The Baseball Economist: The Real Game Exposed (32 page)

This model has its problems. A natural monopoly model of MLB does not discount the possibility of a rival league entering the market all at once with the optimal number of teams, thereby taking advantage of the economies of scale in baseball production and replacing MLB altogether. If baseball is a natural monopoly and the optimal number of teams in the league is forty, while MLB produces only thirty, then why can’t a new league enter as a natural monopoly, provide a superior product to baseball fans for a cheaper price, and put MLB out of business altogether? According to the theory of contestable markets, this is a completely plausible possibility.

Contestable market
theory maintains that as long as the cost of entry and exit are low, merely the threat of entry by potential competitors is sufficient to induce a single producer to generate the socially optimal output of the product. Like the theories of perfectly competitive and monopoly markets discussed above, the market must meet several conditions for the threat of competition to produce the optimal output with only a single producer:

How does the baseball market fit the assumptions of contestable markets? The first assumption is certainly true. There are many potential team owners inside and outside of MLB who have the knowledge and skill to operate baseball franchises. Also, the labor would be drawn from the same pool as MLB, and therefore labor prices would be identical in both leagues. Current MLB players are not bound to play within MLB. If a new league rose up, any player could jump from the majors or minors to a team in a competing league. Just as the owners tried to open the 1995 season with replacement players, players could just as easily jump to a replacement league. The easiest targets for a rogue league would be players who are not eligible for free agency. According to MLB’s reserve agreement with the player’s union, these players are restricted to one team that owns their rights to play in MLB for their first six years in the big leagues. This allows teams to pay these players substantially less than the revenue they generate for their teams.

The second assumption is a bit more complicated. Simply put, the threat of entry is credible to an existing firm as long as entry and exit are low-cost. This does not mean that firms do not bear start-up costs or risks from entering markets, only that if a firm is not directly prohibited from entering a market and it decides to leave, it can liquidate its capital assets for a price equal to the cost of purchase minus any wear on the capital. For example, a firm that builds a T-shirt factory must be able to sell the machines that make T-shirts on the open market to another buyer at a prices equal to the depreciated value of the machines used in making T-shirts while the factory was in operation. If the industry meets these entry/exit capability criteria, this industry is subject to competitive entry pressures.

The physical capital owned by a baseball team includes office equipment, office space, and tools for skilled labor, for the most part like any other business. The biggest capital asset of interest is the stadium where the game it played. The unique stadium required for baseball is a potential barrier to entry by any rival league. Any new team wishing to compete with MLB must provide a stadium of quality and capacity similar to MLB facilities. If the league fails, the stadium owners can receive some value for the stadium, but probably less than they would receive from selling it for use as a baseball stadium.

One obvious solution to this problem is to use one of the many existing baseball stadiums that are not currently hosting a team, until the league gains a sense of permanency. Some of these parks include minor-league facilities. Most potential major-league cities host Triple-A minor-league teams, which draw decent-sized crowds. Almost all of these stadiums could be expanded quickly to accommodate a larger audience. Also, public stadiums previously occupied by MLB teams could provide potential new homes to new teams. For example, Olympic Stadium in Montreal, Candlestick Park in San Francisco, and the Astrodome in Houston are all operable sports stadiums that could host a professional baseball team. Even if the stadiums of the new teams were not quite as nice as current MLB facilities, owners could compensate fans in other ways, such as offering better baseball, cheaper concessions, etc. And recall from above the success of the USFL in finding stadiums for its football games to compete with the NFL. Finding a place to play the game is not a huge obstacle for a league. Baseball has been played for too long and too widely to make finding a place to play a real problem.

It seems that economic theories can only give us competition predictions without absolute answers. Unfortunately there is no way to know which one is right. But history sheds light on the subject. Economist James Quirk compiles an excellent economic history of rival leagues in baseball in his book with Rodney Fort,
Pay Dirt
.

In the history of American professional baseball six leagues have challenged the dominant league to sell major-league baseball, including the AL, which was started as a competing league before it agreed to join forces with the NL in 1903. The American Association (1882–1891, 12 teams), the Players League (1890, 8 teams), the Union Association (1884, 8 teams), the Federal League (1914–1915, 8 teams), and the Continental League (1960s, 8 teams) have all attempted to meet the demand of baseball fans that was not met by the dominant league.

The American Association was the first baseball league to challenge the NL, which began play in 1876. For several reasons 1882 was a good time to enter the baseball business. After a gambling scandal caused several NL teams to fold, seven of the ten most populous cities in America lacked major-league teams. On top of this, the NL decided to cease Sunday games and remove beer from concessions to clean up its reputation. But this was not what fans like Homer Simpson, who believes baseball too boring to be watched without beer, wanted. The American Association brought teams to cities that the NL had abandoned, served beer and liquor, played Sunday games, and charged half the NL ticket price. In the first year of American Association operation, the new league and the NL raided each other’s rosters; however, the leagues eventually enforced some agreements to prevent this. For most of the 1880s the leagues coexisted rather peacefully as the majority of their teams played in different cities.

The Union Association joined the competition in 1884, though its main competition was the American Association, not the NL. In response to the Union Association’s entry to its turf, the American Association expanded from eight to twelve teams. When the Union Association could not compete, it folded after a year, and the American Association then dropped back to eight teams.

