Economics and Business Strategies: Competitive Advantage in Professional Sports - Assignment Example

ECONOMICS AND BUSINESS STRATEGIES Contents ECONOMICS AND BUSINESS STRATEGIES Contents 2 Reference 9 What is competitive business? To what extent does professional sport run as a business view competitive balance in a league as an opportunity or a threat? Competitive balance is one of the most discussed concepts in professional sports leagues. It refers to the difference in equality between the strengths of teams in the playing field. In order to measure competitive balance, often, the measure of inequality in income distribution is taken into consideration. Much effort is dedicated in tracking movements in competitive balance over time. It is debatable that the degree of competitive balance has its shadows over the uncertainty in results in sports leagues which in turn have its effects on the support or attendance of spectators. One of the popular measures of competitive balance is the actual square root of the variance of win-ratios of a certain season and it is compared with the mean root square deviation of the win ratios in the most ‘appropriate’ case where the wins are allocated in a random manner (Owen, Ryan and Weatherston, 2005, pp.4-5). According to Zimbalist, the professional sports teams participating in a league both corporate and compete with each other. The success of a competition is dependent upon the degree of uncertainty of outcomes. It can be stated differently as the degree of competition among the teams acts as a factor in the success of a league. (Zimbalist 2003, Sports as Business, pp. 503). By perfect competition, economists define a market structure under some assumptions which are unlikely to exist in the real world scenario. It talks about a market where the market power of the participants is limited to set the price of a homogeneous product. Some of its characteristics include unlimited number of buyers and sellers, factors are free to move, and perfect information exists to all the participants. Monopoly exists only in cases where competition is absent which may result in inferior products along with prices set a higher levels. When a firm is able to gather higher levels of profits than the average of all other firms existing in its industry, a situation of competitive advantage is said to exist for the firm and it is of mainly two types namely advantage over costs and differentiation advantage. A competitive advantage is said to exist when a firm is able to deliver its services with some added advantage over costs or products of a higher quality than its competitors. To attain a successful sporting outcome it is required to maintain a certain degree of competitive balance which is described in the hypothesis of “uncertainty of outcome”. Gate sharing revenue is one of the popular means of improving competitive balance. This means is very common knock out competitions. However some other means of improving the competitive balance includes salary caps, and luxury taxes. The Major League Baseball adopted an equal splitting of gate receipts which were reduced with time. Since 2003 the clubs participating in the American League contributed 34% of their revenue which were later divided into equally among the clubs. But this type of steps is challenged by ‘invariance proposition’ which states that revenue sharing is ineffective in distribution of talents between clubs. The main rivals for the American professional sports include Major League Baseball, National Football League while NBA and NHL are competitors of lesser degree. However the mobility of a player is allowed in European football league. This adds in the competition within leagues on the labour market. US leagues on the other hand have profit maximising motive. The evolution of UEFA National Association Coefficient is a method to find the evidence of the decreasing competitive balance. The coefficient measures the performance of teams participating in the European cups during the last five seasons. The results of the last five years are taken into consideration to compute the coefficient. The Gini-coefficient of the variables interprets the results in increasing concentration of sports success along with a decline in competitive balance. In spite of believing in free enterprise mechanism, regulating the clubs is the need of the time and not to the detriment of sporting excellence. The introduction of ‘luxury tax’ on payrolls has failed to create any type of drag on the salaries of the players and thereby enhancement of competitive balance failed. Many low profit clubs who realised that they had no chance to compete for the post season did not increase the pay rolls of the players and opted marginal profitability from revenue. The outcome of any game or match contains some degree of uncertainty and if it is not the case then that will lead to the loss of interest for the consumers. It is important to have at least some degree of competitive balance between the participating teams. There has not been any confront the relative strengths of competitors. Some questions have remained unanswered like the process of controlling the competitors of inferior quality or prevent them from free riding. One of the most important questions of competitive balance is the correlation between winning and payroll. The need is also to determine the relationship between size of the market and payroll of the team. The Blue Ribbon Report depicts that the baseball teams with largest payroll packages dominate the post-season play. However a positive relationship has been found between market size and winning percentage. It concludes