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Competitive Balance – or Lack Thereof – in Major League Baseball

Lucas Costa

7142560

Seminar Leader: Michael Evans-Branagh

December 7, 2021
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Introduction

The Yankees, Red Sox, Dodgers and Giants have won eight of the past fifteen World

Series Championships, dating back to the 2007 season (“World Series Winners,” n.d.). That’s

approximately 13% of the league, accounting for over 53% of the league winners. It comes as no

surprise since all four of those teams rank in the top five of the league’s most valuable franchises

(Ozanian, 2021). However, Major League Baseball (MLB) is not a four-team league, as the

league consists of thirty teams (“MLB Teams,” n.d.). On the other end of the spectrum, are teams

like the Marlins, Rays, Royals, Reds, and Athletics, who in that same timeframe of fifteen years,

have only won one championship (“World Series Winners,” n.d.). Without question the disparity

between the teams is astronomical, which is why there is a great divide in baseball between the

most and least valuable franchises. As a result, there is a significant competitive balance issue in

the MLB, which has a direct effect on the viewership and revenue of specific teams (Kesenne,

2006). This paper will address the reasons why MLB needs to create a more competitive

landscape, and the various solutions to increase competitive balance in the league.

Why Is Competitive Balance Important?

Competitive balance, referring to when competitors have approximately equal abilities to

one another, is important for a multitude of reasons (Kaplan et. al., 2011). For starters,

competitive balance is important because a matchup between a great team and a poor team loses

fan interest, since fans thrive from the uncertainty of outcomes (Kaplan et. al., 2011). This was

clearly illustrated regarding a game between the New York Yankees and the 37-win, 94-loss,

Baltimore Orioles in the late 2018 season. That game was on the marquee Sunday Night Baseball

production by ESPN, and had 1.42 million viewers (Paulsen, 2018). Although that number may

sound high, it was actually the Yankees’ least-watched game on Sunday Night Baseball in three
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years. Without surprise the Yankees won that game, alluding to the point that a game between a

good and a bad team loses fan interest, since the outcome is predictable. However, if this exact

game featured two teams that were competitively balanced, fan interest would be substantially

higher, meaning that the viewership would’ve also increased. When viewership increases so does

revenue, for all stakeholders. At the end of the day, revenue and money is the reason that MLB

exists, so if MLB wants to continue to exist and to continue to generate revenue, competitive

balance is important for the betterment of the league (Fisher, 2015).

Team success has a big impact on increasing their fanbase. Each win that a team gets

while they are above .500 (meaning that their win totals are greater than their loss totals) adds

between 138 to 380 fans to that team (Davis, 2009). Furthermore, an above-average team,

meaning a team that is at least 20 games above .500, can increase attendance by up to 15,000 per

game, when compared to a below-average team, a team that is 20 or more games below .500

(Davis, 2009). An increase in attendance means an increase in ticket sales revenue, concessions

revenue, as well as many other revenue streams too (Coates & Humphrey, 2007). Increased

revenue is what allows a team to be more competitive, since they're stronger financially, creating

a vicious cycle. In the 2019 season, the Dodgers, who were 50 games above .500, led the league

in attendance, while the Marlins, who were 48 games below .500, were at the bottom of the list

regarding league attendance (“2019 Major League Baseball Attendance & Team Age,” 2019). As

a result, the Dodgers generated $556 million in revenue while, in that same season, the Miami

Marlins obtained $222 million in revenue, a drastic difference between the two (Gough, 2021).

On top of that, the substantial difference between the team’s revenue has a direct effect on each

team’s payroll. The Dodgers payroll was $217 million whereas the Marlins payroll was only $98

million (Gough, 2021). To put it into perspective, the Dodgers 2019 payroll was literally only $4
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million below the Miami Marlins' entire revenue for that season. This all stems from the fact that

winning is what brings in fans, which drives up revenue, and revenue is extremely important to

survive. Additionally, this explains that competitive balance is important to ensure that all thirty

teams in the league can have attendance to the maximum, to generate as much revenue as

possible in order to remain competitive on the field, and on the financial statements too.

Why Is This Issue Prevalent To MLB?

Baseball has always been considered as America’s pastime, but that was a time of the

past. Over recent years, people have been losing interest in baseball. From 2015 to 2019, MLB

attendance had dropped 7.14%, meaning a loss of 5.2 million fans (Saunders, 2021). In addition,

the World Series has become much less popular than it once was. To put it into perspective, the

1978 World Series averaged over 44 million viewers, whereas the 2019 World Series only

averaged just under 14 million (“World Series Television Ratings (1968 - 2019),” n.d.). Ever

since the 1980s, the audience of the World Series Championship Series has steadily decreased

over the years (see Appendix) (“World Series Television Ratings (1968 - 2019),” n.d.).

