The Organization of Sports Leagues

Sports leagues have been organized in many different ways. This essay examines the incentive structure and efficiency of different forms of league organization, including the methods for scheduling games, admitting new members, and making operational decisions. This article also compares operations and outcomes in Europe and North America, and concludes that the European system of promotion and relegation is superior to the closed structure of American leagues, and that the American system of multiple parallel leagues to determine qualifications and seeding in a post-season tournament is efficiency enhancing. The article also discusses the optimal size and number of leagues, and concludes that both the European and American systems produce too few major league teams, largely because they have permitted major leagues to be monopolies. Forthcoming, Oxford Review of Economic Policy THE ORGANIZATION OF SPORTS LEAGUES by Roger G. Noll* Team sports require coordination among contesting teams because the main product, a game, involves at least two distinct entities. Teams must agree on the rules of the game, the time and venue at which it will be played, the identity of the officials who will enforce the rules and keep the score, the responsibility for marketing the contest if one objective is to collect revenue, and the procedures for dividing the revenues and costs of the contest. These decisions sometimes are made between contesting teams on a game-by-game basis. But if several teams regularly play each other, this approach is highly inefficient, and provides an incentive to create a league – a group of teams that schedule games and develop other policies and rules for the purpose of determining a champion (which among them is strongest).1 Team sports almost always are organized into leagues. Despite the simplicity of the concept of a league, the structure of sports leagues varies enormously. Teams in a sport must make at least five types of decisions about league structure: * format – the method for scheduling matches to determine the champion; * hierarchy – the relationships between leagues of lesser and greater quality; * multiplicity – the number of leagues at the same level of the hierarchy; * membership – the conditions under which a team enters and exits a league; and * governance – the methods for deciding and enforcing league rules and policies. A league also normally makes other decisions, such as developing playing rules and controlling aspects 2 of the economic behavior of its members. This article explores the economics of the organizational form of leagues. The choice of organizational form affects the demand for a sport, the cost of scheduling games, and the extent of competition among teams for fans and their most important inputs, players, coaches and stadiums. The organization of leagues is interesting for two reasons. First, the incentive effects of league rules, and hence the efficiency of league operations, are subtle, and frequently misunderstood by fans, journalists and even team owners. Second, the most prestigious professional leagues, called major, premier, or first division leagues, are almost always monopolies. Thus, teams have a strong incentive to organize leagues in a fashion that reduces the extent of horizontal competition among them in both input and output markets. An important issue in the organization of team sports is to distinguish between rules and policies that improve efficiency from those that reduce efficiency by reducing competition among teams. A monopoly major league controls the entry of teams into the top echelon of the sport. One must then ask whether a monopoly league’s procedures for admitting new members produce the optimal number and geographical distribution of teams. Two elements of this analysis are the optimal number of teams in a city and major leagues in a sport. Specifically, are teams in a local market and leagues at a given quality level “natural monopolies” in that competition is likely to be unstable or otherwise to reduce the net social benefits of a sport? An additional issue is how leagues change the cities in which teams play. Some leagues have permanent, fixed membership and change the cities in the league through expansion and team relocation, while other leagues regularly change their membership by replacing the weakest teams with the best teams in lesser leagues, as is common in