Holzman: In baseball, no competitive balance without financial balance

Since the institution of Major League Baseball’s modern economic structure in the late 1970s, rising player salaries have fueled concerns over the financial viability of small-market teams. The establishment of a free market for unsigned players has allowed the owners of large-teams, backed by the revenues generated by their deep fan bases, to bid up player salaries at will. Such uninhibited spending patterns have threatened the competitiveness, popularity and financial viability of their small-market counterparts. In his most recent column “Dissecting parity in baseball,” John Ettinger suggests that financial parity among MLB teams bears little, if any, relevance to the degree of competitive balance found within MLB. However, if MLB administrators hope to preserve a league which can survive as both a popular sport and a viable business, they have no choice but to confront the fragility of MLB’s current financial system.

A reasoned analysis of MLB’s economic structure cannot deny the financial inequity to which it gives rise. Limited in popularity by the size of their respective metropolitan areas, small-market teams cannot generate revenues comparable to those realized in larger markets. High ticket sales, lucrative media contracts, and the potential for worldwide brand recognition provide large-market teams with ample funds for the assumption of expensive player contracts. Small-market teams, unable to afford such expenditures, are unable to compete for the best available talent and are forced to settle for lesser players demanding lower salaries.

Exorbitant payrolls and star-stocked rosters do not necessarily imply the competitive dominance of large-market clubs. On-field success depends on the intelligence with which a team’s resources are allocated. Managerial incompetence can be just as threatening to a team’s competitiveness as may be its resource limitations. Indeed, teams like the Mets and Cubs, which maintain extravagant payrolls with the financial support of the nation’s largest media markets, have wallowed in relative mediocrity for almost a decade. Meanwhile, the Oakland Athletics, famed for their managerial ingenuity, have identified strategies which allow them to remain competitive on an annual basis, despite the limitations of their market.

Nonetheless, we cannot allow such conditional results to belie the underlying truth of MLB’s financial inequities and the consequences which they imply for the league’s competitive balance. Large-market teams, backed by robust sources of revenue, have the ability to allocate funds inefficiently while still maintaining competitive clubs. In examining the relative efficiency of MLB teams, analysts study the marginal dollars of payroll spent per marginal win — the payroll expenses in excess of the lowest feasible payroll, given MLB’s minimum salary requirements, per wins above a theoretical minimum. The Yankees have demonstrated amongst the highest marginal payroll expenditures per marginal win among all MLB teams, demonstrating highly inefficient payroll allocations. At the margin, their frequent signings of all-star talent do not represent major contributions to their potential win totals, for they are already among MLB’s most competitive teams. Further, many of their expensive signings fail to meet initial productivity expectations. However, despite their managerial inefficiency, they have maintained on-field success as a consequence of their robust revenues. Their resource base provides them a financial cushion which protects them from the risk of underperformance by big-ticket signees. The Yankees, both financially and competitively, can afford to make mistakes.

Small-market teams have no such luxury. For the Athletics to assume the expensive contract of a top-tier player would be for them to commit a large percentage of their resources to a single asset. The failure of such a prized asset would result in the team’s competitive weakness. More injurious, however, would be its inability to recover from that failure through additional acquisitions until its funds are again made accessible by the expiration of the player’s contract. Small-market teams cannot afford to risk such large portions of their revenues on premier talent.

Oakland’s success has come of its innovative techniques used to identify undervalued talent, and their innovations have indeed paid off. Nonetheless, their success has been realized in spite of the underlying tragedy of MLB’s economic system — small-market clubs have no choice but to allocate their resources with superior wisdom. They must be abnormally efficient, or else fall to the financial might of large-market competitors. For large-market clubs, the metric of marginal dollars spent per marginal win is but a reflection of how well their big-name players have succeeded, after the fact of their signing. For small-market teams, it is the metric which directs their every managerial decision, for their on-field success necessitates efficiency.

