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Chapter 9

Chapter 9. Labor Market Imperfections. The Other Key to Leagues: Monopsony. One buyer of a good or service One company town Monopsonist pays less & buys less Monopsony comes from Lack of competing leagues Reserve clause binding players to teams

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Chapter 9

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  1. Chapter 9 Labor Market Imperfections

  2. The Other Key to Leagues: Monopsony • One buyer of a good or service • One company town • Monopsonist pays less & buys less • Monopsony comes from • Lack of competing leagues • Reserve clause binding players to teams • The reserve clause gave teams a lifetime claim to players • You play for the Browns – or not at all • Results in exploitation of employees • Underpay • Poor working conditions

  3. The Impact of Rival Leagues • Undermines monopsony power • Salaries rise with serious challenges • In 1960, when the AFL appeared to challenge the NFL, players salaries increased until merger between the AFL & NFL in 1969, at which point players’ salaries dropped. • NFL salaries doubled between 1982 and 1986 because of the USFL • Introduced competition for players • In 1983, rookie salaries jumped in the NFL an average of 52% over 1982 salaries. • Between 1970 and 1976 salaries in the NHL more than tripled because of the WHA

  4. Introduction of Free Agency in MLB in 1977 • 1976 average compensation = $54,330 • 1977 average compensation = $77,292 • 1986 average compensation = $431,500

  5. Introduction of Free Agency in MLB in 1977

  6. Monopsony and Baseball • Initially players controlled the game • Governing body: National Assn of Professional Base Ball Players • It could not keep players from jumping contracts • Pittsburgh Pirates named for piracy of players from other teams • Then in 1887, National League of Baseball Clubs • Teams allowed to reserve 5 players • Reservation eventually extended to all player contracts • Becomes the Reserve Clause - part of the standard contract

  7. The Reserve Clause Seems Innocent • Bound players for length of contract plus one year • The key to binding players: • Players were not allowed to play without a contract • Other sports leagues copy

  8. Free Agency • No major sport still has a reserve clause • Free agency came to NFL (1994), NBA (1981), and NHL (1993) through the courts • MLB players had the toughest path • MLB was exempt from antitrust laws • Union got owners to agree to arbitration panel (video: “This Man Miller”) • Panel overturned the reserve clause • Introduction of Free Agency in 1977 • COLLUSION BY OWNERS TO DESTROY FREE AGENT MARKET: 1987 (article; video: Collusion!)

  9. Unrestricted Agency • Can sign with any team • Eligibility • MLB: After 6 years • NBA: After 4 years if a 1st round draft pick • Otherwise no restriction • NFL: After 4 years if contract has expired • NHL: Has a complex formula • Depends on age, position, and number of games played

  10. Restricted Free Agency • Player’s original team has right of first refusal • It can retain the player by matching an offer • Eligibility • MLB does not have restricted free agency • NBA: After 3 years if a 1st round draft pick • Otherwise does not exist • NFL: After 3 years if contract has expired • NHL: Has a complex formula

  11. Salary Arbitration • A way to deal with disputes • Arbitrators play the judge • Binding: sides pre-commit to judgment • Non-binding: only indirect pressure to accept • Exists in NHL and MLB • MLB: Uses Final Offer Arbitration (FOA) • Each side makes one offer • Arbitrator must choose one • Cannot impose/propose independent solution • Restores incentive to compromise

  12. Winning by Losing • Players have lost more than half the arbitration cases • But it still has had a huge impact on salaries • 111 player filed for free agency in 2009 • Only 3 actually went through arbitration because the rest settled beforehand. • Players’ union has said that FOA has had a bigger impact on salaries than free agency • The average salary increase for the 111 players was 143%

  13. Measuring Monopsony Power: Empirical Paper 2 • Krautmann, von Allmen and Berri (2009) compare 3 major sports leagues • Players who are not eligible for arbitration or restricted free agency • Are paid 66% of their MRP in the NBA • Are paid 50% of their MRP in the NFL • Are paid 19% of their MRP in MLB • When they are eligible • They receive 59% of their MRP in the NFL • They receive 86% of their MRP in MLB

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