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Law and Economics Working Papers Series
Working Paper No. 00-07
September, 2000
OPEN COMPETITION IN LEAGUE SPORTS
STEFAN SZYMANSKI STEPHEN F. ROSS
Imperial College, London University of Illinois
This paper can be downloaded without charge from the Social Science Research Network
Electronic Paper Collection:
http://papers.ssrn.com/pape.tar?abstract_id=243756
2
OPEN COMPETITION IN LEAGUE SPORTS
STEFAN SZYMANSKI STEPHEN F. ROSS
Imperial College, London University of Illinois
The fundamental difference between the structure of team sports in the U.S. and in the rest of the world
is openness. In the U.S., sports leagues are closed: membership of the league is in the gift of the existing
members, who typically only grant the right of entry in exchange for a substantial fee. Outside of the
U.S., teams sports leagues are open: membership of the league is contingent on success. Sports are
organized in ascending tiers (generally called divisions) and every year the worst performing teams are
relegated to the next lowest division and replaced by the best performing teams from that division. This
system operates in soccer, rugby (league and union), European basketball, cricket and almost all other
team sports.
Our main argument in this paper is that the institution of promotion and relegation tends to raise
consumer welfare by increasing effective competition among the teams in a league. Because teams seek
to avoid relegation as well as to win championships, they have greater incentives to invest in players than
teams participating in closed competitions. For lesser teams in lower divisions the allure of promotion to
the top division enhances the incentive to invest in players and provides added interest to junior league
competition. Moreover, promotion provides a market-based means of permitting new entry to check
the power of incumbent clubs to exercise market power – most notably their ability to secure tax
subsidies for stadia.
Promotion and relegation is in fact an ideal structure for surgical antitrust intervention to promote entry,
since it involves replacing the least efficient (in terms of wins) incumbent with the most efficient entrant.
Moreover, entry is only conditional on continuing success, so that a relegated incumbent has an
opportunity to recapture its position the following season. In this sense, promotion and relegation is
analogous to the Baumol-Willig efficient components pricing rule (ECPR), which requires incumbents to
grant access on terms which, in a contestable market, ensure that only entrants more efficient than the
incumbent can enter the market. We justify antitrust intervention through an argument that the decision
by current clubs to maintain a closed-league structure constitutes an unreasonable restraint of trade.
3
OPEN COMPETITION IN LEAGUE SPORTS
STEFAN SZYMANSKI STEPHEN F. ROSS
Imperial College, London University of Illinois
I. INTRODUCTION
The fundamental difference between the structure of team sports in the U.S. and in the rest of
the world is openness. In the U.S., sports leagues are closed: membership of the league is in the gift of
the existing members, who typically only grant the right of entry in exchange for a substantial fee. This is
true of all the major team sports leagues in the U.S.: the National Football League (NFL), Major
League Baseball (MLB), the National Basketball Association (NBA) and the National Hockey League
(NHL). Outside of the U.S., teams sports leagues are open: membership of the league is contingent on
success. Sports are organized in ascending tiers (generally called divisions) and every year the worst
performing teams are relegated to the next lowest division and replaced by the best performing teams
from that division. This system operates in soccer, rugby (league and union), European basketball,
cricket and almost all other team sports.
This structural fact has significant consequences for the conduct and performance of sports
leagues in the U.S. and the rest of the world. It also has potentially important consequences for the
4
antitrust treatment of sports leagues. Yet oddly there has been very little research on the impact of
openness on the organization of sports leagues.
Our main argument in this paper is that the institution of promotion and relegation tends to raise
consumer welfare by increasing effective competition among the teams in a league. Relegation involves
participating in a lower standard of competition with a lower degree of interest to the fans, and therefore
a smaller revenue generating potential for the team owners. Because teams seek to avoid relegation as
well as to win championships, they have greater incentives to invest in players than teams participating in
closed competitions. For lesser teams in lower divisions the allure of promotion to the top division
enhances the incentive to invest in players and provides added interest to junior league competition.
Moreover, promotion provides a market-based means of permitting new entry to check the power of
incumbent clubs to exercise market power.
We believe that these effects involve a direct gain for consumers (sports fans) since the
additional efforts of their team enhance the quality of the play while the excitement of promotion and
relegation struggles add an extra dimension to league competition. We also believe that consumers gain
indirectly, because of the implications of promotion and relegation for the economic structure of team
sports. To understand this point one must first recognize that the treatment of competitive restraints
among members of sports leagues is considerably more permissive than in the case of most businesses.
All sorts of rules involving the sharing of revenue between rival clubs, significant barriers to entry into the
league joint venture, numerous agreements among clubs limiting their competition for players, restrictions
5
on the sale of broadcast rights, and limitations on the internal business structure of member clubs are all
tolerated unless demonstrably unreasonable in the sports context, but would be unlikely to be
acceptable under antitrust laws if employed in other industries. This legal generosity stems from the
recognition that sports leagues have a special character: that teams cannot produce their output without
the inputs of their rivals and that a more balanced competition is more interesting to consumers.
Restraints that promote balance are therefore deemed justifiable, and those listed above have all been
accepted by the courts or the legislature as legitimate restraints (Ross, 1997).
However, numerous commentators have expressed concern about the potential for abuse of
market power that has been created by the permissive regime applied to sports leagues (e.g. Quirk and
Fort (1999), Scully (1995) or Zimbalist (1992). Examples include the hiking of ticket prices,
indifference to the interests of committed fans, exploitation of players and racial discrimination. But
perhaps the most notable abuse has involved public subsidies for new stadia. Since 1960 almost every
major league team has benefited from a public subsidy of some kind (Noll and Zimbalist (1997)). In
most cases these subsidies have been the result of a bidding war between municipal authorities. Noll and
Zimbalist characterize the situation thus:
“All major sports are controlled by monopoly leagues. Like monopolists anywhere these
leagues profit from a scarcity of teams. By creating a situation in which several cities that are viable
franchise sites do not have teams, the leagues set up competitive bidding for any team that becomes
available, whether through expansion or relocation. Cities that lack a team then become credible threats
6
to induce an existing team to move, as well as to provide a hungry pack of suitors when a league
decides to expand. This situation bids up the price for franchises and the subsidy that a city must expect
to pay in order to capture or retain a team.”
