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"Baseball is too much of a business to be a sport and too much of a sport to be a business."
In Chicago, there are four professional baseball teams. However, the market is dominated by two of these teams: The Chicago Cubs and the White Sox. While Major League Baseball operates as the only unregulated legal monopoly in the country, the local baseball business market is clearly not a monopoly. This paper investigates the various characteristics of the Chicago baseball market and relates them to economic market structure theory.
Using attendance figures, ticket prices, market shares, and team values, the market is shown to exhibit many common oligopoly characteristics. First, the market is redefined to include only the two Major League ball clubs. Then, the effects of mutual interdependence on ticket prices are inspected. These effects are shown to be stronger in Chicago than the other 'two team' Major League markets. Continuing to look at ticket prices, the effects of price discrimination on profits are discussed. Furthermore, the market is shown to feature characteristics of collusion. The kinked demand curve is then related to the market's collusive nature. After the kinked demand curve, various entry barriers into the market are inspected. Two main barriers exist; one is a legal barrier that stems from the "league nature" of baseball. The other barrier is shown to be the prohibitive amount of capital that would be required to join the market. Next, nonprice competition is shown to be a determining factor of market share. This leads to an investigation of the seemingly non-economic motives behind each team's business practices -from which productive inefficiencies arise. Lastly, some flaws in the assumptions, theories, and data used in the paper are identified and addressed.
The paper then concludes by reaffirming the initial hypothesis: The Chicago baseball business market functions as a collusive, profit seeking duopoly within the framework of a league sport.
The game of baseball has been a fundamental part of Chicago for years. Despite a few name changes, the Chicago National League Ball club (the Cubs) has been continuously playing baseball in the same city for a longer duration than any other club can boast (Myers 1). Furthermore, Chicago is one of only four urban areas in the country with more than one Major League ball club. Using information such as ticket prices and attendance figures, evidence of mutual interdependence, price discrimination, and collusion will be considered. Furthermore, the characteristics of product differentiation and nonprice competition will be connected to the Chicago baseball market. In addition, the market entry barriers will be identified and explained. Then, the seemingly illogical actions of each team's owner will explain the productive inefficiency that is common in the market. Finally, using these characteristics and the public actions of the teams, the market is found to function as a collusive, profit seeking duopoly operating within the framework of a league sport.
One common characteristic of an oligopoly is that it is composed of a few large firms (McConnell and Brue 240). In the Chicago area, there are only four professional baseball teams. These teams are the Chicago Cubs, the White Sox, the Kane County Cougars, and the Schaumburg Flyers. Thus, because there are four teams (firms) in the market, it is clearly not a monopoly. An oligopoly can also be defined more precisely as a duopoly if there are only two firms present (McConnell and Brue 243).
Duopolies are rare, but most commonly occur in "geographically distinct markets" (Samuelson 510). While the Chicago market may not be a duopoly in the strictest interpretation of the definition (only two teams), a compelling case can be made to present the market as a duopoly. By referring to table 1, it is clear that the Chicago Cubs are the market leader, followed by the White Sox. However, between the two minor league baseball teams, the combined market share is a little below thirteen percent (Chart 1).
The Herfindahl index is one way to gauge the concentration of an industry (McConnell and Brue 242). By squaring the market share of the four largest firms in the market and adding the results, the process yields an index number. Generally, a Herfindahl index above 1800 is considered an oligopoly (McConnell and Brue 366). In the Chicago baseball market, the index is 3,994 -substantially higher than the 1800 level commonly used to denote an oligopoly. However, if the Flyers and the Cougars' market shares are ignored, the Cubs and the White Sox would still yield a combined index of 3,897 (Chart 2). Because this number is virtually the same as the index for all four teams, it is clear that the market is densely concentrated around the Cubs and the Sox. Therefore, the number of sellers in the Chicago baseball market strongly indicates a duopoly. For the remainder of this paper, the Flyers and Cougar's will be ignored, and the Cubs and Sox will constitute the Chicago baseball market.
