Sample Economics Paper on Two-teams model in Professional Sports League

The professional teams sports industry stands out due to its unique structure as it is the only
sector where production is organized and implemented by leagues. This distinct organizational
framework is the outcome of the industry-specific production and competitiveness of parties involved.
external stakeholders of the industry often view individual teams as firms and consider them as
production units. However, unlike commodity manufacturers like automobile, member teams cannot
produce commodity for trade. Every unit team requires at least a single opponent to contest a match.
Nonetheless, a match between two teams alone cannot be entertaining and must be enhanced by
integration into a structured championship competition. This enhancement that provides every match
with aesthetic value within the larger scope of the championship is subject to the league’s management.
From a sports perspective, every competing team desires to win as many games as possible to
be crowned league winners. However, economically, member teams are not absolute competitors but
relative complementary. The economic value and quality of the league mainly relies largely to the level
of competition and competitive balance. In contrast to automobile producers like Toyota or Ford that
prefer weak competitors to thrive in the industry, sports teams like Manchester United in England, Real
Madrid in Spain or Juventus in Italy benefit from the stiff competition from other league members. This
makes a league more balanced thus making it more attractive, thus enhancing its economic value.
Economists’ interests in sports league have led to the emergence of various models to explain
various phenomenon and the dynamic decision-making approaches of professional sports league. One
such distinct model is a two-team model theta encompasses a large and a small-market club, which
demonstrates that imposing a payroll cap, described as a fixed percentage of total league revenue
shared among participating teams, serves to enhance the competitive balance together with the
distribution of players remuneration in the competition. The most advanced sports economics literature
suggests that modelling a team sport league using a contest theory. This literature reveals that analytical
models in sports emphasize the outcomes of cross-subsidization schemes including salary caps, reserve
clauses, and revenue sharing on the competitive balance without considering that the club’s
competition offers a stage for interaction of various market sides comprising fans, sponsors, advertisers,
merchandising companies, and the media.
The most vital aspect affecting the competitive balance of the league is the different sizes of
consumer market. The larger the market, the higher the team’s drawing capacity of the fans and talent
pools The two-team model considers two clubs, identified as 1 and 2, that are asymmetric with respect
to their market size, competing in a professional team sports league. Each team invests separately in
playing talent to maximize its profit margins. Besides, there are two groups of agents with interest in the
club’s competition, the fans and sponsors. The fans consume the sport either through purchasing
stadium tickets or pay-TV licenses, which generate direct revenues for the club. Fans interests in the
competition attracts sponsors who want to convince the fans to purchase their services and products.
Besides, the objectives of the club play a critical role to influence the competitive balance of a league.
For instance, a club that pursues profit maximization differs from one that focuses on win maximization.
This can be represented graphically in Figure 1, to demonstrate the clubs’ demand curves for large
market club and small market club. Evidently, these clubs vary in market size as portrayed by the points
of origin of the demand curve on the vertical axis.

Figure 1
From this illustration, we can deduce that the distribution of playing talents varies if one club
focuses on maximizing wins and the other maximizing profits. However, competitive balance is attained
if a small club is a win maximizer and the large club a profit maximizer. Regarding revenue distribution,
in a profit-maximizing league, sharing gate revenue does not alter the competitive balance. This is
attributed to the reduced demand for talent because both clubs will share the extra match revenue
drawn from an extra talent for visiting teams, consequently reducing the unit cost of talent.
Although clubs vary interms of market size causing large market clubs to dominate small clubs in
attracting talents, they can also vary in terms of supporters preference for more equitable copetition.a
larger parameter in revenue function implies fan value a balance competition. Hence, if a parameter is
large enough to offset the difference in market size, it is likely the smaller team will dominate the large
club. The implication of such a situation is that if the small club dominates, the distribution of playing
talent in a profit optimization league is more unbalanced compared to a win optimizer league. This
imbalance can be illustrated in figure 4.

Figure 4

Such a situation bears significant implications on the distribution of gate revenues. In profit
optimizing leagues, the proposition holds that revenue sharing does not affect the distribution of talent.
However, in a win maximizing league, the gate revenue sharing enhances the competitive balance. The
ill-performing large team benefits from the allocation arrangements to the disadvantage of the high
performing small clubs. This can be attributed to the high budgets small clubs incur when they dominate
the large market club. Further, in this situation, sharing gate revenue implies a reduction of the total
league revenue caused by the drifting of talent distribution from the most efficient talent allocation.
The competitive balance in a league that largely relies on the distribution of talent pools among
clubs is a fundamental attribute in the economics of team sports. It is evident that the market size is the
most critical, although not the sole factor influencing talent distribution. Besides, clubs objectives,talent
supply, supporters’ preference, and revenue sharing arrangements can influence the competitive
balance as well as the revenue allocation. An evaluation of the economic model illustrates that revenue
sharing in profit optimizing leagues can have minimal impacts on the competitive balance. However,
revenue sharing in win maximizing leagues can enhance