A system of promotion and relegation places a significant limit on the monopoly power of sports
leagues. While preserving the integrity of the league itself, a club’s threat to relocate absent tax subsidies
is diluted (a) by the possibility that the team itself may be relegated and (b) by the creation of alternative
entry routes for cities that do not possess a major league team. In other words, both the expected
benefit of the subsidy for the municipality and expected benefit to the team of its the outside option
(relocation) are diminished. As a result, the ability of teams to extract subsidies is either reduced or
eliminated altogether.
Given its advantages, would a system of promotion and relegation ever be adopted in the U.S.?
We think it unlikely that clubs themselves would now voluntarily introduce such a system. Thus, some
form of government intervention is probably necessary to achieve this result. Promotion and relegation
is in fact an ideal structure for surgical intervention to promote entry, since it involves replacing the least
efficient (in terms of wins) incumbent with the most efficient entrant. Moreover, entry is only conditional
on continuing success, so that a relegated incumbent has an opportunity to recapture its position the
following season. In this sense, promotion and relegation is analogous to the Baumol-Willig efficient
components pricing rule (ECPR), which requires incumbents to grant access on terms which, in a
7
contestable market, ensure that only entrants more efficient than the incumbent can enter the market (see
e.g. Baumol et al (1997)).
The rest of this paper is structured as follows. In the next part we develop a simple model to
analyze the effects of a promotion and relegation system. Section 3 outlines the way that the promotion
and relegation operates in English soccer, where it has existed since the nineteenth century. Section 4
discusses how closed leagues might be challenged under US law and section considers the
implementation of promotion and relegation as a legal remedy. Section 6 concludes.
II. A MODEL OF PROMOTION AND RELEGATION
In general, a larger league will be more attractive than a smaller one. A World Championship title
is more prestigious than a national title, which is more prestigious than a regional competition. The more
inclusive the competition, the more gratifying the victory. However, there are limits to the optimal size of
a league. If each club is to play each other at least once during a season, there are limits imposed by
the physical ability of players to perform in a sequence of matches and by the total supply of talent.
Given the skewed distribution of talent, a larger league tends to create more unbalanced contests. If
expansion leads to more unbalanced contests it can be argued that very large leagues will sacrifice
quality for quantity. Finally, even if talent were evenly spread across clubs, the talent-level for each
team will be diluted; although in many cases the value-added for fans of additional clubs outweighs the
marginal decline in attractiveness for fans of existing teams, at some point this ceases to be the case.
8
These reasons explain why members of a league would want to control access in order to maintain an
optimally sized league, taking into account the underlying distribution of talent, and why the law could
find such control to be legitimate.
However, there are reasons to suppose that league members will be have a tendency to restrict
access below the socially optimal level. The major North American sports leagues are organized as
joint ventures, where entry and other major business decisions are made jointly by the clubs seeking to
maximize their own profits, as opposed to a “single entity” where entry and other decisions would be
made by an executive or Board seeking to maximize overall league profits. Thus, while a single entity
league would ordinarily be expected to expand franchises until the point where marginal revenue equals
zero, the objective of teams in the league will be to choose the number of franchises so as to maximize
average revenue per club.1 This is analogous to the well known observation that a labor-managed firm
will not expand employment as far as a profit maximizing firm (see e.g. Ward (1958) and Meade
(1974)).
1 The point is easily made with a simple model. Suppose each team in a league has a profit function of the form where πi = V + wi
(ti)- ti where ∑
=
=n
jj
i
it
t
w
1
is the success of the team (expressed in the form of win percent), t is the playing talent that produces
success (at a constant marginal cost normalized to unity) and V is some fixed utility associated with the presence of a sports team
in a particular location (which the team is assumed able to extract through stadium subsidies or other means). Social welfare in this
model is simply nπ where n is the number of teams. The symmetric profit maximizing talent investment for each team t* = (n-
1)/n2, and hence π* = V + 1/n. Clearly profits are decreasing in n. However, total welfare is simply nV + 1 and so social welfare is
increasing in n. This is the basis of the under-expansion result.
9
Even though expansion franchises can be assessed a fee to compensate the existing teams for
the loss of expected income (reduced probability of winning a championship, reduced percentage of
revenue from league-wide ventures), for a conventional league revenue function this will imply under-
expansion. Moreover, as noted above, league members have an incentive to expand suboptimally in
order to provide clubs with a credible threat to move to economically viable open markets unless local
taxpayers provide generous tax subsidies. Any expansion can be expected to remove the most viable
markets as threatened relocation sites, thus reducing the ability to acquire subsidies. As Fort and Quirk
(1995) put it, “monopoly profits earned by leagues invite entry, so that one critical aspect of league
decision making is acting to inhibit entry.” (p.1292.) Creating new franchises in locations most likely to
be attractive to an entrant league is one strategy a league can adopt. Moreover, when entry does occur,
it is open the incumbent to absorb all or part of the new league: “If a rival league is successful the
inevitable outcome is merger with the existing league in order to exploit the resulting market power over
players, TV networks and stations, and local governments.” (p1294). This suggests that while strategic
entry deterrence considerations may lead to expansion beyond the point that maximizes average
franchise revenue, it is likely that significant opportunities will remain to obtain monopoly rents.2
2 This observation is perfectly illustrated by Major League Baseball’s experience in the late period from 1959-62. Despite a huge
population growth and major population shift from the northeastern United States throughout the continent, the American and
National Leagues remained constant at eight teams each for the entire century. In 1959, legendary baseball executive Branch
Rickey sought to create a new “Continental League” with franchises in New York (which at the time had only one club, the
Yankees) and Los Angeles (which had only the Dodgers), Houston and Minneapolis-St. Paul (which had no major league club at
the time) and four other locations without any established major league team. Many felt this league would have been viable, but
the two established leagues responded by adding additional teams in New York (the Mets) and Los Angeles (the Angles) as well
as new teams in Houston and Minneapolis-St. Paul. This deprived Rickey of sufficient markets to operate at minimum viable
scale, and forestalled entry.
10
We now develop a model to illustrate the point that an open league system, with promotion and
relegation, will significantly dissipate rents, as well as inefficient rent-seeking activity such creation of
suboptimal entry restrictions, without any of the problems that might be associated with overexpansion.
A. Rent dissipation through spending of rents in the contest
There is a close analogy between league competition and a rent seeking contest (see e.g. Tullock
(1970), Gradstein and Konrad (1999)). In a rent seeking contest, the competitors expend effort in
pursuit of a fixed prize; the higher each contestant’s effort, the greater the probability of winning. In a
league competition teams also expend effort in pursuit of a prize. Although generally the explicit money
value of the Championship Title is small, more successful teams tend to attract a higher degree of
support and thus generate a higher revenue through the sales of tickets, merchandising, etc. In the rent
seeking literature considerable attention has been given to the notion of efficient rent seeking -- whereby
all rents are spent in the contest. Here we are interested in a similar issue -- to what extent will the
possibility of promotion or relegation (a change in the structure of expected rewards) lead to increased
investment in talent and therefore a reduction in economic rents accruing to the club?