In an oligopoly, firms will produce either a homogenous or differentiated product (McConnell and Brue 240). In the case of the Chicago baseball market, the Cubs and the Sox produce similar, but differentiated products. This assertion can be shown in a variety of ways. For instance, the White Sox play in the American League, which uses a designated hitter. The Cubs, on the other hand, play in the National League, which forces pitchers to bat for themselves. The White Sox rely on speed and defense to win games while the Cubs rely on 'power hitting' to win their games. As with any two Major League teams, there are differing styles of baseball played in Chicago.
Table 2: Chicago Ticket Prices
|Team||Least Expensive||Most Expensive|
Because the Sox and the Cubs generate similar products, the two teams must be conscious of each other when setting ticket prices and planning profits. Mutual Interdependence, the need for each seller to consider the competitors price in determining its price, is a characteristic that is most evident in an oligopoly (McConnell and Brue 242). However, this interdependence is deeply impacted by the nature of the Chicago baseball market.
Because baseball is a game well as a business, fans assign their favorite team a certain economic value. This means that a Cubs fan would be willing to pay more for goods and services related to the Cubs than the same goods affiliated with the White Sox. Thus, while White Sox tickets may be cheaper than their Cub counterparts (see table 2),3 the White Sox had a smaller attendance in 2000 (table 1). This occurred because Cubs fans value a day at Wrigley Field more than Sox fans value a trip to Comiskey Park. Since the Chicago baseball market is similar to the baseball markets in New York, Los Angeles, and the Bay area the ticket prices in each market can reasonably be compared (table 3).4 While there does not appear to be consistent strong competition in the most expensive ticket prices, each market has competitive low price tickets. In fact, the largest difference in any market between lowest cost tickets is four dollars. Furthermore, the New York market is the only market of the four where the more popular team has a less expensive cheapest price ticket. (This can be explained because Yankee stadium is larger than the Mets ballpark, Shea Stadium.) Thus, by looking at the lower end tickets, it is readily apparent that ticket prices are firmly impacted by supply and demand (see graph 1).
Table 3 - Ticket Prices in two team markets
|Market||Team||Most Expensive||Least Expensive|
|Graph 1 shows that ticket prices vary directly with demand for tickets. In a baseball stadium, the supply of seats is constant thus the supply line is vertical (perfectly inelastic). Thus, if demand goes up, so will prices. If the demand falls, prices will as well.|
The most expensive tickets offer evidence to support an interesting defining characteristic of a monopolistic market- Price discrimination. (McConnell and Brue 218). Maintaining seats in the front row of Comiskey Park costs no more than maintenance in the upper deck, yet front row seat tickets cost more than upper deck tickets. The practice of selling tickets at more than one price is price discrimination. Price discrimination occurs when a product is sold at more than one price despite the fact that there is no difference in production costs (graphs 2 & 3) (McConnell and Brue 218). The degree of price discrimination is therefore a good measure of the monopolistic nature of a market. Because the ability to price discriminate is directly linked to the number of sellers in a market, an oligopoly will show imperfect price discrimination.
In order to engage in price discrimination, a seller must be able to meet three criteria. The seller must exert some monopoly power, operate in a segregated market, and prevent resale (McConnell and Brue 218). Thus, the first criterion would indicate that markets such as New York and Los Angeles have more monopolistic characteristics than the Bay area and Chicago because they exhibit a greater degree of price discrimination. The degree of price discrimination can be determined by looking at the difference in price between the most expensive and least expensive tickets. The market in Chicago is also clearly segregated. In Wrigley Field as well as Comiskey Park, the most expensive tickets sell first, followed by the less expensive tickets. Marking seats on the tickets eliminates the third condition. It is very difficult to purchase a less desirable ticket and sell the ticket for more money when the seat location is fixed. Furthermore, the City of Chicago helps protect the market by enforcing 'scalping laws'. Because the Chicago baseball market does not have a high degree of price discrimination like New York and Los Angeles, it can be determined that Chicago has less monopolistic character than New York or LA.