One of the main reasons why baseball has decreased in popularity is because of the lack

of competitive balance. People are not interested in watching the Goliaths in MLB beat up on the

Davids. Szymanski (2003) summed it up saying, “fans and TV viewers might substitute for some

alternative leisure activities, while the availability of both alternative sports and alternative

leagues of teams playing the same sport suggests that the overall quality of competition is a

significant factor in the demand for the competition of a particular league” (p. 24). In the time

that baseball has decreased in popularity, the National Football League (NFL) has increased in

popularity. According to ESPN (2021), in the NFL “games are averaging 17.3 million viewers

on television and digital, a whopping 17% increase over last season and 3% compared to two
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years ago” (p. 1). A big reason for that is because competitive balance is truly in effect, and

specifically the smaller market teams have a legitimate chance of winning the Super Bowl (SB).

Since the 2007 SB, five of the sixteen teams in bottom half of the league regarding franchise

value, has won the SB (Ozanian & Settimi, 2021). Although it may not sound like a lot, in that

same timeframe, only one team in the bottom half of MLB’s franchise value ranking has won the

World Series (Ozanian, 2021). All this to say that if MLB wants to solve its declining popularity

issue, competitive balance is something that they need to take seriously.

All teams, no matter their financial superiority, should care about the lack of competitive

balance in the league. Firstly, MLB has implemented a revenue sharing system in which each

team contributes approximately 31 percent of its locally generated revenue (gate receipts, local

broadcasting revenues, advertising and sponsorships) to a central fund (Maxcy & Milwood,

2018). As imagined, the wealthier teams generate a much higher local revenue than other teams

in the league, so, as stated by Maxcy and Milwood (2018), “the largest revenue producers make

the greatest contributions and the lowest producers receive the largest shares of the total

redistribution payments” (p. 56). As such, the issue of the lack of competitive balance is

prevalent to wealthy teams too because the more competitive disparity between the teams, the

more money that the wealthier teams will lose do to this revenue sharing model. If,

hypothetically, all teams were competitively balanced, then the gap between all team’s locally

generated revenue would be smaller and thus, teams like the Yankees and Dodgers would

contribute less money into the central fund than previously, ultimately saving more money.

Solution One - Luxury Tax

Baseball’s luxury tax, formally known as the “Competitive Balance Tax,” is meant to act

as an unofficial salary cap which penalizes teams if the collective average annual value of their
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players, exceed a defined threshold (Anderson, 2019). However, there is little evidence that

shows the luxury tax creates a competitively balanced landscape (Anderson, 2019). As of 2020,

the initial threshold was set at $208 million, as agreed in the Collective Bargaining Agreement

(CBA) (Anderson, 2019). Per the CBA, first time offenders pay a 20% tax on every dollar above

the threshold, while teams exceeding the threshold for the second year in a row are subject to a

30% tax, and three or more straight seasons are 50% tax ("Competitive Balance Tax,” n.d.).

Furthermore, teams who exceed the threshold by between $20 - $40 million have an additional

12% surtax, meaning an additional tax on something that is already being taxed ("Competitive

Balance Tax,” n.d.). Teams over by $40 million or more are taxed 42.5% the initial time and

45% every year that follows ("Competitive Balance Tax,” n.d.). Since 2018, teams above $40

million also have their highest pick in the MLB Draft moved back ten places unless the pick falls

within the top six ("Competitive Balance Tax,” n.d.). The luxury tax imposes harsher penalties,

mostly financial, as the dollar value and years above the threshold increase.

However, financial penalties are ineffective in trying to build competitive balance. In

2020, the Los Angeles Dodgers renovated their stadium for $100 million while simultaneously

paying a tax of $150 million over that same five-year period (Gonzalez, 2021). This illustrates

how the big market teams can afford to pay these penalties, and then some, in order to field the

best team possible. According to Maxcy and Milwood (2018), some teams are willing to

sacrifice profits to generate more wins. As a result, having penalties in the form of money may

not be the best way to disincentivize teams from exceeding the threshold. Instead, penalizing

them in the form of losses of higher round draft picks may be more incentivizing since in the

National Football League, for example, players drafted in the first round of the NFL Draft play

more games and are more highly skilled than players drafted in subsequent rounds (Kraeutler et.
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al, 2018). The same can be said in MLB since obviously, teams value high picks because they

usually represent higher potential on the field of play, making your team better. Penalizing teams

in the form of losing high draft picks should galvanize them from spending above the threshold.

In addition, penalties regarding international prospects are another feasible solution.