(a) A (closed) monopoly league
11
Suppose there existed four feasible locations for a sports team, based on the drawing power of those
teams. We assume that each location can support only one team, while two locations possess a greater
drawing power than the others. In such a universe a number of league configurations are possible. We
focus on the following plausible candidates:
(i) A single symmetric two-team league (based on the larger drawing areas)
(ii) Two symmetric two-team leagues
(iii) A three team league (with one location unserved)
(iv) A four team league
It is natural to suppose that a two-team league in the two largest drawing locations would emerge
initially. Each team (call them 1 and 2) generates income from its franchise and we ignore for the
time-being the possibility of revenue sharing. Revenue is thus a function of the drawing power of each
team in its franchise area and the success of the team (which could be measured by indicators such
as win percent or championship victories). Success in turn depends on the investment made in
playing talent relative to the investments made by the rival team. The relative investment in talent can
be thought of as the ex ante probability of winning. We assume that units of talent can be purchased
a constant marginal cost in the market. We normalize this marginal cost to unity. We analyse per
period profits, assuming that all investment in talent relates to a single year (i.e. clubs sign only one
year contracts). In a closed league, absent any shifts in exogenous parameters, the equilibrium
choices of the clubs will not change from year to year.
12
The drawing power of the teams 1 and 2 is assumed to be to µ > 1 which is the drawing power of
any teams that might choose one of the two smaller locations (potentially teams 3 and 4). Thus the
expected profit of a club in the two-team league in any year is
(1) 1
21
1
1)( t
tt t
E−
+
=
µ
π
In reality the two largest drawing locations might differ in size but this problem has been assumed away
for the closed league. Assuming profit maximization the equilibrium for the two-team league is thus
(2) 2
,
4
** 2121
µ
ππ
µ
==== tt
Admission of a team from a third location would not be profitable for the two incumbents. Given the
lesser drawing power of a team from the third location (team 3) we can compute profits and talent
investments of each team:
(3)
2
2
3
2
3
2
21
2
21
)4()2(
,
)4()2(2
*
)4(2)4(
,
)4(2
**
µ
µ
π
µµµ
µµ
ππ
µ
−
−
=
−−
=
−−−
==
−
==
t
tt
13
Aggregate profits have now fallen by an amount equal to µ(3-µ)/(4-µ). Expansion is not profit
enhancing in aggregate because (a) expected revenues fall and (b) investment in talent increases.3
Expected revenues fall because revenues are equal to the probability of success multiplied by drawing
power. The probabilities are unchanged in aggregate, but the average drawing power has fallen with the
addition of the third team. The impact of expansion from the point of view of the league members is to
dissipate rents through competition for talent. However, the addition of the third team is likely to be
welfare enhancing, because the citizens of the third location would receive the benefit of having a team,
thus offsetting any reduction in welfare of fans caused by the reduced winning probabilities of the two
large drawing teams. The same arguments extend naturally to expansion of the league to a fourth team.
We can compute the investments in talent and profits as follows:
(4)
2
2
43
2
43
2
2
21
2
21
)1(4)2(
,
)1(4)2(3
**
)1(4)12(
,
)1(4)12(3
**
µ
µ
ππ
µµµ µ
µµ
ππ
µ
µµ
+
−
==
+−
==
+−
==
+−
==
tt
tt
Aggregate profits are even lower and investment in talent is even higher in the four team model.
(b) Competing closed leagues
Given that a monopoly league would not voluntarily expand, it is natural to consider the possibility of
3 Note from (3) that the third team would want to invest in a negative quantity of talent for all µ > 2. Assuming that in such cases
14
two two-team leagues. Thus a second two-team league could be established in the two lesser drawing
locations. We assume that this league would be intrinsically less interesting than the league based on
teams from the large drawing locations. Their revenues would be smaller and their profit maximizing
investment in talent would be smaller. Thus we suppose that participation in the second tier league
would confer a lower drawing power, which we represent by a factor λ < 1. Thus the equilibrium
investments in talent and profits in closed two league system are:
(5)
2
,
4
**
2
,
4
**
4343
2121
λ
ππ
λ
µ
ππ
µ
====
====
tt
tt
Note that these assumptions imply that the second-tier league has a negligible effect on profits in the top
tier league, but the existence of the top-tier league reduces the profitability of the second-tier league.
(c) Open leagues
We now consider the possibility that instead of expanding the top tier league, a system of promotion and
relegation is instituted. This means that at the end of each season the worst performing team from the
top-tier (e.g. in terms of win percent) is relegated to the second-tier
league and replaced by the best performing team from the second-tier league. We maintain the
assumption that competition in the second-tier league is less attractive than participation in the top-tier
league. We assume that the starting point for the system is one where the two larger drawing teams are
the team is restricted to zero units of talent, admitting a third team never increases total profits.
15
in the top-tier league.
Once the threat of relegation is introduced, the time dimension of the problem becomes
significant, since current investment decisions will be based on expectations about future profits as well
as current profits. We develop a two period model, so that investments in the first period will be
affected by the prospect of promotion or relegation. In the top tier of an open league the first period
expected profit of team 1 can be written as
(6) 12
21
2
1
21
1
1)()( tD
tt t
D
tt t
E−
+
++
+
=µµ
δδµπ
where Dµ1 is the expected profit of a large drawing team from retaining a place in the top-tier league and
Dµ2 the expected profit following from demotion to the lower-tier league and δ is the discount factor.
Similarly, the expected profit of a team in the second tier is
(7) 32
43
4
1
43
3
3)()( tD
tt t
D
tt t
E−
+
++
+
=
δδλπ
where D1 is the expected profit of a small drawing team from promotion to the top-tier league and D2
the expected profit from remaining the lower-tier league. The symmetric profit maximizing investment in
talent for each club in the top tier the first period is
16
(8) )]([
4
1
**
)]([
4
1
**
2143
2121
DDtt
DDtt
−+==
−+==
δλ
δµ
µµ
The prospect of demotion for teams in the top tier and the prospect of promotion for teams in the
second tier both induce an increase in investment in the first period. The size of these extra investments
depend on the expected profits form competition in the second period.