|Graph 2 shows profit made by perfect price discrimination. This assumes that each unit (ticket) is sold at the maximum possible price. The shaded region is the profit. The point where marginal cost (MC) equals marginal revenue (MR) (which equals demand in perfect price discrimination) decides where the firm (team) will produce.|
|Graph 3 showe the profit mady by a firm that does not price discriminate. In this case, demand no longer equals marginal revenue. The quantity produced is still decided at the point where marginal revenue equals marginal cost.|
According to Adam Smith's The Wealth of Nations, a competitive market will naturally operate at a point that is best for society. Thus, while most of the economy may be ruled by Smith's invisible hand, baseball is not naturally drawn to produce at the socially optimal price. Collusion arises from the principle of mutual interdependence (Samuelson 514). Thus, without highly competitive forces in the baseball market, the invisible hand is disregarded and firms are tempted to collude (Samuelson 515). There are two main types of collusion, tacit (covert) and explicit (overt) collusion (McConnell and Brue 248). Tacit collusion involves no communication between the two firms about price levels (Samuelson 514). Simply the two firms realize that it is in their best interest to keep prices stable and relatively near each other's price. Explicit collusion produces the same effects, but involves direct communication between the two firms (Samuelson 514).
By examining baseball ticket prices in Chicago, it appears that the Cubs and White Sox may be colluding (table 2). This can be said because the ticket prices are almost identical. Furthermore, the Cubs and Sox tend to change their prices within a year of each other. In 2000, the White Sox increased their ticket prices, and now the Cubs have increased prices for the 2001 season (Greenstein). While it would likely be impossible to prove any collusion, certain indicators such as ticket prices definitely raise the question. While collusion is illegal in the United States, it is still highly attractive to oligopolists because it maximizes profits (graph 4).
|Graph 4 shows the contrasts between collusive and economic profits. The collusive profits are shown by the shaded rectangle, ABCD. The normal profit is depicted by rectangle EFGH. Colluding firms will produce at quantity Q2 - where marginal revenue equals marginal cost. Non-colluding firms will produce at quantity Q1 - where marginal cost equals demand.|
In a competitive market (guided by Smith's invisible hand), ticket prices would be set where marginal revenue is equal to marginal cost. However, with the teams colluding, they are able to charge the price dictated by the demand curve for the quantity where marginal revenue equals marginal cost. This leads to excess profits equal to the additional price multiplied by the quantity of seats offered. This is further complicated by price discrimination. With each different ticket price level, the team is adding profits that would not be realized if only one ticket price was charged (graph 5). However, the tradeoff of increased profits decreases the quantity each team produces.
|Graph 5 shows the breakdown of each baseball team's profit. Because of collusion, the teams produce at MC = MR. A portion of the bottom profit rectangle represents the normal profits that would result from producing at MC = MR. The top half of the first rectangle shows the additional profit reaped from collusion. The top profit rectangles result from imperfect price discrimination.|
Mutual interdependence also gives rise to another unique feature of oligopoly markets. The kinked demand curve takes effect when oligopolists do not collude and results from competing firms' reactions to a price change (McConnell and Brue 245). In Chicago's baseball market, the threat of a kinked demand curve helps to ensure the teams remain in a collusive relationship. A kinked demand curve is really the combination of two demand curves and two marginal revenue curves (graph 6) (McConnell and Brue 245). These two sets of curves depict hypothetical outcomes if a competitor's price is above or below the firm's price, When combined at the intersection of the two demand curves, a kinked demand curve results (graph 7). Thus, from the shape of the kinked demand curve, it becomes apparent that collusion is more profitable for both teams. In a collusive agreement, the teams produce at a level very close to the intersection. This is because any change in price when a market operates under a kinked demand curve will decrease the firm's revenues (McConnell and Brue 246). As can be seen in graph (7), raising ticket prices would send baseball patrons across-town to the competitor's ballpark. However, lowering prices would only increase attendance temporarily until the competing team lowers its prices. With lower prices, each team has a lower gross revenue. In economic terms, if a team were to raise ticket prices without its competitor following suit, the team would be producing at a quantity located on the highly inelastic portion of the kinked demand curve (McConnell and Brue 246). If the team were to lower prices, it would be producing (for a time) at a quantity on the elastic portion of the kinked demand curve (McConnell and Brue 246).
