Economics: a study of the baseball industry in a free labor market
Holsclaw, David Alan
Master of Arts
The economic literature treating the sports industries has concentrated on a unique institutional restriction in the industry's labor market—the reserve rule. The received theory about the reserve rule is analyzed and is reconsidered in light of baseball's experience since the 1976 abolition of the reserve rule. The reserve rule is a collusive agreement among the owners of major league baseball teams that restricts ball players to offering their labor to only one buyer. Each team, then, holds a monopsony position in its market for players. In a competitive market the last player hired would receive a wage equaling the revenue that his work generates for the franchise. This is the player's marginal revenue product. In a monopsony market the difference between the marginal revenue product and the marginal laborer's wage is a rent that accrues to the firm. One researcher has used an econometric model to estimate the dimension of this monopsony rent. He concluded that the last player hired is exploited of 85%-88% of his marginal revenue product by the firm's monopsony position. The literature also describes a key role for the reserve rule in baseball's product market. The theory depicts the reserve rule as a barrier protecting the industry's product market from excessive dominance by one team. The rule prevents big-city teams from capitalizing on the profitability of a winning team located in a large city. The rule hampers such a team from hiring all the best players. If one team should dominate play all other teams would become unattractive entertainment products to area fans. The theory might be tempered, however, by two considerations relating to team owners. Their objective functions often vary widely from the theory's strict assumption of profit maximization. Baseball owners also are nearly all wealthy individuals. These two factors create a host of circumstances that mitigate against dominance by big-city clubs. An examination of baseball's experience since the 1976 demise of the reserve rule verifies the theoretical analysis of baseball's labor market. The reserve rule did suppress wages below the marginal laborer's marginal revenue product. Baseball's free market experience also has indicated a great deal about baseball's product market. The modifications to the theory that are suggested in Chapter 2 are supported by the events of the last two seasons. It appears that the wealth of club owners and their varied objective functions might combine as bulwarks to the profit-maximizing, dominant big-city franchise. The product market of most teams will not be ruined by the competitive labor market, and industry profits should continue to be healthy.