It is clear that in the second period there will be competition between teams of unequal drawing
power. Given that both teams have the same probability of relegation from the top tier, we assume it is
team 2 that is relegated. Likewise we assume team 3 is promoted. It is straightforward to compute the
investments in talent and levels of profit of the teams in each league. These are
(9)
2
2
4
2
3
2
2
2
2
3
2
3
2
1
2
2
4
2
2
2
2
2
2
3
2
2
2
1
)1(
,
)1(
)1(1
,
)1(
)1(
*,
)1(
*
)1(
*,
)1(
*
µ
λ
π
µ
λµ
π
µ
π
µ
µ
π
µ
λµ
µ
λµ µ
µ
µ
µ
+
=
+
=
+
=
+
=
+
=
+
=
+
=
+
=
tt
tt
(superscripts refer to time period). Given the expected profit in period 2 it is straightforward to derive
the profit maximizing investment in talent and expected profits in period 1
17
(10)
+
−
−==
+
−
−==
+−
+==
+
−
+==
2
1
4
1
3
2
3
1
2
1
1
2
1
4
1
3
2
3
1
2
1
1
)1()1(
4
1
)1()1(
4
1
)1()1(
4
1
**
)1(
)1(
4
1
**
µµλδ
λππ
µµλδ
µππ
µλδ
λ
µµλδ
µ
tt
tt
Note also that, as is to be expected, the value promotion is positive (D1 > D2) and the value of
relegation is negative (Dµ2 < Dµ1). These are the spurs to competition that dissipate the rents of a closed
monopoly league. Rent dissipation occurs through increased investment in playing talent. Higher levels of
investment in playing talent means higher quality of competition on the field.
Of the three main configurations considered (a two-team monopoly league, a closed two-team
two league system and an open two-league system), the open system delivers the highest level of
investment in talent. Investment in talent is also higher than a three-team league or a four-team league as
long as µ is not too close to unity. For example, assuming a discount factor of 0.9, and a discount for
second-tier competition of 50% (= 0.5), the total investment in talent of the teams in the top-tier league
in the first period will be greater than talent investment in a three team league for µ > 1.3. Thus even if it
were decided somehow to mandate an optimal expansion of a closed league (a point on which we are
skeptical), the open system would in fact deliver a better outcome in terms of talent investment. The
open two-league system not only leads to greater aggregate investment, but also greater investment at
18
the highest level of competition. Note that the difference in revenue generating potential between the
divisions (λ) drives the result- if there were no difference then the threat of relegation would be an
empty one. If a closed lower-tier league exists, it will clearly have a lower level of investment in talent
than an open system.
(d) Fan Utility
By modeling leagues as contests, we abstracted to a degree from the utility of the fans who
value these contests. In fact, we would argue that fan utility is a complex notion with several dimensions.
Although most economic models have focused only on the issue of competitive balance - - arguing that
fans derive greater utility from more balanced contests -- in fact one might imagine four ways in which
the fans derive utility. Assuming that success is proportional to a team’s share of playing talent these are:
(i) team success- utility is increasing in ∑
=
n
jj
i
t
t
1
(ii) total talent- utility is increasing in the quality of the players ∑
=
n
jj
t
1
(iii) average talent per team- utility is increasing in the quality of players at each match played
∑
=
n
jj
t
n1
1
19
(iv) competitive balance- utility is increasing for ∑
=
n
jj
i
t
t
1
< 1/n and decreasing for ∑
=
n
jj
i
t
t
1
> 1/n
{SAS: does this need to be modified here to take account of the utility of having a team to
ort?}
This does not take into account fans’ expenditure on tickets, merchandise and so on. If teams were
capable of perfect price discrimination they would simply extract all the consumer surplus of the fans
and fan utility would be identical to revenue. While this is perhaps extreme, it is not obvious that this
issue is critical to the evaluation of the promotion and relegation system. For example, one might
suppose that the clubs can extract a constant fraction of fan utility, thus obviating the need to analyze
issues such as ticket pricing.
The model suggests not only that total talent is increased with open competition but also average
talent per match. Even if all the best potential baseball, basketball, football and hockey players in the
entire world already appear in the North American major leagues, there is likely to be some scope for
improvement through increased expenditure on methods training, and coaching. These improvements
would be driven by the fact the failure would now involve a heavier price than simply waiting for the next
season. Players would try harder, and coaches would work harder to as a natural consequence of
openness so that that “effective” talent on display at matches would increase. Moreover, if there is any
elasticity in the supply of talent, investment in new talent would increase. Note that if the number of the
teams in the top tier were expanded, and promotion involved the admission of significantly inferior
20
teams, then average talent per match could fall. The significance of promotion and relegation is that it
does not require potentially inefficient expansion to produce the efficient increase in competition.
In our model, closed two team leagues are always perfectly balanced while an open system with
promotion and relegation will lead to unbalanced competition in some years. This effect should not be
exaggerated. If we extended our model one period further forward the most likely outcome would be
for the larger drawing team relegated in period to win promotion back to the top tier and the smaller
drawing team that was promoted in period 1 to be relegated. Thus competition would once again be
evenly balanced. In a league with many more teams (say 18 in each tier, as is usually the case in
European soccer), the larger drawing teams are highly unlikely to be relegated. Moreover, it is open to
leagues to share revenues or promote competitive balance in other ways, which is, after all, the basic
rationale for the permissive antitrust regime they currently enjoy.
Because leagues can extract much of the surplus that consumers derive from increased utility in
competitive balance, leagues have an incentive to promote such balance. However, the problem with
schemes like revenue sharing is that while it may improve balance, it reduces the incentives each team
has to make its own product as attractive as possible for its fans, through better players, improved
facilities and stadium, effective marketing, etc. Revenue sharing allows teams, to some degree, to free-
ride on the ancillary revenue generating activities of other teams. For this reason, it may be preferable to
allow teams to retain some fraction of locally generated revenues, thus preserving some competitive
imbalance (as indeed happens even in the NFL, the most egalitarian of all leagues). Compared to a
21
closed league structure, open leagues mitigate the dilemma leagues face of promoting balance and
preserving incentives to compete, to the ultimate benefit of fans. Although any sharing of revenues
derived from local promotion may lessen the incentives for that promotion, open leagues significantly
limit the ability of clubs to free-ride with respect to player talent; a club that seeks to pocket shared
revenue rather than spend it on player talent will find itself relegated. Moreover, because more clubs
will participate in the top-tier league over time, the diversity of fans is better served. In sum, within-
season competitive balance may well increase as clubs in an open league are more willing to share
revenue (knowing that the recipients will have to spend the money on improved balance), while
between-season competitive balance is clearly enhanced. Thus openness might be thought to spread the
benefits of league competition more evenly and thus generate a net increase in welfare.