that largest market teams are likely to appear at the top of the league table. The demand of the spectators is a function of competitive outcome on a certain season as opposed to the entire season (Sanderson and Siegfried, 2003). If the decision makers or the managers are more inclined in maximising their own objectives then individual utility maximisation behaviour can lead to non-profit maximisation in respect to the firm. Profit maximization is a process by which the firms tend to forecast the price and output levels that will generate the maximum profit. Utility is defined as the satisfying power. Economists define utility maximization as a purchase decision of the consumer that attempts to provide maximum possible value for certain expenditure. In order to look into the profits in case of sports industry the owners must give attention to revenue attained over the entire season. Owners can choose to approach winning through purely profit maximizing or they can operate by maximizing utility, or a combination of the two. When an owner maximises profit they provide attention to attract as many fans as possible at the gate. They might use the strategy of drafting players. These strategies are sometimes ineffective as most of the time these are looked as cheap strategies adopted by the owner and not putting enough efforts on the team to succeed. When the team searching for a player, is a profit maximizer, they would look at an equation such as: (Cost) / (Additional Win) = {[(New Revenue) - (Previous Revenue)] / (Additional Win)} + (Expected Playoff Revenue) Utility maximization: Cost = [(New Revenue)-(Previous Revenue)] + (Expected Playoff Revenue) + (Utility of winning) Comparing the 2 equations results in: (Utility of winning) = (Expected Playoff Revenue) (Additional Win - 1) For an owner to maximize the utility of the team, they have to spend all revenue and income up to a point on the highest budget line available to them. This means that they will have a profit of zero every year, due to spending their entire revenue to acquire better talent, improve facilities, and to promote the team brand. By spending all of the teams revenue and when done in an efficient way, the owner will be on the highest indifference curve attainable, until a higher level of income is achieved. If the owner makes a profit from the team, then they are not fully maximizing utility, since they are not spending on the highest indifference curve attainable. A significant portion of the investments is indirect. Owners are attentive in maximising their total return apart from the financial profit. Franchise owners often produce substantial capital gains. There are many ways for a owner to seek pecuniary returns. They can take the initiative to engage entities for business with the team (Zimbalist, 2003, p.507). Some baseball teams even ask for public support for their facilities. The owners are in search of new findings that will impose restrictions in the labour market. They treat the entire team as a part of their investment portfolio. The most important rationale behind the sports leagues engagement in cross subsidisation is the market structure. Sporting leagues can be thought as cartels of competing producers. Remaining within these cartel arrangements leagues needs to compete as well as corporate to ensure effective management. It will replicate that the clubs are monopolies. Thus, the governing bodies have helped clubs by dictating terms, which are met by the clubs in competition and influence the economic aspects of sporting (Ralph, 1992, pp.5-6). A firm or an industry may have the opportunity of transferring the burden of covering costs from a certain area of products or consumers to another effectively with the objective of subsidising the latter. The telecommunication industry in North America is largely controlled by private players which are open to competition. A large sum of money was spent by protagonists in this industry for lobbying practice hearing of trade. They are engaged in political import of decisions which have its shadows on cross subsidies. Cross subsidisation allows the firms to overcome the losses incurred in the unregulated secondary market with the extra revenues gained by the firm from increasing returns to scale in the regulated primary markets. Presence of cross subsidy targets the consumer who are bracketed under higher levels of “Ability to Pay” (Jamison, 2000, p. 112). The utility will have to be compensated for the uncovered consumers. The cross subsidisation policies will have its impact in expanding the consumer base. This would act to improve the long-term profit structure and act accordingly for the welfare of the firm. Reference Jamison, M., 2000. Industry structure and pricing: the new rivalry in infrastructure. United States of America: Springer. Owen, P., Ryan, M., and Weatherston, C., 2005. Measuring Competitive Balance in Professional Team Sports Using the Herfindahl-Hirschman Index: A Cautionary Note. Available at: http://www.business.otago.ac.nz/econ/personal/do_files/Competitive%20Balance_NZAE%20(3).pdf. [Accessed: 2nd March, 2012]. Ralph, E., 1992. Cross-Subsidy: A Novice’s Guide to the Arcane. Available at: http://www.ekonomicsllc.com/Ralph1992Cross-subsidy.pdf. [Accessed 2nd March, 2012]. Sanderson, A., and Siegfried, J., 2003. Thinking about Competitive Balance. Available at: http://www.vanderbilt.edu/econ/wparchive/workpaper/vu03-w18.pdf. [Accessed: 2nd March, 2012]. Zimbalist, A. 2003. Sport as Business. Available at: http://files.campus.edublogs.org/caledonianblogs.net/dist/2/123/files/2011/01/Zimbalist-chapter.pdf. [Accessed 2nd March, 2012]. Read More