Economic Activity and Structure of Competitive Sports

Many variables contribute to the competitive economic activity of the professional sport market. The simple structure of the sports broadcast market outlines the flow of revenue streams from leagues/teams to media and onto advertisers.  The flow goes back and forth between these three factors.  

The type of sport, the market that sport is played in, and the structure of the league are three variables that carry significance in relation to the economic actively of the market.

Source of Revenue:

Not all sources of revenue are equal across all North American sports.  The National Football League.  “NFL teams derive most of their revenues from national media contracts and those contracts are shared equally among all NFL teams.”  (Humphreys, 2015 p. 29)

The huge and equal influx of national media revenue puts less pressure on smaller markets in the NFL. The NHL, for example, has little national coverage and is able to thrive in smaller markets.

Costs:

The NHL has a hard salary cap imposed on all teams equally.  This means that every team is allotted the same amount of money to spend on players.  The number is determined by the previous year’s league-wide revenue.  By contrast, Major League Baseball does not impose a salary cap on player salaries.  This provides less restriction and therefor more guarantees for their on-field product.

League Structure:

All 4 major North American sports are unionized.  Each league has a collective bargaining agreement (CBA) between the player’s union and the league as a whole that governs the economic movement between the players and the teams as a whole.

Because these CBAs typically last 5 years, renegotiating the arrangement allows for forecasting potential issues.  The NHL has been either completely or partially locked out 3 times since 1992.  The lockout in 2005 was in-part related to the implementation of a league-wide salary cap.  The NHL is currently bracing itself for another showdown with the players association as the current CBA expires in 2022.  This time around, speculation on the work stoppage stems from the freedom of contract structure allowed to General Managers.  Under the current system, teams can “front load” (pay more upfront) to a player, or offer unusually high signing bonuses, which under the current CBA do not count against the salary cap.

These three variables work together to create a unique economic system in professional North American sports.

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