B. Reduced opportunity for rents through franchise scarcity.
The prior discussion demonstrates how, with four possible locations for teams, the members of
a two-team closed league would resist expansion. If it were argued that a rival league in the remaining
two locations would significantly reduce the rents of the incumbents (perhaps by driving up the marginal
cost of talent), then expansion to a three team league might still occur to pre-empt competition. Leaving
a single market unserved has an additional benefit for the incumbents, in that they can threaten relocate
and use this threat to extract rents from their current location. The repeated use of this threat is well
documented in Noll and Zimbalist. We think of this in the following way. Suppose there are rents that
22
teams cannot extract through conventional means of ticket pricing, broadcasting rights sales and
merchandising- at its most simple this is the consumer surplus associated with reading about the local
team in the newspaper or talking about it with friends. It is socially efficient to extract the quasi-rents
associated with the maintenance of a team of high quality through some form of public subsidy (like the
fixed fee of a two-part tariff). However, it is socially wasteful to extract pure economic rents by
threatening to relocate unless a heavily subsidized facility is provided. This possibility is a consequence
of franchise scarcity and the amount of the rent extracted is the willingness to pay of the unserved
location (and if this is larger than the willingness to pay of taxpayers/voters in the current location the
team moves). The existence of an unserved location enables all of the teams to extract economic rents
from their existing location, whether or not any of them actually move.
Once a system of promotion and relegation is instituted, all credible locations will be served,
even if only by teams competing in the lower tier. The threat of relocation is now of limited value. The
only credible relocation offer in the open system is when a team in small drawing location currently in the
top tier offers to relocate to a large drawing area. However, the amount of rent is much smaller because
(a) second tier competition has a value (b) a second tier team can be promoted in the future (and will be
likely to if it is form a large drawing area) and (c) a team currently in the top tier might end up getting
relegated at some point in the future. All of this suggests that relocation is quite unlikely with a system of
promotion and relegation.4
4 And in Europe, where the promotion and relegation system operates, relocation is almost unheard of.
23
III. PROMOTION AND RELEGATION IN ENGLISH SOCCER
When the twelve-team English Football League was founded in 1888, it was agreed that the
four worst performing teams should have to seek re-election by a vote of the remaining members, a
system borrowed from county cricket. From the beginning it was intended that a second division should
be created, but its provisional title -- the “second class” -- clearly indicated its status. Five years later,
the second division came into being and potential aspirants to league could apply to join either division.
Then in 1898 the system of automatic promotion and relegation from Division 1 to Division 2 was
introduced for two best/worst performing teams in each Division. This basic principle of hierarchical
openness has been adopted throughout the soccer playing world, and in most other team sports played
outside North America. According to one consultation paper issued by the European Union, the
“system of promotion and relegation is one of the key features of European Sport... In theory teams
can start at the lowest rung of the ladder in a regional competition and by dint of sporting merit alone
they reach the top”. (European Commission (1998)).
English football provides a case study to evaluate the impact of promotion and relegation on
league structure and performance. A full financial evaluation is uniquely possible in England because
U.K. Company Law requires that all limited companies file standard financial accounts available for
inspection by the general public that contain details of revenues, wages and profits5.
5 The usefulness of these accounts is enhanced by the fact that all of the companies that operate English football clubs have
24
Mobility between the divisions is more than a theoretical possibility. In any one year there are
92 league clubs, and over the seasons 1976/77 to 1997/98 there have been 99 teams participating in
four professional divisions (there have been a small number of demotions to the lower semi-professional
divisions). Of these 99 teams, only five were never relegated or promoted over the period.6
Furthermore, over the period more teams have ranged between three divisions (43) than have moved
only between two (32), while twelve teams managed to visit all four divisions over the space of twenty
two years.
Expenditure on players represented the largest single cost item for all teams. In the Premier
(top-tier) League, salaries accounted for 52% of total income, while in the second-tier league (called the
Football League First Division), it averaged 68% of income. In the Second and Third Divisions teams
traded at a loss, spending respectively 84% and 97% of their income on salaries. Although Noll (1986)
and Quirk and Fort (1992) have documented the many ways in which teams can understate their true
profitability,7 in English soccer only three Premier League teams reported an average operating surplus
in excess of $10m per year over the five seasons between 1993 and 1998. Of the 72 teams in the
Football League, only eight reported an operating surplus at all. Of all the English clubs, only
Manchester United can be considered to have reported significant and consistent profits.
virtually no other business interests separate from football.
6 Four of these teams have remained in the top division (Arsenal, Coventry, Everton and Liverpool) while one has remained in the
lowest division (Rochdale).
7 The profitability of sports teams is an issue that has sparked particular controversy in the U.S. given the disputes between
owners and player unions about the ability of the clubs to finance wage increases.
25
These figures representing modest profitability were reported not against a background of
relative decline, but on considerable growth. Between 1993 and 1998 aggregate attendance at league
matches rose by nearly 20% to 24.7m. Capacity utilization averaged 90% in the Premier League and
69% in the First Division. Ticket prices rose at an annual rate of around 15% in the 1990s, well in
excess of the rate of inflation, and by the late 1990s the average ticket price for a Premier League match
(when tickets are available) was around $40. TV broadcasting income rose from less than $20m per
year (for entire league) to a more plausible figure of around $250m per year. Low profit figures are thus
explained in part not only by high levels of player spending, but also by significant increases in stadium
expenditure made by the clubs themselves, which has in part made possible the increasing levels of
match attendance.
Skeptics of U.S. team sports profit figures point to the very large values attached to franchises
when they are traded. Such trades are infrequent in England, but in the mid 1980s around 20 English
clubs floated at least part of their equity on the financial markets. According to financial markets theory,
the market value of a stock should reflect the net present value of anticipated earnings. In mid-1999
only three teams had a market capitalization in excess of $100m (Manchester United, Newcastle and
Chelsea). Of the remaining Premier League teams, those that seldom fall into the bottom of the division
had capitalizations just under the $100m mark (Tottenham, Leeds, Aston Villa). Three teams that have
recently moved between divisions or repeatedly faced the threat of relegation- Sunderland, Leicester
and Southampton had market capitalizations of $50m, $20m and $17m respectively- little different from
comparable teams in the First Division.
