Competitive Balancing Act I, Scene IV—The King James Version: An Overview of the Literature
by Mike Carminati
Other entries in the series:
Competitive Balancing Act I—The King James Version: An Overview of the Literature, Scenes I, II, III, and IV
Competitive Balancing Act II—This Is Pop: Redefining Large- and Small-Market by Population
Competitive Balancing Act III—C'mon Freddy, Everyone into the Poo-el: Reviewing the Available Player Pool
Competitive Balancing Act IV—Natural Resources: Attendance and Competitive Balance
[T]he sanity of society is a balance of a thousand insanities.
—Ralph Waldo Emerson
Now, we'll complete the review of the competitive balance literature with two of the more influential writers on the topic, Andrew Zimbalist and Bill James.
Zimbalist is probably the most prolific writer and speaker on the topic of competitive balance (He also has a new book with Bob Costas, of all people, May the Best Team Win: Baseball Economics and Public Policy ). He is second to Rottenberg in influence over academic study on the topic (and seems to have a rival in Doug Pappas—at least on April Fool's Day).
His theories are grounded in the academic and are based on Coase/Rottenberg. However, Zimbalist has had a flare for blue-skying and theorizing beyond the strictures of the free agent model beyond which most of the academic studies have not ventured.
In his 1992 book Baseball and Billions, Zimbalist devotes a section to "Free Agency and Competitive Balance" (pp. 95-104, hardcover edition). He starts with Rottenberg and then points out some "nuances…that require qualifications in his conclusions." He explains that after free agency "poor clubs [are] no longer as able to sell off their stars[; therefore], an important source of revenue is curtailed", thereby possibly creating "greater competitive imbalance". He also points out that "Rottenberg did not consider that free agency might raise transaction costs (the costs of making and enforcing a contract)."
However, he points out that "competitive balance… has become noticeably more equal [since 1976]", citing playoff and World Series teams.
Zimbalist instead of pointing to the usual suspect of free agency instead points to a number of other factors:
- He points out that the start of the era of greater competitive balance more closely coincides with the establishment of the reverse-order amateur draft in 1965. It "eviscerated the 'bonus wars' of the 1950s and early 1960s."
- Second, Zimbalist points to a greater "compression of baseball talent".
- Citing Scully, he opines that "baseball's growing balance is a function of population dispersion, in particular, there is a tendency for small- and medium-size cities to grow more rapidly than big cities[, resulting] in a leveling of media markets." This can be seen by looking at the census figures for up-and-coming cities like Las Vegas and Orlando. Zimbalist points out, however, that "this dynamic has not yet come to baseball. In fact, local sources of income have grown considerably more unequal over the last twenty years."
However, revenues have been equalized because of national media contracts and licensing, i.e., equally shared "central revenue sources…have been growing the most rapidly." But Zimbalists seems dubious, correctly, that the central revenues will continue to outpace local ones and cites this as the main rationale for revenue sharing.
- Zimbalist also points to the Yankees dynasties of the past being facilitated by its incestuous relationship with the Kansas City A's, which also ended in the mid-Sixties, when CBS purchased the club.
Zimbalist then points future trouble spots opining that the amateur draft has potentially run its course as a leveling agent. He points to the Todd Van Poppel and Brien Taylor signings, neither of which did much to help the parent club. He speaks of a GMs getting over a "learning curve in dealing with free agency". Finally, Zimbalist presages what is now considered the largest problem facing competitive balance, that local revenue growth for some teams has outpaced central revenue growth. "This, of course, could engender financial instability."
Finally, Zimbalist closes the section by comparing free agent MRPs for large- and small-market teams. His findings are that the prevailing opinion, that star players mean more to large-market teams than small, is not supported by the facts. His rationale is that a) team revenues over the long haul are not so easily swayed by a free agent signing, but rather by a tradition of winning, and b) a free agent signing in a small market can have a greater affect than in a large market. Also, he points out that teams do relinquish a draft pick in signing a free agent so Coase's assumption that there is an absence of transaction cost is not supported.
There is an interesting passage near the end of the section:
It will always be in MLB's self-interest to exaggerate the economic difficulties of its weaker franchises, since it provides a ready rationale both not to expand the number of MLB teams and to allow existing franchises to move to greener pastures [Mike: or at least threaten to do so].