Another common characteristic of oligopolies is that market entry is limited (McConnell and Brue 242). There are two main reasons that entry into the Chicago baseball market is blocked. The first reason is due to the overall structure of Major League Baseball. Baseball's antitrust exemption allows the owners to legally control entry into the market. Thus, the owners must approve expansion, or a new league must be formed. (The American League is the only league that has ever successfully competed with the National League (Adomites et al. 16).) The second major entry barrier is capital investment. When the amount of money that is required to enter a market is prohibitive, this is called a capital investment barrier (McConnell and Brue 242). In 1999, the Chicago Cubs claimed expenses of $106 million (Greenstein). However, Wrigley Field has been standing since 1914 (Adomites et al. 42). Thus, the capital expenses to starting a new team would include the cost of building a new stadium as well. There are also some other factors, which must be considered to explain the difficulty of market entry. In order to compete with the Cubs and the Sox, a team must field similar quality players. However, as the late baseball commissioner Bart Giamatti said, "Major League baseball players of the kind of quality American people have had every right to expect since 1876 are scarce items" (Heylar 464). In economic terms, this means that the amount of qualified labor is nearly a fixed quantity (graph 8). Therefore, assuming another competitor attempted to enter the Chicago market, the wages of the qualified players would increase and thus the capital investment barrier would be built up as well. When there is too much money being spent on a limited supply of goods (or services) demand-pull inflation occurs (graph 9) (Samuelson 242). Thus, it would be illogical for a third competitor outside of major league baseball to attempt to enter the market. Furthermore, it would also be self-defeating for baseball owners to voluntarily expand the market. This is because the relative scarcity of baseball teams increases the value of each franchise (graph 10) (Heylar 464).
If ticket prices and the win loss columns strictly decided market share, the Chicago baseball market would be completely different than it is now. The reason the Chicago Cubs have a commanding market share can be attributed to nonprice competition. In fact, nonprice competition in a collusive oligopoly usually determines market share (McConnell and Brue 252). With this is in mind, the discrepancies in market share can be accounted for. The Tribune Company purchased the Chicago Cubs in 1981 for $20.5 millions (Myers 302). In 1998, the Cubs value was estimated at $224 millions by Forbes magazine (Greenstein). This increase in value is closely related to market share, which can be attributed to nonprice competition. Not only does the rapid increase in the value of the team indicate its nonprice competitive savvy, attendance levels also correspond to this fact (table 4)'. In the 19 years before the Cubs were sold, the Northsiders averaged 1.165 million fans per season. In the 19 years since the Cubs have been purchased, the average attendance has increased by more than a million fans per year to 2.169 million per summer. Over the same 19-year period before 1981, the White Sox averaged 1.068 million fans per season. However, in the 19 years since the Cubs were purchased, Sox attendance has only increased to 1.790 million per year. Furthermore, this number is distorted by a three-year jump in attendance caused by the White Sox new stadium (Thus the five-year market share figures are most accurate.) All the while, Cubs and Sox tickets have been priced relatively similarly. If the market is assessed for the last five years, the Cubs have about 60% of the market share. Therefore, it is obvious that the Tribune Company has increased its market share through nonprice competition. This nonprice competition takes the form of advertisements, radio and television broadcasts, print media coverage, stadium atmosphere and many other mediums. Perhaps, the most unique form this competition takes is 'player draw'. Few industries are able to market a labor force as baseball does. Big name attractions such as Sammy Sosa, Mark Grace (formerly), Kerry Wood, Frank Thomas, and Ray Durham are strong forces in the Chicago baseball market.
