Market Power

Tanking and the Structure of the NBA draft.

This week in my Sports Econ class I'll be talking about, among other things, the draft as a measure to promote competitive balance.  I will also talk about the perverse incentives that certain draft structures may cause, one being tanking: the incentive to lose games to improve draft status.  This year the NBA is taking a close look at tanking (links are in the original).

The NBA’s current lottery system incentivizes less-than-blessed franchises to do all they can to do as little as possible in order to be in the best position to draft someone like, say, Victor Wembanyama.

The league has tried various initiatives to curb the scourge that is tanking — something NBA commissioner Adam Silver addressed after a question by team employees with the Phoenix Suns recently — a franchise that seemingly has very little chance of such a worry.

Beck Taylor and Justin Trogdon looked at this very thing in a paper published 20 years ago.

The focus of tournament models has been rank‐order compensation schemes whereby participants receive higher payments for higher relative performance, either incrementally or winner‐takes‐all. Our research focuses on a unique tournament that offers rewards for both winning and losing, specifically the National Basketball Association’s regularly scheduled season of games. We examine three NBA seasons to determine whether team performance responded to changes in the underlying tournament incentives provided by the NBA’s introduction and restructuring of the lottery system to determine draft order. Our results yield strong evidence that NBA teams are more likely to lose when incentives to lose are present.

Taylor and Trogdon (TnT) looked at three NBA seasons, 1983-84, 1984-85, and 1989-90.  In 1984-85, the NBA had a strict reverse-order draft.  In 1984-85, non-playoff teams' draft order was by lottery meaning they had equal chances of having the number one pick.  In 19z89-902, the NBA used a weighted lottery meaning all non-playoff teams had a chance to pick first, but the worst team had the best chance, the second worst team had the second best chance, etc. etc. .

After controlling for other factors*, TnT found that non-playoff teams' probability of losing was 2.5 times as great as playoff teams in the strict reverse-order draft, 2.2 times as likely to lose as playoff teams in the weighted lottery, and no less nor more likely to lose under the lottery system. So TnT found evidence consistent with tanking.  What will the NBA find this year?

*The other factors are team WPCT, opponent WPCT, home game for the team, away game for the team, whether the team or the opponent had clinched a playoff berth, and whether the team or the opponent had been eliminated from earning a playoff berth.

Neale's Multi-firm Plant Concept

Here is another little concept from Walter Neale's classic 1964 QJE paper "The Peculiar Economics of Professional Sports".  One of the peculiarities he discusses is the multi-firm plant (a reconsideration of the more familiar multi-plant firm). 

The concept of "plant" in economic theory is a "place" where production takes place.  If the "output" of firms in sports is competition, then the firm as a unit of analysis in economic theory is the league.  In order to produce competition, we need not only a league but a space in which to play.  So a football stadium, for example, is a required input to produce football competition, and since teams "work" in stadiums to produce competition, the stadium can be thought of as a plant. 

But playing spaces by themselves do not produce competition.  For that you need multiple teams. One team by itself cannot produce competition for consumption by fans.  There needs to be multiple teams playing with common rules, playing schedules, and a championship format, all mutually-agreed upon by the teams in the league. To have this at lowest average cost, you need a league.  

Near the end of his paper, Neale writes "(t)he plant of economic theory is the game, which requires three factors of production: namely, land, labor, and labor."  The playing space is one plant, and "labor and labor", meaning two teams competing, is a second plant. He correctly notes that if the product is competition, the firm in economics cannot be a team.  This is Neale's multi-plant firm.

In my mind, each team produces effort against the other team. I suppose it is reasonable to think of a team, widely defined to include the players, coaches, trainers, front office personnel, practice fields, etc. as a plant.  It simplifies things.

Or does it?

Updated: I have edited the title and deleted a duplicated word.

Neale on Professional Sports and Antitrust Law

I've been reading through Walter Neale's 1964 classic "The Peculiar Economics of Professonal Sports." In this paper, he describes various oddities about pro team sports as compared to the economic theory an economics student might learn, particularly those from the early 60's. 

Neale argues that the product in the sports industry is competitions.  If the product is competition, then a team is an input in the production process and not "the firm" as understood in economic theory.  Instead, a league, like the NFL, is the firm in this case.  He argues that the market for competition within a particular sport is a natural monopoly. 

