When a product becomes extremely profitable in an industry, there is a standard response: more businesses enter the industry. This is done in order to steal a portion of these excess profits. More and more businesses enter until additional entries will not result in a net profit. This process does not guarantee that every company will make the same profits; rather, it makes profits attached closer to quality. The companies with the best products rise to the top.
In Major League baseball, this process has been hindered. The structure of team placement has artificially created 30 monopolies. Shielded from competition, their enormous profits are not the result of supplying a superior product.
With rare exceptions, teams within the MLB do not compete with each other. To illustrate, how many people decide between attending a Pirates game or a Yankees game? Very few. The people living in New York are not going to spend an entire day driving to Pittsburgh to see the Pirates lose. They would not do this even if the Pirates were the greatest team in the history of the game. The 30-minute trip from their apartments in New York City to the ballpark ensures they will attend a Yankees game or a Mets game instead.
This means the Mets and Yankees compete, correct? Yes, but they compete for greater than 19 million people in the New York Metro Area, at least. Assuming the Mets and Yankees each attract 50% of this population, that leaves them with approximately 10 million potential ticket-purchasers individually. The Pittsburgh Metro Area has fewer than 2.5 million people! Even if the Pirates won 100 games, they will never be able to make as much money in ticket sales as a New York team. This does not even factor in the potential revenue from television deals.
The same holds true across the country. Many teams have an entire market to themselves, but they belong to small markets with a low ceiling to their profitability. The markets where two, or maybe three, teams actually compete for the fan base have the luxury of massive populations.
Fortunately, modern technology has helped make teams more accessible to out-of-town fans. Nonetheless, fandom remains closely tied to location. Even if the Internet and TV packages topple the barrier to watching any team on any night, a fan has one or two options when it comes to attending games on a regular basis. Barring the invention of teleportation, this problem will not be solved soon.
The close correlation between population and revenue ultimately dooms a franchise like the Pirates or the Royals. Even if the ownership pumped money into the team and created a 100-game winner, the increased number of fans attending the game or watching on TV will be marginal. The increase would almost certainly not be enough to earn a significant profit on the additional money spent.
This has led to a large and vocal group of people calling for a salary cap. The intentions of this move are pure, but display a tremendous lack of creativity. The end result may be more parity, but the dominance of the same teams year after year in sports with salary caps provides evidence to the contrary. (Philosophical side note: Should the big-market teams, which represent a larger population, be forced to suffer more losses so that the smaller population represented by small-market teams can win more games? Aren’t more people happier when the Yankees win a championship than when the Marlins win?).
Revenue-sharing exists as a second-best solution. This policy takes money from the high-payroll teams and distributes it to the low-payroll teams. With a salary cap, the teams have to at least draw crowds to earn money. A simple redistribution such as this could give an incentive for teams to spend less of their own money to earn more of the rich teams’ money. Obviously, this could be worked around by developing a system that factored both revenue and winning into the equation for doling out funds. Nonetheless, a revenue-sharing program is not the best possible solution.
The optimal solution arises from the insight at the beginning of this article. When a market draws excess profits, it needs new entrants. Two teams already exist in New York City, but why not one or two more? The same is true of the Chicago and Los Angeles Metro Areas. The Pittsburgh Metro Area cannot be increased, unless the U.S. government takes a page out of China’s playbook and utilizes forced migration. However, the markets of these large Metro Areas can be dispersed across a greater number of teams. The Yankees will not like the competition, just as Coke would prefer not to compete with Pepsi, but the fans with a brand new stadium built closer to them will quickly attach themselves to this new team: the New York Subways, sponsored by Subway.
This policy of improved team placement would most effectively level the playing field in the MLB, without the downsides of the other proposals. Unlike a salary cap, additional teams will not distribute money from players to billionaire owners. Contrary to revenue-sharing, bottom-feeders cannot make a living off of more successful teams. Allowing more teams to compete in large markets will create markets that are all approximately the same in terms of profitability. This policy would make team revenue closely correlated to winning, not market size.
Population numbers from U.S. Census Bureau.