The Baseball Economist: The Real Game Exposed (29 page)

Why not compare net MRP estimates to player salaries? This would be ideal, but these additional costs are difficult to estimate, especially for individual players. Some players require more complementary inputs than others. For example, a pitcher with arm problems that require regular expensive medical treatment, is going to cost more than a naturally healthy teammate. Assuming the players produce equal value to the team on the field, we expect that the player who needs the expensive medical care will earn a lower salary even though they have identical onfield gross MRPs. But it would be very hard to identify the difference between the players without access to hard-to-get information.

Not only is it difficult to identify costs by player, but even to know how much teams spend on players beyond salary in general. However, the MRP estimates may provide a guide to the answer. After all, these players are hired on an open market by owners who want to win. They are as unlikely to forgo profit opportunities as pedestrians are unwilling to leave $100 bills lying on the sidewalk.

The median difference between actual salary and MRP estimates is about 19 percent for pitchers and 8 percent for hitters; therefore, it’s likely that teams spend around 19 percent and 8 percent of the salaries of pitchers and hitters on complementary inputs. The fact that pitchers receive less of their gross MRP than hitters does not surprise me considering the resources needed to support pitchers. Teams appear to spend more on coaching and medical treatment for pitchers than hitters, with pitching and bullpen coaches, video analysis, and Tommy John surgery. The fact that pitchers report earlier to spring training than the rest of the team is a good indicator that pitchers are more costly to maintain than hitters.

As distasteful as reducing a player’s athletic accomplishments down to a dollar amount may seem, it’s a task every general manager in baseball must do. With dollar-value estimates of players—based on the things players contribute to wins—the GM is equipped to make decisions for the franchise. Identifying potential problems in performance due to injury, psychology, the team social dynamics, and media pressure are huge challenges. GMs must deal with human beings, whose tempers and egos are the stuff of legend. So it’s more than just crunching the numbers. However, a GM who can help a player through a messy divorce but can’t tell a fourth outfielder from a rising star won’t succeed either.

Part Four

WHAT FIELD?

14

Is Major League Baseball a Monopoly?

—TED TURNER
⁸²

THIS IS A SILLY QUESTION , right? Major League Baseball (MLB) is, after all, the only professional sports league in North America providing “major league” level baseball. Many leagues have tried to compete with it, but all have fallen short in their noble quest. And don’t forget about the infamous exemption that gives MLB protection from the antitrust laws responsible for preventing monopolies in other American industries. On top of all of this, MLB seems to fit the monopoly stereotype perfectly with its gentlemen’s club of billionaire owners, headed by a real-life version of C. Montgomery Burns, Allan H. “Bud” Selig. Even the organization in question admits it is a monopoly. A silly question? It’s outright preposterous!

But I’m not sure MLB is a monopoly. This is one of those cases where most economists—or at least the economists who choose to write on the subject—agree with the conventional wisdom. But I don’t.

A monopolist is not some old white guy with a bushy mustache and sporting a top hat, like that cartoon fellow on the board game by Parker Brothers. A monopoly is a market institution that sells a product without threat of competition from outside rivals. And this lack of competition causes the monopolist to behave in a manner that is quite predictable and easily identifiable. This absence of competition allows the monopolist to increase its revenues by doing something other than providing better products at cheaper prices. By selling output to those customers willing to pay higher prices for the product, the monopolist earns profits. In a competitive environment this behavior will not work; restricting output and raising prices sends customers running to competitors. Trying to act like a monopolist when you are not one is a good way to kill your business.

While the league is not completely competitive, I think that the places it isn’t are harmless. Several other major sports leagues do not share baseball’s antitrust exemption. It turns out that baseball seems to be the best behaved of the bunch in terms of responding to market forces. Maybe MLB is a special kind of monopolist, one which can hide the most egregious sins of the typical monopolist. However, this sort of monopolist is benign—it provides baseball fans with the baseball they want. But why does MLB act as if it is governed by competitive market forces without any competitors? History shows that when the league has ignored the wishes of the fans, competitors have sprung up to challenge MLB. As an organization, MLB is constantly on the lookout for new competitors. These virtual competitors stop it from acting like a monopolist. Is this really true? Moreover, is it a stable arrangement?

Since 1903, when the American League (AL) and National League (NL) agreed to collude, for all but two years MLB has been the only producer of major-league-level baseball in North America. The exception occurred from 1914 to 1915, when the Federal League (FL) operated in direct competition with MLB as a major professional baseball league. Its brief existence ended when MLB agreed to expand, but more importantly, the FL is the prime evidence of baseball’s pernicious monopolist character.

One disgruntled FL team decided to sue MLB rather than accept the settlement with MLB that forced the end of the FL. Baltimore formally accused MLB of violating the Sherman Antitrust Act in
Federal League v. Major League Baseball
. But the unfortunate event of this case was the “Landis decision,” which was the first step in creating baseball’s infamous exemption from antitrust laws—the rules designed to protect against monopoly. The motivation for this decision was an odd one; simply, baseball is not interstate commerce, and therefore it is not subject to federal antitrust laws. Despite this strange ruling, which has never applied to other sports leagues, the Supreme Court has upheld the Landis Decision on several occasions. To many, these series of legal precedents have created MLB’s “antitrust exemption,” and this means that baseball can act as a monopolist without fear of legal intervention to stop its behavior.

