I have been witness to the homer's calling for their team to sign every Type-A free agent or thinking they have the best shot at every free agent since their team has cap room...We have all been there, some of us have been the ones guilty of this crime.
But let's be real, most people on this site, or in the sporting world have no clue what goes on internally as far as decision making on the GM and Owners part.
What they are missing is called the "Economics of The Game". Or simply the cash flow, and money decisions that the GM and Owner take part in. But you may think, it's as simple as having cap room and spending that cap on the best player available...Well you're right in certain aspects. Obviously you want to have "the best player available" and you always want to stay under your cap, but what you are missing is the other half of the decision, the long run and economic payoff decision.
It will be my goal in what time I have here to simply guide you through what "Economics of The Game" are all about. What decisions and decision making processes and formula's the GM's and Owner's go through.
First of all, let's all assume every sport franchise and owner is a profit maximizer, or simply "in it for the money". In the business today, it is a pretty safe assumption that owners are this way, exceptions do apply like Jerry Jones, and the Green Bay Packers. But for the sake of my fingers and your brain, lets keep it simple.
In a perfect economic world, if every owner and franchise was profit maximizing, the distribution of players and thus talent would be even on every team. This is due to the owners self-interest that they do not become too strong compared to their rival or neighboring team. Players would be evenly distributed among the teams that best fit their needs and will yield the highest payoff.
However, the situation I just gave you is not what we have today. In the NFL we see two principles that negate the "utopian sport world" as mentioned above, the two principles are Revenue Sharing and Salary-Capping.
As I said earlier, most franchises are profit maximizer's, but the NFL policy of revenue sharing skews my hypothetical utopia above. Revenue sharing means all revenue made by a franchise will be pooled together and distributed evenly among the teams in the NFL. This causes the owners to have no incentive to get better or make the best decisions that would increase their economic profit. Although, exceptions do apply again, you may have a owner who values winning as much as money. The other violation of my utopian sport world is the salary cap. The Salary cap can exclude players from finding the team that best suits their interests because the team may have already hit the maximum spending ceiling (in economic terms this is called a "price ceiling"). This can cause a chain reaction...the player signs somewhere else that doesnt fit his needs, he creates a dissention on the team, causing that team to fall behind the rest of the league, and disrupting the balance of the utopian sporting world.
Lets move on to another hypothetical situation. Suppose the NFL had no salary cap, no revenue sharing...say it was a completely free market in which teams could spend whatever they wanted. In this example I will use Jerry Jones. Mr. Jones is known for "buying" the best player available, and in this scenario he "buys" every free agent. Thus making the Cowboys unstoppable. They win the Super Bowl every year until the cap is reinstated.
Now most of you cowboy fans think this would be the greatest situation on earth...and from a fans standpoint it really is. But from an Owners...wow, worst nightmare has come true. You must be thinking "is he crazy!?!?! Any owner wants to win that many championships". Well from an economic standpoint, no you don't want to win that many...especially in a row.
The situation I have just created is a prime example of a "Monopoly". Most teachers and students know that a Monopoly is a business owners dream, you control price and you control output. Basically letting your Marginal Revenue skyrocket. But what owners in most sporting leagues realize is they need competition to boost sales. In the sporting world, it is more profitable to have competition as good if not better than you. Because in the hypothetical situation above, after the third maybe fourth championship, Jerry Jones will start to see decreasing marginal utility, or less and less people care and receive positive externalities or benefits from the championships. This causes a loss in Jersey sales, a loss in ticket sales...an all around economic loss.
But where competition keeps the rivalry going, stadiums fill up to see the intense game, people buy new jerseys to flaunt their "fan ship". Perfectly competitive sports is the best economic situation for profit maximizing owners.
The next concept I would like to go over is the ratio of demand to supply. These are common terms when talking about supply and demand for a company that produces, lets say, TV's. Supply would be the TV's and demand would be how many people want to buy a TV from that company. Easy enough.
But when it comes to the sporting world the supply can be anything from a new player or new coach...even a new stadium. And the demand is the demand for jersey's, tickets, anything that the team produces and receives revenue from.
Again, I am going to use an example to show the relationship owners must think about when they factor in supply and demand.
In mid-June, the Milwaukee Brewers acquired lefty ace, C.C. Sabathia. A great economic move by owner Mark Attanasio. The demand for anything Brewers was going down because the Brewers were in a bit of a slide and were losing some games and losing their bid at the playoffs.
The owner used the idea of supply and demand when acquiring Sabathia. He knew if he could increase "supply", he would have more of a demand for the Brewers. He thus acquired Sabathia and instantly sales boosted. Brewer's fans sold out every game for the rest of the season as well as making the Brewers the top jersey sellers according to MLB.com. It also paid off in the sense that the Brewers made their first playoff appearance in 26 years and boosted fan morale. But you may think since the Brewers lost Sabathia, demand goes back down. Wrong, by increasing the supply and raising demand high for a long period of time, Attanasio created investors in his team...aka season ticket packages for the next year hit an all time high when the season ended. Even though he lost Sabathia and his "supply" he gained a long run investment.
The principle rule of supply and demand is you want supply to equal demand to maximize profits. That is what Attanasio did, he created more demand so that it would equal his supply and payoff in the long run economic world.
That will end my first lesson on "The Economics of The Game"...hopefully next week I can churn out another article with some more great hypothetical situations!!
Hope you enjoyed the first of my 3 article installment of "The Economics of The Game".