A concrete example may help to put this fact in perspective. In 2005, no American League team which achieved fewer than 94 wins qualified for the postseason. That season, a team operating at the median level of payroll efficiency while amassing 94 victories would have incurred a total payroll of approximately $110 million. Even today, after five years of nearly uniform payroll increases, such high expenditures lay beyond the financial capabilities of small-market and many mid-market clubs. Herein lies the competitive disparity implied baseball’s financial structure — small-market teams can succeed, but, if they wish to do so, they must be smarter than their large-market counterparts. In this, the Athletics have succeeded. To hold all small-market teams to such a standard as a prerequisite for success, however, is unreasonable.

That MLB’s economic organization is inherently unfair is clear. However, in his column, Ettinger is less concerned with financial inequality than competitive balance. In reality, he asserts, we observe a significant degree of parity within MLB. If competitive balance is our end in engineering financial balance, why seek financial parity when the ultimate goal has already been achieved?

A more thorough quantitative study than that performed by Ettinger must be executed prior to the assertion of the existence of competitive balance in baseball. However, methodology aside, we must inquire into the kind of parity which we seek before investigating its presence. In measuring competitive parity, Ettinger examines the average number of spots by which teams may rise or fall from one year to the next when teams are ranked in order by record. This metric, however, is flawed in that it defines parity from a broad perspective and over a limited time horizon.

Baseball fans do not establish their fandom from such a detached perspective of the league. Fandom represents an investment of attention and emotion in one specific team. As such, it requires a certain degree of confidence in that team’s ability to succeed on a consistent basis. We therefore must question whether the parity described by Ettinger – the random, short-term variation in any given team’s record – is that which is sought by the fans of particular teams. Fans, rather, seek the assurance that the specific team to which they become attached has the ability to construct a roster deserving of their emotional investment. Implied by fandom is a personal identification with one’s chosen team, through both its successes and failures. Such identification can only be of value if the team can demonstrate consistent promise for both the present and the future.

Financed by plenteous sources of revenue, nearly all large-market teams, regardless of the competence of their current ownership, can provide fans with such optimism – indeed, with the dawn of every winter comes hopes of a blockbuster acquisition. A small-market team, regardless of the year-to-year fluctuations in its record, can engender no such hope. A weak financial outlook begets a lack of optimism for its future and apathy among its fans. The declining ticket sales and media contract values that follow further weaken the economic strength of the team, provoking a cycle of disappearing finances and fans.

If MLB hopes to flourish as both a viable business and a source of entertainment for its fans, it must once again engender the sentiment of allegiance which small-market teams have lost in the free agency era. Only when allegiance can be enjoyed by optimistic fans will they identify themselves as such, and only when clubs maintain a robust fan base will they survive as profitable organizations. However, such allegiance begins with long-term confidence in one’s team, and such confidence begins with financial balance.

I encourage readers to read my article in the most recent edition of the Yale Economic Review, titled “A Level Playing Field: Solving Economic Disparities in Major League Baseball,” in which I explore potential solutions to baseball’s economic crisis. A failure of league administrators to solve the growing crisis will only serve to alienate fans further, threatening the viability of small-market teams and of the league as it exists today.

Adam Holzman is a junior in Davenport College.


  • iheartjohn

    this is an inadequate answer to my john john’s article. Totes mc no no, you pooper!

  • chasingutley

    “Implied by fandom is a personal identification with one’s chosen team, through both its successes and failures” Not if you’re a newly discovered Giant’s fan! They only get the successess!

  • BusterPosey

    weak article

  • Saybrook10

    @BusterPosey “weak article”

    What is weak about this article? Holzman provides, for the length of the article, a fairly in-depth economic and psychological analysis of the state of baseball competition, management, and fandom, in a fashion atypical of that you’d generally find anywhere in the Yale Daily News, or a newspaper at all, for that matter. It’s probably a fair assumption that Holzman based some amount of his economic analysis on “Moneyball” by Michael Lewis (and if it’s not a fair assumption, then I apologize) and Lewis’ sources, but in addition, the psychological perspective of fans that he brings to the table is pointed and relevant. I look forward to reading your article in the YER, Adam, and hopefully your writing will be open to peer review at some point rather than just the peanut gallery.

  • Goldie08

    “Baseball fans do not establish their fandom from such a detached perspective of the league.”

    Speak for yourself. While I am a Phillies fan (being from the area) I am also a “fan of the game” and enjoy the sport on a high level.