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The discipline of economics is generally valid for all industries across the world. This is because the basic fundamental economic principles of demand, supply, and free market are applicable to almost all industries in the world. There are only a few industries where these economic principles are not really applicable. The sporting industry is one such unique case.
The normal economic principles of demand and supply do not really apply here because of certain economic peculiarities. Hence, we need to understand the specific economic issues that are relevant to sports leagues and how they must be taken into consideration.
In this article, we will try to understand the peculiar economics related to sports leagues.
Sports leagues and teams are able to make money because of their fan following. Sometimes, this means that the league has to compromise on short-term profits in order to keep the fans interested. Hence, the objective of the league is not static. Instead, these objectives keep on changing based on the stage of the league and even the stature of the club. Hence, many economic laws that blindly pursue the principle of profit maximization are not applicable to sports leagues.
If there is no league, no competitors, and no competition, the team does not have any significant economic value. This is because the product being sold by the sports league is entertainment.
Entertainment is a function of the close matches which happen as a result of tough competition between teams. Hence, the sports league teams jointly produce the product.
Generally, economic organizations try to produce the best product which can always beat the competition in the marketplace. However, this logic does not work in sports leagues. If the product of one team is far better and always beats the competition, the customers i.e. the viewers begin to lose interest.
Adam Smith has defined this phenomenon as the invisible hand wherein if each player pursues their own individual objective, the objective of the marketplace is also achieved.
However, this rule does not apply to sports leagues. This is because in the case of sports leagues, if a sports team is able to perform well and corner all the resources i.e. players, then they will end up winning consistently. There will not be an element of uncertainty in the game. As a result, the viewership and fan following will drop and there will be negative economic impacts on the entire league.
Hence, it can be said that the free-market principles do not apply to sports leagues. Instead, the sports league exists in a controlled environment wherein it is imperative to ensure that all teams have approximately the same level of competition.
In essence, they form a cartel of clubs that actively work with each other. However, they do not co-operate with the competition. The word “cartel” generally has a negative connotation when it comes to economics. However, sports leagues are natural monopolies. It is common for leagues to control the supply in the following manner.
Generally, leagues exercise this control by limiting compensation, having cooling-off periods, and creating rules that govern the transfer of players between different teams in the league. This control is necessary to ensure that the competitive balance within the league is maintained.
Hence, it can be said that the economic fundamentals of sports leagues are quite different from the general economic principles. It is for this reason that the reader must become aware of these peculiar economic fundamentals in order to better understand the decision-making in the game.
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