26
These low market values for teams at the bottom of the Premier League is not simply a
reflection that the UK is a smaller country than the US. Since 1998 Manchester United has been valued
at over $1 billion, making it the most valuable team sports franchise in the world.8 The income of clubs
at the bottom of the Premier League is between five and ten times smaller than that of Manchester
United, but in 1998 still amounted to around $30m per year, compared to the average baseball club
income of about $75m in the same year. Yet the least valuable baseball franchise would sell for well in
excess of two and a half times the market value of an English club threatened with relegation.9
Conversely, there can be little doubt that if Leicester City or Southampton were promised perpetual
membership of the Premier League, their market values would rise sharply.
Finally, it is worth observing that while all clubs have increased investment in stadium facilities,
and several teams have moved to entirely new stadia, none of these investments have been supported
directly by local government and no team has moved out of local area. Even if a local authority had the
power to fund such a move, it would make little sense to invest money in this way, since every local
authority of any size has at least one local team and could plausibly invest in developing its existing team
with a view to promotion up through the divisions.
8 By early 2000 it exceeded $1500m.
9 The Phoenix and Tampa expansion franchises in baseball sold for $135m each in 1997, about seven times the market value of
Southampton and Leicester.
27
IV. AN ANTITRUST CHALLENGE TO THE STRUCTURE OF A CLOSED LEAGUE
Because clubs forming sports leagues must, of necessity, reach agreements on a variety of rules
and regulations, the U.S. Supreme Court has recognized that these agreements should not be
condemned summarily, as conspiracies in restraint of trade in violation of section 1 of the Sherman Act,
as they might in other industries. NCAA v. Board of Regents, 468 U.S. 85, 102 (1984). Where
rivals’ collaboration has efficiency-enhancing potential, the proper legal framework of analysis is the
doctrine of “ancillary restraints.” The doctrine originated in the English common law on restraint of
trade, was imported into American antitrust law by William Howard Taft’s landmark decision in
Addyston Pipe, and remains today the most coherent explanation of Supreme Court decisions in this
area of antitrust law. (Ross, 1993; Piraino, 1999). The doctrine requires courts to evaluate whether
challenged agreements among competitors are ancillary to a efficiency-enhancing collaboration, and, if
so, whether the restraints are reasonably necessary to achieve the benefits of the lawful collaboration.
See, e.g., United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), aff’d, 175 U.S.
211 (1899); Department of Justice (2000).
The Supreme Court effectively incorporated the ancillary restraints doctrine into its analysis of
sports league conduct in the NCAA decision. Having rejected the plaintiff’s claim that an agreement to
restrain output of televised games was illegal per se, the Court examined the restraint to determine its
effect on price, output, and the responsiveness of output to consumer demand. Finding adverse
28
evidence on all three counts, the Court nevertheless proceeded to consider the defendants’ arguments
that the agreement was justified.
The economic analysis detailed above suggests that the decision by member clubs to operate as
a closed league bears the hallmark of an unreasonable restraint of trade. The closed league model
allows the league to restrict the number of franchises below an efficient level, and this scarcity allows the
league to increase the price that consumers (in areas where exclusive territories bar competition) and
taxpayers (in terms of stadium subsidies) must pay. Moreover, the guarantee of permanent presence in
a dominant sports league allows firms to pocket profits, rather than spending them on improved quality
teams, thus rendering output unresponsive to optimal consumer demand.
Although North American sports leagues have faced numerous legal challenges over the years,
the decision by member clubs to operate as a closed league has never been subjected to judicial
scrutiny. The leading case concerning entry is Mid-South Grizzlies v. NFL, 720 F.2d 772 (3d Cir.
1983). In that case, the plaintiff sought entry into a closed league; the court concluded that this was not
a case of rivals conspiring to eliminate other competitors, because the new entrant did not propose to
compete with incumbents.
The court’s rationale would be inapplicable if, instead, the plaintiff had challenged the NFL’s
refusal to create an open-league structure that would allow it the potential to enter the top-tier league
through promotion. Viewed in this light, the existing clubs in the NFL are in competition with each other
29
in two important respects. First, by agreeing to a closed league structure, existing clubs are excluding
potential rivals for stadium subsidies now obtained through threats of relocation. Second, in an open-
league structure all teams would be competing with each other to remain in the top-tier; the decision to
operate as a closed league is thus seen as an agreement to foreclose competition among existing clubs.10
Having established, then, that the agreement to maintain a closed league structure is an
agreement among rivals to eliminate competition among themselves11 and with potential rivals, we adopt
the application of the ancillary restraint doctrine to the exclusion of rivals from joint ventures set forth in
Hovenkamp (1995). Initially, we note that, because unlimited entry is not optimal for sports leagues,12
the refusal to allow open entry can serve a rational purpose other than price fixing, so that per se
condemnation is not appropriate.
Second, we conclude that the exclusion does indeed threaten to reduce output, raise prices, and
render output unresponsive to consumer demand in a properly defined market. As noted above, the
decision to organize a closed league would be challenged as restraining competition for tax subsidies
10 Because this challenge has never been considered in the United States, there are no American precedents on point. Obviously,
an agreement among firms that have never competed against each other in a relevant market not to do so in the future is as much a
horizontal agreement in restraint of trade as an agreement by current rivals to cease competition. Palmer v. BRG of Georgia,
Inc., 498 U.S. 46 (1990). Competition among clubs to remain in a top-tier league has been recognized as a relevant market for
rivalry under Australian competition law. News Ltd. v. Australian Rugby League (1996), 139 A.L.R. 193, 338-39 (Full Fed.
Ct.).
11 Based on previous litigation, sports leagues would argue that the agreement is not among rival clubs but a decision of a single
economic entity. This issue has been exhaustively rehearsed in the literature, for citations, see Ross, 1997. Our analysis of
output by a single firm in contrast to a joint venture demonstrates why sports leagues whose policies are established by member
clubs are not single entities. Moreover, even if a closed league’s decisions on how to allocate labor inputs or how to sell
broadcasting were to be considered the decision of a single entity, the decision to form the league as a closed league, and to
maintain that structure, ought to be subject to scrutiny under section 1.
12 See Part II, supra.
30
and for competition among teams to continue to participate in top-tier competition in that particular
sport. Local taxpayers have no reason to provide substantial subsidies to attract or retain sports
franchises if there were reasonable substitutes.13 Similarly, clubs guaranteed the permanent protection
of a closed league would not enjoy their immunity from new entry if fans in their communities had
reasonable substitutes.14 Where, as in North America, the dominant league in each sport has expanded
to the point that entry by a new league is unlikely because of the scarcity of remaining viable markets,
(Quick and Fort, 1999, at 136) the potential for new entry is not sufficient to prevent the exploitation of
economic power.