Due to the fact that Baseball is a sport, many business decisions do not make sense. In the July 2000 Commissioner's Blue Ribbon Economic Report, Major League Baseball claims that only three teams have been profitable from 1995-1999 (49). (Many industry experts contest this claim.) Assuming MLB's figures are indeed correct, a number of teams should be going bankrupt. Furthermore, the report claims that of the 13 teams sold in the previous decade, five teams incurred a net loss for the owner while eight owners profited from the sales (51). However, no team in baseball has gone out of business. This leaves two possible conclusions: MLB's numbers are incorrect, or baseball team owners are not operating to turn a profit. In all likelihood, baseball's business structure is a compromise of the two possibilities. While it would be very difficult to examine the accuracy of the Blue Ribbon Report's data, it is possible to investigate non-economic motives of Chicago baseball owners.
The White Sox owner, Jerry Reinsdorf exemplifies one common noneconomic motive: Enjoyment. When Reinsdorf purchased the White Sox in 1980, he purchased the team because he was a baseball fan and wanted to have fun while trying to make money (Heylar 243). Reinsdorf was already a wealthy man, having made a fortune in tax shelters, thus he did not purchase the White Sox to turn a profit (Heylar 243).
The Chicago Cubs are owned by the Tribune Company and are representative of corporately owned teams. While the Tribune Company is trying to make the most money possible, it is not advantageous to show this profit in the Chicago Cubs books. This is because MLB imposes a luxury tax on the most profitable teams to implement revenue sharing. Therefore, by showing a loss in their books, the Tribune Company is able to avoid some of this tax. The Tribune Company is able to hide revenues because it is a vertically integrated company (Heylar 244). Vertical integration occurs when a company owns all the steps in production of a good or service (McConnell and Brue 365). Since the Tribune owns radio stations, television stations, newspapers, and other media, the Chicago Cubs provide programming and 'filler space'. Thus, owning the Cubs increases the value of the Tribune Company's other holdings (Chart 3).
Because of each owner's non-economic motives, not all the Chicago baseball business decisions make economic sense. For instance, the Cubs might pay more money to a popular player than the labor market would seem to justify. However, the marginal value the player contributes to the team is only a fraction of the value the player contributes to the Tribune Company as a whole. In the same situation, Jerry Reinsdorf might pay the star player more than the market value for his services because Reinsdorf wants to win.
In what is perhaps the most ironic twist, these productive inefficiencies are characteristic of an oligopoly (McConnell and Brue 252). Productive efficiency implies that a firm is producing at its least possible cost (graph 11) (McConnell and Brue 24). The previous scenarios of illogical player decisions are good examples of productive inefficiency. The reason oligopolies can operate inefficiently is that there is a lack of competition (McConnell and Brue 252.) Thus, the factors that define an oligopoly, such as blocked entry, differentiated products, and collusion produce the market conditions that allow a firm to operate inefficiently. And therefore, with no competition to drive prices down, the oligopolist is free to operate inefficiently.
As an industry, Major League Baseball (MLB) is the only American Industry that is a self-regulating monopoly exempt from anti-trust laws (Zimbalist). This exemption was established in 1922 when Justice Oliver Wendell Holmes wrote that MLB was exempt from anti-trust legislation because it did not participate in interstate commerce (Zimbaiist). Although this logic is quite obviously, and clearly flawed, the Supreme Court upheld the decision in 1953, and 1972 (Zimbalist). As a direct result of MLB's exemption, Baseball has operated in an unconventional manner for the greater part of the twentieth century. Thus, in attempting to discern the economic structure of Chicago's local baseball market, there are many significant obstacles. It is possible to make theoretical guesses about the local baseball business structure, but finding data to back up the theory is often difficult or impossible. Due to MLB's ownership structure and the lack of any regulating agency, this data is often hidden behind closed doors or purposely obscured. Furthermore, the data that is released by the clubs in their financial statements can be erroneous and dissembling.