When I next caught up with Zimbalist, in his 2001 article in The Milken Institute Review, his tune had changed considerably:
Owners on the lower half of MLB’s economic ladder might well opt to minimize payrolls and ride the revenue transfers to profitability.
He uses the Blue Ribbon Panel report as a leaping-off point and proceeds to assess competitive balance since Baseball and Billions. He blames "baseball’s new national television contract in 1994[, which] cut payments by over 60 percent," coupled with a great disparity in local revenue growth for helping create the competitive imbalance. ("[In 1999,] the Yankees earned $176 million in local revenue, while the Montreal Expos managed just $12 million.")
He then points to expansion as a corrosive agent in the trend towards talent compression:
The distribution of baseball skills follows the familiar bell-shaped curve. The larger the number selected to play major league baseball, the greater will be the difference between the best and the worst players.
I am still not sold on his talent compression theory and will test it with a study or two later in this series. He points to the pre-World War II years as an era in which talent disparity was great, and, therefore, superior players set the records that still live to this day. However, "by 1998 talent dilution had almost reached the level of 1930. So, today, the McGwires and Sosas can more easily excel."
Next, he looks at team payrolls citing the inequalities by quartile that from the Blue Ribbon Panel:
And by no coincidence, correlation between team payrolls and team won/loss percentages was statistically signifi- cant at a 99 percent probability level in every year between 1995 and 2000 (and in no year between 1985 and 1994). [Mike: though he cites no study on the matter.]
The final half of the article is devote to the Blue Ribbon Panel's recommendations. First, citing The Wall Street Journal, he calls the Panel's financial cliams, accepted uncritically from the teams, "not credible". He also includes the great quote by the soon-to-canned baseball president and chief negotiator, Paul Beeston, "Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every national accounting firm to agree with me."
He does say that the Panel's report "offers solid evidence of baseball’s growing competitive imbalance, and interesting ideas on what to do about it." Zimbalist fleshes out the Panel's revenue sharing plan:
[The report says] MLB should levy a 40 to 50 percent tax on a club’s net local revenue, then put the money into a central pool and distribute 1/30th of the pool to each club…The real impact would come indirectly, through the incentive effect of this local revenue tax. Assuming the tax was set at 50 percent, each increment to a team’s net local revenue would be reduced by 48.3 percent. This is because half would be taken away by the tax and 1.67 percent would be returned by the equal distribution from the pool to each club. Now, suppose Steinbrenner were contemplating signing Johnny Damon and estimated that, with Damon in the Yankee outfield, the team would generate an additional $16 million in annual local revenue. Without the local revenue tax, Steinbrenner should be willing to offer Damon any salary up to $16 million. With the tax, he should be willing to offer only $8.27 million [$16 million X (1 – 0.483)] [Mike: The new CBA calls for 34% tax].
Though he does argue that revenue sharing would affect salaries more than competitive balance: "the redistributive impact of revenue sharing is likely to be considerably weaker than its negative impact on salaries." He also says that their second recommendation, a 50% tax on payrolls over $84 M, would have the same effect.
Zimbalist does agree with the Panel's recommendation to amend the reverse-order draft, i.e., to add foreign-born players to the draft pool.
As the signing bonuses for foreign free agents increased, U.S. amateurs also demanded higher bonuses. Rather than lose draft picks, low-revenue teams began to skip over the top prospects. The high-revenue teams, though lower in the drafting order, started to get better domestic, as well as foreign, talent. Thus, changes signing new talent, which had promoted competitive balance, seem to be aggravating imbalance today.
The owners were unable to make this last change in the new CBA. However, Zimbalist argues that if the owners remove the compensation rule that gives a team a draft pick when it loses a free agent. By doing so, the draft would no longer be part of the negotiation process and the owners could institute whatever rules they want.
Zimbalist concludes that "to remain effective over time, any reforms baseball adopts in the name of competitive balance will have to sustain both the financial means and incentives for clubs to compete on a more equal footing."