Third, and critically, Hovenkamp asks whether the adoption of a closed-league structure can be
shown to “increase venture-wide output.” An antitrust tribunal should “compare the venture’s output
when the applicant is excluded, with its output after the applicant is admitted, including the output of the
new member itself.” (p.123). The economic model discussed above shows that output will in fact
increase in quantity and quality with an open-league structure.
Fourth, like Hovenkamp (p.96), we acknowledge the general principle that compulsory access
rules invite legitimate concerns about free riding, but we do not believe they are substantial in the case of
13 The saga of the Houston Oilers/ Tennessee Titans illustrates this point. The Oilers were founded in 1959 as part of the
maverick American Football League. At the same time, the incumbent NFL had awarded one of its own franchises to Houston.
The market was insufficient to support two teams, so the Oilers prevailed by offering to spend money to refurbish a local
stadium (the NFL Franchise went to Minnesota). Four decades later, with no rival league to engage in bidding, the same team
owner relocated the franchise to Tennessee for nearly $250 million in subsidies. See Houston Post, Oct. 30, 1959, §5, at 2
col.3; Gordon Forbes, Oilers Ready to Pull Trigger on Move, USA TODAY, November 2, 1995, at 4C.
14 Virtually no teams in recent history of major sports have folded, in contrast to the experience of sports leagues in earlier years
when they did not have power, and in contrast to minor sports leagues like Continental Basketball Association and Arena
Football League, that demonstrate constant instability.
31
dominant sports leagues facing no reasonable substitutes. Free riding is solely an ex ante concern that
legal rules requiring firms to do business with others will lead to inefficient output reduction through lack
of investment. In the case of any specific sport, however, our analysis suggests that promotion and
relegation will lead to efficient output increases through increased investment. There is also the
theoretical possibility that our proposal could create a disincentive to new investment in new sports --
the argument might be that people will be less willing to invest in a new cricket league if they knew that,
once established and highly profitable, they will be subject to promotion and relegation rules and thus be
deprived of monopoly rents. We are unpersuaded, for three reasons. First, antitrust law does not
recognize the ability of collaborators to exclude others from the market for the purpose of recouping
initial rents. Suppose the United States Cricket League were formed in eight cities, and with a huge
investment in promoting the sport proved wildly successful. The antitrust laws would still prevent the
owners from engaging in boycotts or other conduct designed to prevent the formation of a rival
American Cricket League, and antitrust judges would reject the argument that -- absent congressionally
recognized protection akin to patent or copyright -- maintenance of the incumbent league as the only
cricket league was necessary to permit their owners to recoup their investment in promoting the sports.
Fashion Originators’ Guild of America v. FTC, 312 U.S. 457 (1941). Secondly, because the
incumbent league could not use anticompetitive means to forestall a rival league, its original investors
could only be assured of rents if the league carried out a successful strategy of entry-forestalling
expansion. Leagues are not always so prescient. Finally, the first mover advantages in sports, like
many other businesses where new products are developed and promoted, are likely to be sufficient
incentive to warrant investment where the market is likely to support it.
32
In sum, proper application of antitrust doctrine relating to competitor joint ventures should find
that the maintenance of a closed-league structure by MLB, NFL, NBA, and NHL constitutes an
unreasonable restraint of trade. Antitrust tribunals should enjoin the operation of closed leagues, and
require them to establish a system that grants reasonable access to top-tier competition to new entrants.
Such access must allow a new entrant who makes skillful business and sport-related decisions to be in
a position to meaningfully compete in the top-tier league with existing clubs within two years.15
V. PROMOTION & RELEGATION AS A LEGAL REMEDY
Procedurally, the incumbent leagues should be given the opportunity to present a plan that
maximizes their legitimate efficient goals while complying with the reasonable access requirement. An
antitrust tribunal should not mandate the form that reasonable access should take absent an unwillingness
of the defendant leagues to cooperate. Without presuming to design a reasonable access requirement,
we offer in this Part a brief discussion of why we think it likely that sports leagues would select a model
roughly maintaining the existing major league as the top-tier league and adding one or two junior
leagues, the lowest tier featuring easy entry. We also discuss some implementation issues regarding
such a structure.
15 cf. Merger guidelines
33
A. Structure
Dominant leagues could maintain their closed structure and comply with the antitrust laws in two
quite different ways. First, the dominant league could divide itself into two or more closed leagues that
were economic competitors, while collaborating on rules and a final champion. Assuming that each
league made its own intra-league decisions about labor market restraints, expansion, and relocation, a
challenger to the closed structure of any individual league would be unable to demonstrate that the
individual league’s rules had any substantial competition-lessening effect. NCAA, 468 U.S. at 116 n.55.
Although this result would have a number of pro-competitive effects, (see Ross, 1987), we believe it
unlikely that a dominant league would choose such an approach. The clubs would lose whatever
economic power that existed in broadcast and souvenir markets. Moreover, although one of us
believes that competition between rival leagues is economically viable (id.), we suspect that many clubs
would be unwilling to risk the possibility that their particular league might be perceived as inferior, with
disastrous results, if it were then excluded from the dominant, closed league.
Second, a league would be unlikely to face liability if it voluntarily admitted any minimally
qualified entrant that could establish a viable plan for success in a new market.16 There a variety of
reasons why we believe clubs in a dominant league would find this remedy unattractive as well. Overall
output might well decline as fans find it difficult to follow all the teams in the league. Because
16 This is the plan proposed by Piraino, 1999.
34
compliance would require admission of new clubs on relatively equal terms, existing dominant clubs
would face each other fewer times. Clubs in local geographic markets potentially capable for
supporting additional teams would face immediate competition (while under promotion and relegation
new entrants in their area would have to earn entry into the top-tier). Finally, easy entry into a closed
league would exacerbate competitive imbalance, which would either result in a loss of fan interest or the
need to substantially increase the amount of revenue sharing from the wealthier clubs, a prospect they
are likely to oppose.