Throughout this paper, gate attendance was used to measure market share. This assumption is obviously misleading. The uncertainty is a direct result of the nature of baseball. In most business markets, it is easy to gauge the number of consumers a company serves by counting the quantity of goods produced, or the services rendered. However, this is not the case in baseball. Not only can games be seen at the stadium, they can also be seen on television, heard on radio, and read about in newspapers. Furthermore, broadcast ratings are misleading and vague because two teams are playing in any one game. For example, ratings would be expected to rise when a team such as the Milwaukee Brewers plays a Chicago team. Milwaukee's vicinity to Chicago means that many Brewer's fans can watch the Chicago telecasts, thus unrealistically exaggerating market share. The problem is further complicated because both the White Sox and the Cubs appear on seven different television networks during the course of the year. (WGN, ESPN, FOX, NBC, TBS, WCIU, and CLTV). Therefore, mere gate attendance is a poor estimate of market share, but has fewer variables than trying to include broadcast ratings. In the case of Chicago baseball, using only gate attendance as a measure of market share artificially increases the market share of the two minor league teams. Neither the Cougars, nor the Flyers have television or radio contracts. While the minor league teams are not strongly marketed, the major league teams both have radio and television contracts. These contracts would tend to increase market share, which would increase the value of the Herfindahl index sharply in both the oligopoly and duopoly models.
In the American economy, it would be difficult to find any market, which operates in full compliance with a specific business structure. The defining characteristics of all market structures are therefore guiding principles used to examine and classify business practices. Only in the world of economic theory does a perfect oligopoly exist. Thus, in looking at the Chicago baseball market, not all defining characteristics of an oligopoly market structure are displayed. Still, the most fundamental and common characteristics of an oligopoly are present.
There are only four professional baseball teams in the Chicago area, of these four, more than 87% of the market is dominated by two teams (table 1). Thus, the market clearly meets the most important criterion in determining an oligopoly market: fewness of teams (McConnell and Brue 240). Furthermore, both team's ticket prices indicate that the Cubs and the Sox exhibit mutual interdependence in determining ticket price. Moreover, the enormous legal and capital investment barriers to entering the market fulfill the limited entry characteristic of an oligopoly. In addition, the past nineteen years have shown that nonprice competition is the major factor in determining market share. On these four crucial characteristics alone, the Chicago baseball market could be sufficiently defined as an oligopoly market. However, the Chicago baseball market also exhibits some minor characteristics of an oligopoly market: product differentiation, price discrimination, collusion, and productive inefficiency. These minor features ensure a much stronger and detailed diagnosis: The Chicago baseball market structure is a collusive, profit seeking duopoly which operates within the framework of a competitive league sport, and is significantly affected by noneconomic motives.
Adomites, Paul, et al., Treasury of Baseball: A celebration of America's Pastime. Lincolnwood: Publications International, LTD., 1994.
Greenstein, Teddy, "Cubs Richer Than They Say?" Chicago Tribune, 4 February 2001: Sports
Helyar, John, Lords of the Realm: The Real History of Baseball. New York: Random House, 1994.
McConnell, Campbell R., and Brue, Stanley L., Microeconomics. New York: McGraw-Hill Inc., 1996.
Myers, Doug, Essential Cubs: facts, feats &firsts -from the batter's boxto the bullpen to the bleachers. Lincolnwood: Contemporary Publishing Group, Inc., 1999.Samuelson, Paul A., Economics. 9th ed. New York: McGraw-Hill, 1973.
Zimbalist, Andrew, Address. The Economics of Baseball. Conway, NH, 19 August 1992. (www.zmag.org/Zmag/articles/barzimb.htm)
This page is still under construction, the following Tables, Charts, and Graphs were included with the paper originally, and will eventually be loaded onto this webpage.
Tables Charts & Graphs:
Table 1: Attendance and Market Share 4
Table 2: Ticket Prices 6
Table 3: Ticket prices in two team markets 6
Table 4: Changing Market Share 15
Chart 1: Chicago baseball market shares 4
Chart 2: Herfindahl Index 5
Chart 3: Tribune Company revenue flow 17
Graph 1: Ticket prices: supply and demand 7
Graph 2: Perfect price discrimination 8
Graph 3: No price discrimination 8
Graph 4: Collusive vs. normal profits 9
Graph 5: Price discrimination collusion 11
Graph 6: Two sets of curves 11
Graph 7: The kinked demand curve 12
Graph 8: Demand for ball players 13
Graph 9: Demand-pull inflation 14
Graph 10: Scarcity creates value 14
Graph 11: Productive inefficiency 17
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