He proposes that baseball break up its monopoly of its own accord. And have the "two competing business entities" with common rules and an intersecting playoff system:
With two separate businesses, it would be inconceivable that Washington, the nation’s seventh largest media market, would be without a franchise for 28 years. Just as McDonald’s and Burger King race to be the first to open a new restaurant at any promising street corner, each of the two leagues would try to exploit a potential market. Worthy host cities would not have to go begging for teams. Moreover, cities like New York might find themselves with a third or even a fourth team, and the relative revenue advantage of the Yankees would diminish.
He does say that the plan "has about as much chance being implemented as Ralph Nader had of being elected president," given the politics involved.
He warns baseball to proceed with care when making any changes. He cites the fact that teams do not have to reinvest revenue-sharing funds and says the 1996 revenue sharing plan as possibly exacerbating competitive imbalance. He notes that balance may be restored by the new stadiums being planned or built in a number of the poorer teams' markets and by the national media revenue increases ($6 M per club per year). He ends by saying, "It is possible that errant reform will produce more harm than good."
Zimbalist's take on baseball's competitive balance (or imbalance) continued to develop as witnessed by a speech he gave May 29, 2001 at a panel on free agency and collective bargaining (where evidently any mention of competitive balance was verboten).
On the topic of collective bargaining, Zimbalist sums up the owners' approach well:
[I]n the process leading up to collective bargaining, the owners get together…they discuss what they want to propose to the Players Association, and they can’t agree on anything, except one thing: and that is that they want to smash the players. So they come to the collective bargaining table with some plan either to introduce a salary cap or introduce luxury taxes or some other restrictive practice to affect the labor market. And that’s what confronts the Players Association as each collective bargaining session begins. The two sides are at loggerheads…
Zimbalist then proceeds to sneak competitive balance into his oration. He starts by stating that the having the two topics free agency and collective bargaining implies that the two are at odds and that "somehow free agency is part of the problem in collective bargaining rather than part of the solution", which is what he believes it to be. Free agency is beneficial to the sport in two ways: 1) It lifts salaries to the true market value, and 2) "it promotes a higher quality product [by attracting] a better quality of player."
However, "[I]nsofar as competitive balance is a problem in baseball today, and [Zimbalist is] one who believes that it is, I think that free agency actually tends to support balance, greater balance." There are two reasons that free agency does this. First, that it makes it more difficult to keep a winning team together. The other reason is that it allows owners to maximize profit by piecing together a team that will potentially barely win their division. There are more teams that can do this with the aid of free agency. This maximizes profits by promoting more fan interest.
Even though high player salaries grab the headlines, but as Zimbalist shows, salaries' share in baseball's revenues has remained steadily at the same level, slightly above 50%. However, the owners claim that two-thirds of the teams are losing money and that revenue imbalance has created a competitive imbalance.
To remedy these problems the owners propose contraction, increased revenue sharing, and additional restrictions on the labor market, i.e., to free agency.
Zimbalist is cynical on the topic of contraction, that it is nothing more than a bargaining chip in the negotiation process. It can also be used as an additional threat when a team cannot exact a new stadium or other concessions from a community. It had been that they could just threaten to move, but contraction add the threat to obliterate the team altogether to their weaponry. He warns, however, that contraction would potentially face "serious political obstacles in Congress" in the form of a withdrawal of "baseball’s antitrust exemption." He also takes a look at the issues in Florida that potentially could have led to the Marlins' contraction and concludes, "The problem in Florida is bad management and a bad stadium contract. It's not a bad stadium and it's not a bad area" even though those are the reasons usually cited for their potential contraction. The final obstacle to contraction is the players association. However, they have ceded the right to challenge contraction in the last CBA starting in 2006. Zimbalist dismisses contraction with " contraction is not going to happen…it’s a political ploy."
Unfortunately, Zimbalist starts running out of time just as he starts gathering steam. He does have an opportunity to land some mighty blows on the topic of competitive balance:
[I]t seems to me that the public discussion about competitive imbalance so far has been characterized by polarized extremes. People are writing articles either saying there is no problem, baseball has always had competitive imbalance, we don’t have to do anything about it, or they’re writing articles that say this is a cataclysmic event, the world has changed in the last five years, something has to be done drastic right away or baseball is going to implode. I think reality very clearly lies in between those two extremes and I would hope that some of the discussion can become more balanced and more nuanced.