Many of the game's best stars, such as Fernando Tatis Jr., Ronald Acuna Jr., and Juan Soto, were

all signed during the international signing period (Sanchez, 2021). The league gives teams

money to spend on international players and depending on winning percentage and revenue,

teams are placed into different pools. The first pool receives $6.431 million to spend on

international prospects, while the secondary pool receives just under $6 million, and the

remaining teams get $5.3 million each (Sanchez, 2021). As stated by MLB.com (2021), Mariano

Rivera was the best international signing for the Yankees all-time, since he went on to win five

World Series titles, having an exceptional Hall of Fame career (Martelli, 2009). Mariano was not

even a well-known prospect at the time and still managed to be exceptional, further proving the

eminence of international talent. With respect to the luxury tax, another potential solution is to

lower the financial capital that the league gives to certain teams, should they exceed the

threshold. Appreciated that players like Mariano Rivera and Fernando Tatis Jr. were picked as

international free agents would incentivize teams to think twice before going over the limit.

Money could always be regenerated, but generational talents like Rivera and Tatis Jr. are harder

to come by. MLB has shown that they are not afraid to lower teams pay for international

signings. For example, the Atlanta Braves received less ($1.57 million) for violating MLB’s

international signing guidelines (Sanchez, 2021). Given that teams continuously spend above the

luxury tax threshold it is eminent that the same sanctions apply to those teams too.

Solution Two - Salary Cap

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A salary cap is established in the Collective Bargaining Agreement (CBA) between the

player union and the league, which ensures that no team’s payroll exceeds a defined amount

(Pedersen & Thibault, 2019). Leagues like the National Football League (NFL) and National

Hockey League (NHL) impose a salary cap. Unlike the luxury tax, teams cannot exceed the cap

amount even if they are financially wealthy, which ensures that all teams remain relatively

competitive with one another no matter their financial class (Pedersen & Thibault, 2019).

As a result of the salary cap, the NHL has a more competitive balance landscape

nowadays compared to the pre-salary cap days. In the eleven years prior to the salary cap, the

average margin of victory in a game was 2.22, whereas post-salary cap it was 2.03, which

indicates a greater level of competitive balance (York & Miree, 2018). Furthermore, another

metric to measure the difference in competitive balance is the average winning percentage for

Stanley Cup winners, pre and post the implementation of the salary cap. Prior to the salary cap,

the winning percentage of league champions was 0.634, which means that the winners, on

average, won 63.4% of the games they played (York & Miree, 2018). After the enactment of the

salary cap, the winning percentage of Stanley Cup winners was 0.591, meaning that they won

around 59% of the games they played (York & Miree, 2018). Although four percent may seem

small, it is an indication that the salary cap did have a positive effect in creating a more

competitively balanced league. Furthermore, the 2012 Stanley Cup Champion Los Angeles

Kings finished the season with a 0.488 winning percentage, meaning that they lost more games

than they won (York & Miree, 2018). A team with a losing record would never make the

playoffs, let alone win the championship in MLB, but since the NHL is extremely competitive, it

worked in the Kings favour despite their mediocre record. Those same L.A. Kings won the Cup

again in 2014, but missed the 2015 playoffs entirely, alluding to the point that the NHL is
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unpredictable, and any team has a legitimate chance of winning any year as a result of the salary

cap (Richardson, 2015).

As such, a salary cap would be extremely beneficial to MLB because as Richardson

(2015) explains, “The NHL is no longer a place where the teams that spend the most become

Stanley Cup contenders” (p. 1). As exemplified, currently in baseball, the more money spent

results in success on the field. However, by instituting a salary cap, it counteracts the current

culture in baseball, of spending big means winning big. Moreover, by instituting a salary cap, all

teams will have a realistic chance of qualifying for the playoffs and ultimately winning the

championship (Richardson, 2015). Due to that, viewership and revenue would increase since, as

explored in the NFL, “having a reasonable chance of making the playoffs makes local viewers

stakeholders with respect to out-of-market contests” (Tainsky et. al., 2016, p. 42). The

viewership, and most importantly the revenue of all teams would increase, therefore allowing the

smaller market teams a pathway to success, both on and off the field.

Conclusion

Presently, MLB is divided into wealthy teams and the poorer teams, where the wealthier

teams are perennial winners, whereas the poorer teams are barely staying afloat. A big reason for

that financial disparity is due to the lack of competitive balance and the results of that. Teams

like the Yankees and Dodgers continue to generate a substantial amount of revenue, while the

Royals and Rays can barely sell tickets. In order to increase the revenue and viewership of these

smaller market teams, the luxury tax needs to change their penalties for exceeding the threshold

to truly disincentivize teams from exceeding it and implementing a salary cap is another feasible

solution. Both solutions have a realistic potential in benefiting the smaller market teams

especially, so that their organization can survive.

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Appendix