I think he is correct.  Within a team sport played at a particular level, there can only be one "best team".  The history of the past 150 years, at least here in the states, is a tendency towards one league. Leagues have started, some folded, some became dominant.  Rivals have formed.  Some have folded, some have merged with the dominant league, while others have partially merged with the dominant league while the remaining teams folded.

The NFL goes back to the 1920's.  Over the years there have been various rival leagues that have popped up: the All American Football Conference in the 1949's; the American Football League in the 1960's, and the United States Football league in the 1980's, just to name three. 

The AAFC partially merged with the NFL; the rest of the league folded.  The AFL fully merged with the NFL, giving us the NFL we know to this day.  The USFL league folded although some of its players, such as the Buffalo Bills former quarterback Jim Kelly, starred on NFL teams.

These days we are seeing such mergers within college sports, aka "conference realignment."

At the end of the paper, Neale gives some cautionary advice to those who make, practice, and adjudicate antitrust law as it pertains to professional team sports.  He concludes:

... professional leagues have every economic ground to appeal to legislatures, to courts, and to the public that (w)e fall if you divide us; (w)e stand if Johnny Unitas. 

Analysis: true.  Some level of cooperation is required for competition between teams to be commercially viable.  Rules must be developed and enforced.  A championship format must be formed.  Playing schedules must be set, and there needs to be some internal system to deal with the inevitable disputes that will occur between teams. 

In other words, when it comes to making competition happen and to make it commercially viable, some cooperation between teams off the field of play is necessary to make the games happen, and in this particular sense leagues are single entities.

 

Walter Neale's "Fourth Estate"

I've been reading through Walter Neale's 1964 paper "The Peculiar Economics of Professional Sports."  One of the peculiarities he discusses is what he terms "the fourth estate benefit."  The "fourth estate" has historically referred to newspapers, magazines, over-the-air and cable television news channels.  Basically, "the fourth estate benefit" refers to the money the press makes off of sports, even though sports can occur without the press covering it but the press coverage cannot exist without the sports.

Anyways, what about websites such as this humble blog?  Can I be so bold as to claim membership for this blog in the fourth estate? Should I?

Simon Rottenberg is Being Forgotten - Updated

I believe that Rod Fort penned this at The Sports Economist way back in the day a year after Simon Rottenberg, the father of Sports Economics, had passed.

In 1956, the Journal of Political Economy published Simon Rottenberg’s seminal piece in sports economics, “The Baseball Players’ Labor Market.” In researching a commemorative piece on the impact of that paper on all of us that think about sports business and economics, his wife Annette informed me that Professor Rottenberg passed away in January 2004.

I feel awful about this for two reasons. First, it was never my pleasure to make his acquaintance. Second, how could I not know that this giant, whose broad shoulders nearly all of us working on sports stand on, had died over a year ago?

The post is listed as being written by "Guest", but I think it was Rod.  Please correct me if I'm wrong.

I learned about Professor Rottenberg's death from reading that post on TSE.  How weird, I thought, that he would pass in obscurity even to Sports Economists.  But he did. 

Moreover, this Wikipedia page on Sports Economics mentions Professor Rottenberg, but there is no link to his Wiki page, and for good reason; there isn't one. Here is the link to the Wiki search result on his name.

Professor Rottenberg, among other things, gave us the "Invariance Hypothesis." It basically states the distribution of baseball players among teams does not depend on who has the right to determine where a player can play.  That right lies with the player with free agency but lies with his team under the reserve clause. 

MLB said the reserve clause was needed to promote competitive balance.  Rottenberg reasoned that the reserve clause had no effect on competitive balance, but would instead depress player salaries and increase teams' profits.

If a player has the right to choose where he plays, you negotiate with him (through an agent) make it worth his while. If his team has that right, then you negotiate with the team and make it worth its while.

Sound familiar?  The Invariance Hypothesis is very similar to The Coase Theorem, published a few years after Rottenberg's paper.  "Guest" (Rod?) writes at TSE:

The invariance principle essentially says the same thing as the weak form of the Coase Theorem, but it is significant that Rottenberg published it fully four years before Coase. He used it to different purpose than Coase, but the logic is there first nonetheless.

Yup. Coase rightfully won a Nobel for his work.  Professor Rottenberg, whose death we didn't discover for a year and who has no Wikipedia page is being forgotten outside the Sports Econ world.

Update 12/21/2022: I was not wrong.  The Sports Economist post cited above was written by Rod Fort.  Here is a link to the Internet Archive Wayback Machine that has the original post.  Scroll down to the June 19th post that shows it was posted by Rod Fort.  Below is a screen shot.