Very well said. He blames the 1996 CBA for promoting bottom-feeding: "Any team that at the beginning of the year thinks they don’t have a chance to win does better economically by shooting for the bottom. And that’s actually hurt competitive balance."
Zimbalist ends with revenue sharing and how it may affect competitive balance:
Well with competitive imbalance the real issue here is the fan. We’re concerned about competitive balance because we’re concerned about maintaining and maximizing fan interest. The only way we’re going to know about how much competitive balance we need that maximizes, that optimizes the situation in baseball, is going step-by-step. So I think the appropriate way to approach that question [revenue sharing] is to move with a moderate amount…do it in steps over the years of the next collective bargaining agreement. See where that takes you, and then move from there.
The final entry in the Zimbalist litany is a speech he gave in 1992 ("The Economics of Baseball"). A lot of it is a rehash of Baseball and Billions. However, he has a section near the end on the viability of expansion to new markets:
One of the ways you can figure out whether a city is viable or not is to consider the following: the Cincinnati Reds are in the smallest media market of any baseball team. Cincinnati is the thirtieth media market in the country. The Cincinnati Reds have operated profitably for time immemorial. It's a profitable ball team in spite of the fact that it's the thirtieth largest media market. No other ball team is in a smaller media market. If you consider that, with the fact that four cities, including the Bay Area, have two baseball teams and there are two teams in Canada, then without admitting any new teams to cities that are smaller than Cincinnati, you could have thirty six teams instead of twenty eight teams in major league baseball. And there are another twelve or fifteen cities that are within ten percent of the media size of Cincinnati. So if you had an expansion program that went to the year 2000 or 2005 and you posit a population growth of only around one percent for those cities, then those cities also would be large enough. So there are enough cities out there which can support a major league baseball team.
It's an interesting point that runs counter to commonly held theories. It's something that we'll explore further in a future section.
Finally, Zimbalist proposes regulation for the sport:
We need a national, a federal sports agency that oversees the game in every aspect, one that would set a timetable for expansion, that in return for the tens of millions of subsidies that cities give to baseball teams that a certain amount of free access television, ticket pricing controls could get put in place, other kinds of controls on the exploitation of minor leaguers and amateurs could also be put in place. There have been bills that have come up in Congress from time to time to introduce regulation. So far they haven't made it, and of course, like every other political change that might be salutary in this country, it's going to take a lot of work.
That's just about the most extreme idea that I've in any of the studies on competitive balance. Given the gains that the owners made in the last CBA, unless they do something stupid to really tick off the powers that be, it seems a long shot.
James, as opposed to Zimbalist, has written a scant few pieces on competitive balance. However, his influence in the baseball community at large mirrors Zimbalist's in the academic world. Obviously, he's had his influence on me since I named the piece after him. His economy of language is like the sparse notes that Louis Armstrong used in his later solos that expressed more than his more frenetic earlier works.
James first investigated competitive balance in his 1983 Abstract, in which he first establishes his oft-quoted "Law of Competitive Balance":
There develop over time (within a season, between seasons, within a game, between games) separate and unequal strategies adopted by winners and losers; the balance of those strategies favors the losers, and thus serves constantly to narrow the difference between the two
I love how the man can straight through the BS. Unlike the various studies that have added variables for everything under the sun while missing the big picture, James keeps it simple and cuts straight to the bone. Competitive balance is about how easily bad teams become good teams and visa versa. That's it.
The difference in strategy "is in how the two teams view the need to make changes." Winners end up developing a "self-satisfaction." Instead of replacing a sub-par player as a losing team would, they say, "We won the pennant with him last year." Winners don't address problems because they cannot see their problems. They are "frozen by [their] success." Meanwhile, "the more help you need, the more seriously you look at the options that can help you…A team which losesa pennant race by three games or less is much more likely to win the race in the following season than is a team which wins by three or less (Italics his)."
James backs this up with a study: He looks at all teams that won 90 to 96 games in a 162-game schedule. The teams that won a pennant or a division title, the "winners", ended up retaining 81% of their starters while "losers" (i.e., 90- to 96-game winners who did not win a title) retained only 75%. The winners' winning percentage on average decreased from .571 to .536 (35 points) while the losers went from .570 to .549 (21 points; note that by James' Law a winning team will decline on average in the next season). Twelve of forty losers won a division title or pennant the next season while only three of eighteen winners repeated.