A monopoly faces no competitors in providing the goods or services it sells. In the standard model of monopoly—known as the “single price” model because the monopolist charges the same price to all consumers—the monopolist manipulates the price of the product it sells by adjusting the output it produces. By producing less of a product, the monopolist artificially raises the price of the product by selling fewer units. The higher price of the product generates additional revenue to produce monopoly profits—the gain from artificially raising the price of the product. In a competitive market, producers cannot affect the price of a product to earn monopoly profits, because competitors can capture consumers by selling additional units at lower prices. But, by definition, a monopolist faces no competitors; therefore, it does not have to worry about rival companies entering and charging a lower price. What could this mean for baseball fans? MLB produces less baseball—in the form of fewer games, shorter games, or fewer teams—and fans pay a higher price for baseball than they would in a competitive atmosphere.

If there is $1 of revenue to be gained, the monopolist firm, indeed any firm, will spend up to $1 to gain that dollar. If the firm takes in an amount of revenue that is more than the cost of producing a unit, the firm will be all the richer.

Table 35 shows hypothetical costs and revenues faced by a monopolist at differing levels of output. For simplicity, I set the cost of producing
every unit to be the same. According to the law of demand, the higher the price the fewer the units sold, and the lower the price the greater the number of units sold. The total revenue earned by any firm is determined by the number of units sold times the price of each unit. The total cost equals the number of units sold times the cost of producing each unit. We see that as the price falls, the quantity sold rises. Initially, the total revenue begins to rise, but as the price continues to fall, further profits will also begin to decline. In this example, we can see that the maximum amount of profit earned occurs at the quantity where the marginal cost, the cost of producing an extra unit of product, equals the marginal revenue, the additional revenue generated. Let me assure you that this is a mathematical necessity.

The figure that follows shows this hypothetical market graphically. The demand curve (D) is downward sloping, because the firm can expect consumers to purchase more of the product at a lower price and less of the product at a higher price. For simplicity, the marginal cost (MC) is flat at $2; however, this does not have to be so. The quantity at which the MR = MC is 6, which means each of these units sells for $7. The firm earns $42 in revenue (6 × $7) and expends $12 in costs (6 × $2) for a maximum profit of $30. Box A represents the monopoly profit ($5 × $6). We can see that producing units beyond 6 would generate profits for the firm until the firm reached 11 units, because the price per
unit would still exceed the cost per unit. Triangle B under the demand curve represents the lost gains to both the seller and the consumer. The monopolist loses the revenue and consumers lose the goods. Economists refer to the loss of the underproduction as
deadweight loss
, because sellers and consumers would gain if the additional units were produced.

The single-price monopolist maximizes profits by restricting output. An unfortunate side effect is that the monopolist cannot sell units it would like to sell to consumers willing to pay a price greater than the cost of producing those extra units. It is the lack of competition that allows the monopolist to do this. Competitive pressure would cause the market to provide the output where price equals the marginal cost.

At the heart of the argument that MLB acts like a monopolist is the existence of the antitrust exemption. Beginning with the Sherman Antitrust Act of 1890 the federal government has been empowered to fight the monopoly abuses of the marketplace to protect consumers. Antitrust laws are designed to preserve the competitive process that satisfies consumer desires when businesses might prefer to do otherwise. To the general public, and even some economists, antitrust laws are a safety feature like brakes on a car, that keep the economy from running off the road. A car without brakes can turn an invaluable tool into a deadly weapon. Similarly, a market without antitrust might be doomed to control by hungry monopolists, itching to restrict output and raise prices to sap the helpless consumer.

Baseball is a market that seems to fit this description. Without the antitrust protections that protect most other markets in the economy, the market for baseball has devolved into a single monopolistic entity governed by the whims of greedy owners who conspire to raise its profits by producing too few teams and charging fans exorbitant prices. But is this really the case? While MLB is clearly the sole producer of major-league-level baseball in North America, it is not so clear that MLB acts like a monopolist; or, if it is a monopolist, that it is the result of the antitrust exemption.

Compared to the other three major sports leagues in North America—professional basketball, football, and hockey—the baseball market looks very similar. Each market is controlled by a single league: the National Basketball Association (NBA), the National Football League (NFL), and the National Hockey League (NHL). Although each of these leagues enjoys some antitrust exemptions for collective bargaining with labor unions and negotiating television contracts, the antitrust exemption put forth in the Landis decision applies only to baseball. All of these leagues can be and have been sued and found guilty of violating antitrust laws. Though the courts have reviewed some baseball cases involving the antitrust decision, the judiciary has made it clear that Congress must legislate the exemption away, which it often threatens to do but never does.