The American Association and the NL coexisted as rival leagues until 1890, when the Players League came into existence. Seven of the eight Players League teams played in cities already supported by the NL or the American Association. In an attempt to survive, the Players League raided the best talent of the incumbent leagues, which resulted in its teams attracting more fans than their hometown rivals in both incumbent leagues. All of the leagues suffered losses, and there was no way the baseball market could support all three. The leaders of the Players League reached agreements with both the American Association and the NL that ended the new league, with its rivals purchasing most of the Players League player contracts. But the 1890 season also signaled the beginning of the end of the American Association, with several of its teams folding after the season. Following the 1891 season, the NL purchased all of the American Association’s assets and accepted its four strongest franchises, expanding to a twelve-team league. From 1882 to 1889 the NL continued to operate with twelve teams, but for the 1900 season the owners bought out four teams and the league returned to its original eight-team size—dropping Baltimore, Cleveland, Louisville, and Washington.

Once again, the NL would pay for its failure to offer baseball to areas that could support a team. The American League was originally just a minor league that decided to step up to the major-league level. Not surprisingly, three of its eight teams played in cities dropped by the NL, although Baltimore did move to New York in 1903 to become the team that would one day be known as the Yankees. The AL stocked 60 percent of its players from NL clubs during its inaugural year as a major league, and it drew more fans than the NL during its first two years of existence. It was particularly successful in cities where it competed directly with the NL. The AL ultimately succeeded. In 1903 the AL and NL became the organization we know today as Major League Baseball, with a merger that kept the leagues separate, but in which each would agree to honor player contracts.

The Federal League is the most famous of the rogue leagues, for its role in creating the antitrust exemption in baseball. In 1914 the Federal League opened as a major league with eight teams and eighty players from AL and NL rosters. In its first year of operation, attendance in the NL and AL dropped by 40 percent and 23 percent respectively. This is even more astonishing considering the Federal League competed with AL or NL teams in only four cities. But after the 1915 season the Federal League was suffering financially—two teams went bankrupt— and the NL and AL bought it out. However, the owner of the Baltimore Terrapins refused to agree to the settlement and went ahead with a previously filed antitrust lawsuit against the MLB.

But the most influential of these leagues may have actually been the one that never played a single game. The Continental League was founded at a time when many baseball fans felt neglected by existing leagues. From the end of the Federal League, in 1915, until 1961, there were no new major-league clubs added to either league, even though the U.S. was undergoing a dramatic demographic shift in population size and location. During the 1950s the Boston Braves, Brooklyn Dodgers, and New York Giants all moved west, to Milwaukee, Los Angeles, and San Francisco. This was particularly upsetting to New York City Mayor Robert Wagner, who wanted the NL to put a team in New York, which had suddenly dropped from hosting three teams to one. Wagner hired lawyer William Shea—the namesake of the Mets stadium—who then brought in baseball’s entrepreneur extraordinaire, Branch Rickey, to oversee the formation of a new league. The Continental League would include eight teams, in Atlanta, Buffalo, Dallas, Denver, Houston, Minneapolis, New York, and Toronto. The goal of the Continental League was to expand into markets that MLB was neglecting; only New York hosted a major-league team at the time. Branch Rickey put a real scare into the dominant league, especially when he threatened to stock his rosters with its players. Rickey had been told he was wrong before, but he was proven right over and over again. MLB decided it was in its best interest to seek a deal with the Continental League, and the leagues expanded into four cites, three of which were hosting Continental League teams (New York, Houston, Minneapolis, plus Los Angeles).

Since its challenges, Major League Baseball seems to have learned its lesson; as the country has grown, so have the leagues. Baseball continued its expansion in 1969, 1977, 1993, and 1998, to reach its current size of thirty teams. Unlike its past expansions, no explicit external threat of entry was necessary to force the leagues to act. Although a few new leagues have been formed on paper, none have been taken seriously. MLB’s failure to provide baseball to areas that could support it has proved to be costly to owners. Though only one of the leagues survived intact (AL), the rival leagues had a significant impact on the league we know today. Four current MLB franchises were once members of the American Association: Dodgers, Pirates, Reds, and Cardinals. Three cities gained major-league teams after pressure from the Federal League, and four cities gained teams due to pressure from the Continental League. In each instance where a league entered to compete with MLB, MLB revenues suffered. The lesson learned by the owners is that they must supply what the baseball fans want, or someone else will. And although MLB can weather the storm, it would prefer not to. The only way to prevent this pain is to respond quickly to provide baseball to fans willing to pay for it.

Because no rival league has put teams on the field since the Federal League folded in 1915, it seems hard for current fans to imagine the hidden competition MLB must address. But MLB’s actions are consistent with the economic model of a contestable market, in which the threat of competition is sufficient to cause a single entity to properly supply the market. MLB has tried to act like a monopolist several times by shrinking its size or ignoring important markets, but in each instance a competing league has threatened to enter the market, inflicting financial losses on MLB owners. And MLB has always countered such a threat with expansion to meet unsatisfied consumer demand. Since the near entry of Branch Rickey’s Continental League in 1960, MLB has actively sought potential markets to prevent any room for entry.

This buying up of baseball markets to prevent rival league entry may seem like monopoly behavior; however, what is harmful about monopoly behavior is not that competitors beat up on one another, but that a dominant supplier restricts the provision of its product to consumers. If MLB wants to hurt rival leagues by providing more baseball, then I am all for it! It is the ends, not the means, that economists care about in the allocation of goods and services from the competitive process. The same competitive pressures that drive competitive markets are still in place in contestable industries. Has the competitive pressure that fueled interleague baseball competition in the past evaporated, or does that competitive pressure lurk in the minds of owners, who fear the entry by a new outlaw league? The fear probably still lurks. We have plenty of rich men and women looking to be loved by baseball fans across the continent. I doubt that our current stock of eccentric wealthy egomaniacs could leave large quantities of money and public adoration alone. If MLB is acting as a monopoly, there is still a lot of money and love available for the taking. And I have a feeling that the current stock of owners who are members of this crowd are far more familiar with this threat than the average baseball fan realizes. Government intervention in the baseball market is unnecessary and might possibly do more harm than good.