He then uses the example of guarding the lines late in a game as anecdotal evidence of the influence of the Law in an individual game. "It increase the chance of a single, but decreases the chance of a double. The move generally allows more singles than it prevents doubles, thus it increases the chance that the opposition will be able to put together a big inning. But, because it prevents the double which would put the runner in scoring position, it decreases the chance of allowing a single run (Italics his)." Teams play for the big inning and for preventing the big inning early in a game, but their strategy changes later in the game. "The one-run inning becomes much more important, so you guard the line."
Next, the bugbear of competitive balance, free agency, is James' next topic. At the onset, free agency was expected to cause a great deal of competitive imbalance (which James points out was the expectation when rosters were expanded to 25 men, the fear being that the Yankees could use the extra roster spots to stockpile talent). However, what resulted was "exactly the opposite of what they originally said. Then they said it would destroy competitive balance; now, it is going to enforce competitive balance (Italics his)." This was James' stand in 1983, but it would change in his later writings as we'll see.
James then examines how the Law affects World Series play. He finds that the first-game losers won game two 56% of the time. Teams trailing two games to one win game four 52% of the time. Teams that trailed 3-2 won game six 62% of the time. "Why? Because they adjust."
Lastly, James applies the Law to individuals. "The less talent you have, the more you are forced to learn, to adapt, to adjust…The process constantly diminishes the distance between the best players and the worst…An finally, it defines greatness…Great ballplayers continue to experiment, continue to try things, continue to learn before they are on the road to oblivion…[that is] what you have to do to defy the Law of Competitive Balance."
Bill James revisited the topic of competitive balance in 1990 in that year's edition of The Baseball Book. He examines how few teams defended their division titles in the Eighties, three after twenty in the Seventies:
The human mind searches ceaselessly for cause and effect relationships, so when championship teams stopped repeating in the 1980's there was a causal connection drawn between this fact and the other most obvious change in the game, that being the advent of free agency in the late seventies. It is human nature to make such a connection…That was what the Abstract was about, in essence.
James says that even though he was skeptical for much of the Eighties, he believes that it was more than a random fluctuation. He does not have an explanation for why competitive balance had been so strong but itemizes eleven thoughts on the topic:
1) "Throughout the twelve decades of professional baseball, the difference between the best teams and the worst teams has gotten constantly smaller." He means that on a per-decade basis the differences between the best and the worst teams has gotten smaller each decade.
He does make the following unfortunate prediction: "In the next decade, it is extremely likely that the range [i.e., of the winning percentage of the best teams] will be more like 58 to 63 percent, although one or two teams may win more."
2) There is probably some randomness involved in the severe dropoff in repeat champs in the Eighties.
3) "Even historical trends which last for more than a century may eventually reach maturity…I don't think it is possible to get a great deal more balance among teams than we have now." This proved to be quite prescient.
4) Expansion causes the appearance of competitive imbalance since new teams are less likely to be competitive. He finds that this lasts up to ten years after expansion. In the Eighties the effects of the two rounds of expansion disappeared. Baseball expanded in 1993 and 1998 so it is just escaping from one round of expansion, but according to James' findings there is still some effect from 1998.
5) James finds that the effects of the reverse order draft didn't take hold "until the late 1970's, about twelve years after the first draft." So the draft's leveling effect was not fully realized until the Eighties.
6) There were teams in the Eighties that, like the Braves in the late Fifties and early Sixties, should have dominated but didn't. He points to the Mets, Blue Jays, and Sparky Anderson-lead Tigers.
7) The then-new strategy of "bail-out" trades, those made at the trade deadline to either dump salary or to get something in return for a year-end free agent, became popular in the Eighties. "But the effect of this roster strategy is to put a team into a pattern of contending in some years, and not in others. More teams now are in a position to contend…If a contending team can make a trade…it may vault that team up to a level that it is impossible for any team to match year after year."
8) Free agency does have an effect. "The role I see free agency playing is rather different, almost opposite, from the [usually suggested] role…which is that free agency tears apart championship teams…Players of today do not, in fact, change teams more often than players of other generations. What I see is that there may be Too much stability in personnel for teams to repeat…[T]here are all of those players who can't be moved. The effect: competitive balance." Willie Wilson's contract with the Royals is "the classic example".
