The effects of location and team attributes on viability in Major League Baseball
Date
1991
Authors
Mazure, John Charles
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Abstract
In the early 1980s, interest groups in several U.S. cities, and Molson Breweries Ltd. in Vancouver, actively pursued a Major League Baseball franchise. Despite their efforts, the number of baseball teams remains unchanged. During the same period, several existing franchises consistently incurred financial losses, underwent changes in ownership, and threatened to relocate to other markets. An explanation of why Major League Baseball did not expand, nor relocate those teams in financial difficulty, should focus on the determinants of team viability. While other team attributes are important, the long-run economic viability of a club in a particular location should ultimately depend on those locational attributes which are significant determinants of team revenues and profits. This thesis applies a model of professional sports teams to explore the locational and other determinants of attendance revenue in Major League Baseball.
The results are used to evaluate recent decisions regarding franchise location. Their antitrust implications on Major League Baseball regulations for controlling franchise location are also discussed. The two-equation model, which explicitly treats both attendance and price as endogenous variables, forms a system of seemingly unrelated regressions and, using game data from the 1983 season , is estimated using a procedure devised by Zellner. The locational attributes : population, income and climate, are important determinants of both attendance and market power. Although locational quality remains the crucial factor in attendance revenue generation, gate receipts as a percentage of total revenue is decreasing because of the rapid growth in broadcast revenues.
Various measures of team success are also important determinants of attendance revenue, particularly in the short-run. Using composite measures of locational and team quality derived from the model, a regression of the former on the latter provides little support for the Quirk-El Hodiri hypothesis that better quality teams tend to emerge in the stronger markets over the long-run. Simulation of attendance revenue combined with estimates of other revenue sources and estimates of cost indicate that profitability varies widely among the existing clubs. The results indicate half of the teams had net operating losses in 1983 and that several appear to be unviable or marginal operations at best. This was also true for the majority of the non-franchises, however, there were a few cities which appeared quite viable. Hence, the model is effective in explaining the league's cautious approach to expansion. 'Why teams in the markets of questionable long-run viability did not relocate to more lucrative locations can only be explained by factors which lie outside the scope of the model. Public subsidies, in the form of the tax breaks and below-cost stadium rents, are worth a substantial amount to team owners in Maj or League Basebal 1; and, in the weaker markets, is the primary reason why clubs are financially viable. 'While these indirect subsidies increase the number of viable locations, it also results in increased competition among cities for existing franchises, and has led to increased public pressure on Major League Baseball to expand or face increased regulation or lose its special status in terms of being immune from antitrust scrutiny.