Anthony Krautmann, “Buying a Pennant in Major League Baseball,” Working Paper, DePaul University, 2003.

 

Professor Krautmann (DePaul University) analyzes the relationship between market size and the allocation of playing talent in Major League Baseball (MLB).  The importance of the analysis is that market size is likely to impact the ability of a team to generate revenue, and greater revenue for large-market teams may lead to the purchase of more playing talent than small-market teams can afford.  Therefore, differences in market size may impact competitive balance. 

 

            This likely connection between market size and competitive balance is not a new idea, but Krautmann presents a unique methodology for analyzing the connection.  His empirical model estimates revenue functions separately for large-market and small-market teams.  This grouping of teams by market size is based upon metropolitan population, and the dividing point is the median population of all metropolitan areas that have a MLB team, 4.5 million.  Comparisons of the two functions are the basis for his results.

 

            Krautmann finds that the revenue function of large-market teams is significantly greater than that of small-market teams.  Specifically, he estimates that the revenue from an additional win is worth $1.9 million in large markets, but only $1.2 million in small markets.  Therefore, it is not surprising that many of the superstar players migrate from small market teams to large market teams when they become free agents.  These players generate more revenue for the large-market teams, so these teams can afford to pay them higher salaries.

           

Krautmann concludes that large-market teams have dominated MLB since the 1994/95 labor dispute, but disparities in revenue have characterized the sport for a much longer time.  He suggests that a strong commissioner may be essential if MLB is to achieve greater competitive balance as was exhibited in the 1980’s.

 

In addition to the empirical analysis, this paper also presents an excellent discussion of three alternative models of MLB labor markets.  Intelligent readers with a principles-level knowledge of economics will be able to understand most of the substance of this paper.  The statistical technique is multiple regression, and Krautmann’s results should be of interest to all “business of baseball” fans.  They are important to the continuing discussion of the competitive balance issue.   

 

 

Reviewed by:            Lawrence Hadley

University of Dayton

                        Dayton, OH  45469-2251

                        937-229-2403

                        hadleyla@udayton.edu