Competitive Balance in a sports league
Many authors have marked as an important statement that says all the competitors must have the same ability to get a success in the competition and financially. Last years most of fans, sports analysts and even economist have seen an important imbalance between the spending of the different clubs in a league and also the polarizing of these leagues by therichest clubs.
For this reason we are going to analyze the different concepts about the competitive balance as theoretical aspects, the relationship between payrolls and performance, a description about the natural forces and institutional rules and regulations and evaluate the likely effect of several popular proposals—payroll and salary caps, luxury taxes, and increased revenue sharing—oncompetitive balance.
This relative force of each competitor is the real problem to solve; there was not a uniform way to sort it out. Inasmuch as uncertainty of outcome is a key component of fan demand, the big differences in the inputs, thus, the outcomes will show a bad health in the long term to the finance viability of the enterprise. Therefore how to handle weak teams, to prevent lower, can beas much or more of a problem as dealing with the strong teams, because there is always interest in seeing the very best individual performers and teams in the same league.
First of all any club must decide what objective wants to achieve, cause its outcomes are related with this decision. On one side, we have profits maximizers clubs, their first idea is get benefits from this activity. They wantto maximize this function , i.e., seasonal revenues minus seasonal costs to maximize the season profit. This option is more supported by the American clubs, because they think if a club hires talent players their revenues will increase their profits. On the other side, we have the win maximizers, most of the European clubs, based on the win thought and the only way to reach it is hiring the bestplayers, so their function of the maximum number of talents will be restricted by one important variable, the budget of the club. So a win club would like to maximize this function , where w is the season winning percentage, under the next restriction , where π^0 is a fixed amount of positive or negative profits. We can see this graphically explained in the next figure, where are represented theprofit versus win maximization. The vertical axis shows the total season revenue and cost, and the horizontal axis the number of talents. We can see how the cost and the revenue increase as long as the number of talents increase, but with the difference is the revenue slope in a determined moment starts to decrease due to the uncertainty of outcome in the league.
If a club is profit maximiser, itwill be situated on x1 where the difference between revenues and costs is higher; however a win maximiser club will be placed in x2 where the numbers of talents is higher.
The implications of these decisions are different according with the objective. But these decisions will affect to the most important variables of the team sports industry, as the salary, the total revenue, thedistribution of talent, the market regulation…
About the player market, the main implications are: in a market where with a lower demand, with a given supply of talent, the average salary in a profit maximizing league is lower than in a win league; another is that the distribution of talent across clubs is more unequal if he objective of the club is win. These two implications show a competitive balance.A third implication is the total league revenue is higher in a profit-maximizing league than in a win league because the talents are not efficiently located. A fourth implication, a club is a price maker cause they use to manage their local monopolist to set the prices. For a win club, which is based on the hiring of talent players the optimal ticket price will be high than in a profit club,...
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