9) The positives of parity (more teams enter the season thinking they can contend and more teams actually contend) outweigh the negatives (indistinguishable blandness).
10) James draws parallels between Stephen Jay Gould's theories on a general improvement creating competitive balance and his Law of Competitive Balance.
11) Finally, "[c]ould anything cause parity to go backward? Will we ever see a .700 baseball team again?" James sees only one possible for reversing the course of ever-increasing competitive balance, a new league.
James returned to the issue of competitive balance eleven years later when he revised his classic Historical Baseball Abstract. First, he establishes an "Index of Competitive Balance" based on the average standard deviation of winning percentages per season over the decade and the decadal average standard deviation of winning percentage. James is trying to account for variations among the teams in a season as well as over longer stretches of time. There is of course the problem of standard deviations being an inappropriate measure across leagues with different numbers of teams and with different lengths of schedules. He never fully explains how the index is derived ("because it's boring") but does state that lower index scores indicate less competitive balance and that a perfect score is 100%.
Here are the index scores per decade:
This contradicts James' previous statement that competitive balance has been ever-increasing over the twelve decades of baseball history. It looks relatively flat for the first half of 1900s. In the 1990s section of the book, James assesses the decade thusly, "[A]s the decade has moved on, competitive balance has begun to fray [even though] overall competitive balance was greater in the 1990s than in any other period in baseball history." His stand on free agency has changed as well: "Many things suggest that free agency now is destroying competitive balance, although it took twenty years for this to happen."
Frankly, I'm very surprised by James' turnaround on competitive balance in the past decade. I'm also confused because so little of the reversal is documented. As a matter of fact, the data cited contradicts his assertions.
Perhaps the growth of competitive balance that steamrolled through the three previous decades has slowed, but a) is still grew slightly and b) there is not indication that free agency is affecting competitive balance in the Nineties any differently than it did in the previous decade and a half. I could see revenue imbalance and the shortcomings of the previous CBA having more of an affect. Besides maybe the precipitous growth of the previous few decades were the anomaly and slower growth is more the norm.
Also, I have a germ of a theory that adding an extra round to the playoff system has had an affect. The number of playoff teams were doubled to eight out of thirty from 4 out of 26 in 1992, 4 out of 24 in 1976, 2 out of 20 in 1968, and 2 out 16 prior to 1961. You'll recall the theory that teams that make the playoffs do less to improve themselves than those who do not. So perhaps there are more teams doing less to improve themselves, given more make the playoffs. However, I would think that this would help both components of James' index. I keep attacking this from different angles but I can't see how the extra playoff teams negatively impact competitive balance. I'll see if I can come up with anything intelligible when we conduct our own study.
Anyway, I agree with James' original approach of attacking the competitive balance in a less cause-and-effect approach and more of an anecdotal approach, of course, supported by the meaningful data. My concerns with the strict data modeling approach are based in my belief that you cannot properly model all of the things that affect competitive balance. To control for whether or not there is a reverse-order draft ignores the reality that the influence of the draft has changed over time as international players, who do not enter the draft, have driven up the signing bonuses requested by in-demand draft-eligible players, thereby causing low-revenue teams to bypass those players. Free agency cannot be controlled for as well. Even if one controls for free agency weighting by the number of free agents, a myriad of issues is ignored: bail-out trades, long-term contracts to young players, arbitration pay raises, teams colluded not to sign free agents, and the fallacy of the assumption that the number of free agents has a direct, linear affect on competitive balance.
I will now undertake to study competitive balance using the approach that there is a story with many facets and no one model that explains it all.
—"The Law of Competitive Balance", The Bill James Baseball Abstract 1983: The Thinking Fan's Guide to Baseball (Ballantine Books, 1983, pp. 220-223)
—"The Parity Party", 1990 Baseball Book (Villard Books, 1990, pp. 32-34)
—"Index Fingered", The New Bill James Historical Baseball Abstract (The Free Press, 2001, p. 19)
—"The 1990s in a Box", The New Bill James Historical Baseball Abstract (The Free Press, 2001, pp. 311-312)