Supply and Demand In Professional Sports

SPORTS RADIO CHATTER From time to time, I listen to sports radio in Chicago. It’s either AM 1000 or The Score. Sometimes, usually during baseball season, I hear Chicago fans calling sports radio complaining about their favorite baseball team not spending the necessary money to help make them a winner. It’s that simple, according to some fans, if you don’t win, you’re not spending enough money. Some fans are convinced there’s a direct correlation between the money spent on ball players and success on the diamond.

Let’s look at this in further detail. Even if your pro team increase their annual salaries by 20%, you’d still hear callers say their team should spend more money. What proof do I have? Firsthand knowledge while casually following both the Chicago White Sox and Cubs. Let’s examine this issue a little closer.

For example, let’s say your favorite baseball team (I’ll use the Chicago Cubs as an example) currently spends $100 million annually for their team’s baseball salaries. To simplify, let’s say $100 million is the average amount spent for each Major League Baseball (MLB) team. Assuming there’s an association between money and success, as a general manager (GM), you decide to take a risk because your fans want a winner and you want to please your fans. So you decide to increase your annual spending significantly.

Unpeel the Onion…

SPEND THE MONEY AND TRY FOR A CHAMPIONSHIP As the GM for the Cubs, you decide to go for broke and spend $200 million for a number of years – you’re trying to obtain as many good players as possible. If the Cubs do their homework and sign valuable players and have some luck, their team should do well. (This also assumes most other teams will not follow this same model for this period.) How do you define ‘well’? I think ‘well’ means the cubs will play competitive baseball and will make the playoffs. No guarantee of a World Series title but they are a big draw at the ticket gate and through various media channels. During your post-season review, management feels the money well spent and this model may continue.

Because MLB can be a copycat league, other owners have been watching the Cubs and want a piece of this action. They think if the Cubs can generate success (with this business model), why can’t they? Actually half or 16 owners out of 32 owners decide to experiment and give it a try for a year or two.

REMEMBER, THERE IS ONLY ONE WORLD SERIES WINNER Should any owners or fans be worried with this arrangement? First, only one team wins the World Series. If you win the American League pennant but lose in the Series, no one remembers you. Remember, we have 16 teams each spending around $200 million. Again, assuming there’s a direct correlation between a team’s payroll and success, you still have at least 8 teams who spent a ton of money without success. How do you justify this to your fan base or owner if you spend $200 million on an experiment and fail to play in the post-season? If you own the team, do you fire the GM and manager without too much thought? Who do you think will help pay for this experiment directly or indirectly? The average fan?

Even If 10 or so owners really want to win and aren’t afraid of spending money, at least two things will happen. First, some good baseball players will be overpaid – fortunate for the bidding wars between the 10 big spenders or so. Second, one way or another, your fans will be paying more for their seat and/or higher concession prices. And remember, there are no guarantees the product on the field will improve. There’s so many factors involved so there’s not always a direct correlation between your payroll and success on the field.  One needs to realize spending the money and signing free agents doesn’t mean these well-paid players perform up to their potential for that year. Or well-paid players play up to their potential for the length of the contract. What’s viewed on paper in spring training doesn’t necessarily translate to the baseball diamond.

SCARCITY IN BASEBALL Baseball is a simple game but with this new model, basic economics comes into play – supply and demand. Most people are aware that baseball pitchers who can throw a fastball at 100 mph are scarce. It’s like finding a needle in a haystack. To find a power hitter who hits 40 home runs each and every year and plays excellent defense is also nearly impossible to find. These players are rare coup for baseball scouts. Almost immediately, your demand for those key unique talents far exceeds the supply.

Each team would like to sign at least one left and right handed pitcher who can throw 100 mph with good control (of course), although there may only be 4 or 5 of these pitchers available anywhere in the world. Again, each team would want to sign three power hitters who hit a home run every 15 times at bat or at least 40 homers every year. They are scarce and not easily found– supply is low for this talent; when demand exceeds the supply it pushes up the price and demand for such services.

SALARY AND MANY OTHER FACTORS TO DETERMINE SUCCESS IN BASEBALL Of course, in reality, there are many factors that determine a team’s success in MLB. Staying healthy, a strong farm system, good scouts, building a team around your ball park configuration and a strong management team to name some key components. Holding these variables equal, it’s ignorant and perhaps creating a false sense of security to think there’s always a direct correlation between spending money and success on the diamond. It may or it may not. It may not even make a difference.  Be careful what you wish for. Spending money carelessly or without a strategic vision (and weak farm system) could cost your franchise in multiple ways. 

ADDENDUM Professional baseball players will never refute or deter any baseball team from possibly over spending for certain key players. Even if that player is not directly involved, significantly increasing a salary or salaries will add more money to the resource pool increasing their chance of a big payoff in the future.

You have approximately 800 major league players in MLB. The amount of money spent on those players may fluctuate. Whether that is $800 million or 4 times as much ($3.2 billion) annually, the sum of money will be unevenly divided among these players. If the pool increases annually, those players who are signing new contracts increase their chances of signing a better deal as there’s more money in the pool. Of course, this depends on their most recent performance, age, reputation, and value they can bring to an organization.

Kevin Schwarm

I have over 25 years of professional experience in business, information technology (IT), and customer service. Industry experience in retail, medical insurance, higher education, non-profit, financial services, and property and casualty insurance. Customer focused professional interested in providing value (save time, money and aggravation) by evaluating and analyzing information, services and products with a unique perspective.

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