‘invariance principle’), Fort and Quirk (1995) showed that sharing local television revenues can improve the competitive balance, while Kesenne (2000) showed that gate sharing can lead to more balance if owners are win-maximizers. Modeling a sports league as a non-cooperative game, Szymanski and Kesenne (2004) showed that league balance can suffer when gate revenue sharing is imposed.
Since the allocation of playing talent ultimately depends on the intensity of demand, the recommendation is to look at the demand for player talent. A team’s demand for talent is its marginal revenue product, derived from its marginal revenue (MR) and the marginal product of players (MP). Teams in big cities have an advantage over their small-city counterparts in that their marginal revenue, and hence the demand for talent, is larger. As such, the dominance of the sport by the large-market teams is a free-market outcome ultimately explained by the greater value of a win in these cities. While the market allocation of talent may be optimal from the perspective of anyone team, it ignores the externality associated with the overall well-being of the league. First introduced by Rottenberg (1956), the uncertainty of outcome hypothesis maintains that fans prefer sports events in which the outcome is exciting because of its uncertainty. If large-market teams acquire the strongest rosters and deepest benches, then match-ups with small-market (and less talented) teams could hurt the demand for the league as a whole. For the recommendation of redistribution on the allocation of playing talent, assume the supply of talent is fixed, that teams are profit maximizers, and that the league consists of one large-market (L) and one small-market (S) team. The distribution of winning percent (W) between the two teams is determined, with the large market team’s winning percent (W L ) plotted on the horizontal axis (hence, W S is [1- W L ]). Given this normalization assumption, each team’s demand for talent is determined by its marginal revenue functions. As is common in this type of model, assume that the marginal revenue function of L is greater than that of S. Under profit maximization, the market allocation of talent (without redistribution) occurs at the intersection of the two marginal revenue functions, where each is equal to the price of a unit of talent, P T. Given that MR L > MR S, this allocation results in the large-market team winning more games than the small-market team (i.e., the equilibrium winning percent of the large-market team is greater than 50%). If the league values competitive balance and we assume that the equilibrium distribution of wins is widely perceived as unacceptable, then this market mechanism must be overridden. But simply transferring revenues from large markets to small-market teams will not achieve this goal; the teams’ marginal revenue functions must be changed to have an effect on the allocation of talent. It has been argued elsewhere that redistribution programs ultimately reduce the marginal value of a win because the amount taxed away from each team does not equal the amount returned to that team (Fort and Quirk 1995; Fort 2003). For example, consider how the current revenue-sharing program in MLB affects teams’ marginal revenue functions. This agreement takes 17% of each team’s local revenues, then returns an equal share (i.e., 1/30) to each team. While winning an extra game adds to local revenues, some of this extra revenue is taxed away, meaning that the marginal value of a winning net of redistribution payments will be smaller than that which ignores such payments. Given that each team’s marginal revenue function is decreased as a result of the redistribution program, the remaining question is whether the net result on the allocation of talent is in the intended direction of greater competitive balance (i.e., towards small-market teams and away from large-market teams). For example, consider the case where both teams’ marginal revenues fall by an identical amount. In this case, the allocation of talent is unaffected by the program and the only effect is the reduction of the equilibrium price of talent. If redistribution has a greater impact on the marginal revenue of the large-market team, then the league will become more balanced. Conversely, if the program disproportionately affects the marginal revenue of the small-market team, then balance will suffer. In all cases, however, the effect of redistribution on players’ salaries is unambiguously negative.
The recommendations to balance the growing divergence in local revenues generated by teams from differing market sizes, MLB has to take up several programs to redistribute revenue. While the intent is to enhance the balance of talent across the league, it is also well known that such programs ultimately depress players’ salaries. If the net effect of revenue sharing were to “equalize talent” (in any case, more so than would occur in the absence of such programs), then perhaps we might feel that this reduction in salaries paid to players is justified because of its beneficial effects on competitive balance. The question of interest in this paper is whether the net effect of redistribution has helped or harmed the balance of talent in the league. Since redistribution, in theory, depresses the MR curves of all teams, the ultimate comparison is whether the MR of large-market teams falls by more or less than that of the small-market teams in equilibrium. Based on estimates, the MR curves of teams were indeed reduced by the redistribution efforts undertaken by Major League Baseball from 1996-2001. But the overall effect of those efforts on league balance was neutral, leaving teams’ winning percentages essentially where they would have been had revenue not been redistributed. The results are thus consistent with the invariance principle and suggest that the assumptions behind those models that conclude that redistribution will affect league balance either positively or negatively do not hold. At the same time, the results indicate that redistribution led to an economically significant reduction in players’ salaries. Hence it is recommended that equitable redistribution should be based on the player’s performance and talent rather than any other equitable measures.
Ethics and Discipline
According to a report published by Taiwan Tiger. (2005), there are vast indiscretions by some of the players who play for different clubs. It has been widely alleged that some players had accepted money and other favors to lose a game and that the players acted in objectionable behavior with others. There is a lack of enforcement and ethical behavior among the teams and certain rules of behavior and conduct should be imposed on the players. The question again arises as to who would enforce the rules and discipline the players. An apex body needs to be constituted that would be made up of neutral members of the Judiciary, eminent retired players, and coaches and they should be given the power to censure and place a player on the bench if any gross misconduct and improper behavior are proved beyond all reasonable doubt. The apex body should also have the power of arbitration and be authorized to solve disputes among different clubs. A strong bias against foreign players has also been reported and there is a cap of a maximum of two foreign players in the team. The number could perhaps be relaxed with a cap on the maximum appearances of foreign players in a season. The paper suggests that exposure to foreign players and their participation is beneficial to the game and would bring an overall improvement. The paper also recommends that there should be equitable treatment of foreign players and that they should not be unduly victimized or censured.
Gambling and Betting
Lisa (2007) has pointed out incidents that involved gangsters who intimidated some players into losing a game and has suggested that the gambling syndicate is behind such episodes. Gambling is quite popular in China and Taiwan and people like to place bets for specific outcomes of the game. While people like to place bets on straight games, they become skeptical when the games are fixed and consequently the game suffers, there is less attendance and a fall in sponsorship and revenue. The paper recommends that betting be regulated by the government or other bodies and illegal gambling and match-fixing should be strongly put down.
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Draft questions of the interview
- What is your specialty or career background related to professional baseball?
- What do you think CPBL should improve on its operation structure?
- What responses and actions does CPBL need to take with the impact of MLB globalization?
- How do you look at the free agency system in NPB(Nippon Professional Baseball) and KPBL(Korean Professional Baseball League) ?
- Is it feasible to implement the free agency system on CPBL?
Suggesting List for Interviewees
|Secretary of CPBL||1|
|CPBL Club Manager||2|
|Sports Management Scholar||2|
|Senior Baseball Commentator||2|