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Abstract
It is often assumed that sports leagues should have teams in the largest markets. However, a very basic model of a sports league shows that, depending on talent investments role in team revenue, this assumption is not necessarily true. Heterogeneity in markets sizes can not only decrease costs but also increase expected league revenue. Having a smaller market leads to more wins for the larger market team and less competition for playing talent. Therefore, leagues may prefer smaller markets for expansion teams or team relocation. Given that leagues typically want larger markets, the paper investigates how the basic model of a sports league may be lacking. If leagues want competitive balance or more absolute talent, it may cause leagues to pursue larger markets.
Keywords: contest success function, sports leagues
Introduction
At least since Rottenberg (1956), economists have suggested that consumer demand may be influenced by competitive balance and therefore relatively equal markets for teams may be preferred. Since investment in talent is a function of market size, leagues may want relatively equal market sizes leading to balance. This implies that if incumbent teams already occupy the largest markets, new teams should enter the largest available markets to ensure balance and a large fan base for the league. Many studies have empirically estimated the effect of competitive balance on the demand for sports, and the results seem mixed. However, the cost side of having evenly matched markets and teams is less studied. This study shows that teams of dissimilar market sizes will invest less in quality and may even have higher expected league revenues. In other words, competitive balance may be accompanied with more competition in the labor market and possibly even less total league revenue. Interestingly, increasing the fan base of the small market team can hurt the leagues profitability. Therefore, when leagues expand or relocate, it is not obvious, at least theoretically, that one of the largest available markets should be chosen.
Empirically, it seems as though leagues generally prefer to have large markets for all their teams. For North American sports leagues, all relocations and expansions must be approved by the league, and while there are exceptions, leagues have typically tried to inhabit the largest markets. The goal of this paper...