Thus, we believe the most likely scenario would see the establishment of a junior league without
significant obstacles to entry, combined with the ability to gain promotion to higher-tier leagues based on
success. Such an approach is, we suggest, the most efficient way to determine the clubs that should
constitute the top-tier in the sport. It is also the method that minimizes the effect on the wealthy and
powerful teams in the current dominant league. The likelihood that these teams would be delegated is
rather remote. Promotion and regulation allows the clubs to maintain their current schedule of contests
against traditional rivals, and ensures that revenues shared by the wealthy teams with poorer ones
actually are spent on improving competitive balance rather than simply enhancing the profits of weak
teams’ owners.17
In order to meet the standard of meaningful entry within two years, we believe that open entry
must be available no lower than a “third division” within the sport. Leagues can be expected to
17 For example, the Montreal Expos maintain profitability by pocketing shared revenues and maintaining a low payroll.
35
determine whether two have one or two junior leagues, and the size of each league, based on their own
assessment of the net gains and costs for larger leagues.18
B. Issues of Implementation
(Sullivan, 1999).
18 We assume that clubs in the major leagues will prefer to maintain the current number of top-tier league teams. As to the
second-tier league, the clubs would recognize that additional teams will attract significant additional higher revenue if they were
added. Each expansion, though, modestly dilutes the quality of talent available for the remaining second-tier clubs, and modestly
lessens the attractiveness of the product to fans of the remaining clubs by lessening the number of contests between top rivals and
by lessening the chance that each team will be promised.
Under the antitrust laws, joint ventures are permitted to impose entry limits that result in lower
prices, higher output, or output more responsive to consumer demand. This standard provides guidance
as to whether a variety of ancillary rules are reasonably necessary for the efficient operation of the joint
venture.
Currently, closed leagues periodically choose to expand, and then as a separate and secondary
consideration they take steps to ensure that a new franchise is acquired by an owner who meets
acceptable criteria. Reasonable access -- with an eye to the ability of the public to receive the fruits of
competition, rather than protection of specific competitors -- means that objective limits to ensure that
new owners possess personal integrity and have structured new clubs on a financially sound basis would
be permissible. These rules are likely to make the sport more attractive to sports fans, and are unlikely
36
to eliminate so many would-be entrants as to harm competition. Limits must be fair and non-pretexual,
however. Thus, for example, rules limiting indebtedness must apply to existing clubs as well as potential
entrants and rules on stadium and facilities required for entry must not be used to re-establish entry
barriers.
The benefits from open competition would be lost if incumbent firms were able to forestall entry
by foreclosing rivals from inputs necessary for success. The principal assets that could be foreclosed
would be players. Between those players whose contracts expire at the end of each season, college
graduates unable to secure a major league job, and athletes entering the professional market from
college, clubs seeking to enter the market should ordinarily find reasonable access to players.
However, each North American major league currently has rules, embedded in collective bargaining
agreements with their players’ union, that limits the ability of clubs to bid for the services of players, even
at the expiration of their contracts. If new entrants in the second- or third-tier league were subject to
these agreements, it could well foreclose their ability to compete meaningfully. (This is particularly true
because, unlike the case in the rest of the world, North American leagues generally proscribe the
assignment of rights to a player’s services for cash. See, e.g., Finley v. Kuhn, 569 F.2d 527 (7th Cir.
1978).) For entry to be likely, timely, and effective, new clubs must have reasonable access to existing
talent so that incumbent teams cannot simply sink costs in player contracts and so yet again establish
entry barriers. 19
19 See, e.g., Philadelphia World Hockey Club, Inc. v. Philadelphia Hockey Club., Inc., 351 F.Supp. 462 (E.D. Pa.
1972). In that case, the court held that the standard player contract agreed to by all teams of the incumbent National Hockey
League, that bound players to their current employer for at least three years, unlawfully foreclosed rivalry from the rival World
Hockey Association.
37
Similarly, incumbent firms should not be able to foreclose access to markets necessary to gain
revenue. Under the doctrine of Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977), a club
that controls access to an essential facility must grant reasonable access to the facility if it will not
interfere with its own use. Although modern techniques of stadium construction would ordinarily
preclude a finding that use of an existing stadium is essential, short-term use might well be necessary in
specific cases to permit effective entry in two years.
Exclusive contracts regarding the local broadcast rights for games have many legitimate
purposes, but can in particular broadcast markets foreclose access to new entrants. Here, the key issue
would be the length of the contract. Unduly long contracts, or contracts that required the broadcaster
to maintain exclusivity even if the incumbent club were relegated, may be foreclosing in markets where
there are no realistic alternatives.20
Although continuing supervision of the operation of a promotion & relegation system will be
minimal, antitrust tribunals will need to ensure that incumbent clubs are not able to maintain economic
power through unduly restrictive criteria for club ownership or stadium size. In addition, standard
application of the antitrust proscriptions on foreclosing agreements are necessary to ensure that new
clubs can obtain necessary personnel and have access to markets in order to make their entry timely,
likely, and effective.
20 Local affiliates of major television networks are disinclined to broadcasting local sporting events in prime time because of the
conflict with regular series programming, and in many local markets there maybe only one independent over-the-air station and
one cable sports station interested in providing local programming.
38
VI. CONCLUSION
An economic model comparing incentives for professional sports teams demonstrates that a
structure of open competition, whereby new entrants have the ability to displace existing clubs in the
top-tier league within a professional sport, is likely to increase incentives to invest in player talent and
decrease the ability of clubs to extract monopoly rents from state and local governments under threat of
relocating the club elsewhere. But, after all, the Sherman Act is a "consumer welfare prescription,"
Reiter v. Sonotone Corp., 442 U.S. 330 (1979), and the most relevant conclusion we draw is that
open competition appears to be good for sports fans. We predict that sports leagues would respond to
an antitrust tribunal’s finding that their maintenance of a closed league violates section 1 of the Sherman
Act by creating one or more lower-tiered leagues, promoting the top teams from the second-tier league
into the major league each season, while relegating the worst teams from the major league. Fans of
teams that successfully stave off relegation are treated to more exciting seasons and increased
investment in the quality of their teams. Whether or not teams with the highest payrolls increase their
investment further because of fears of relegation, their fans will benefit from the overall improvement of
competitive balance due to other teams’ increased investment. Even fans of doormat teams might well
be better off, preferring an occasional relegation with the excitement of success at the lower team, and
increased investment in the quality of the team, to perpetual mediocrity with no chance of success in a
closed league.
39
To be sure, a requirement of open competition for monopoly sports leagues does occasion a
government-mandated restructuring of sports leagues. Right now, however, consumers face billions of
dollars in tax subsidies, and fans continue to face too many games played by teams with no real
prospect for a championship and no real incentive to improve. There ought to be a better way, and an
economically sound application of established antitrust principles provides one.
