Diamonds Are Forever: The Business of Baseball.

Singell, Larry D., Jr.

The business of baseball changed dramatically in the last two decades: Diamonds are Forever: The Business of Baseball is a collection of scholarly work on the impact of these changes on the game. A combination of theoretical, descriptive, and empirical studies examine four broad issues: (1) the labor market for baseball players; (2) the impact of fans; (3) pay, performance, and competitive balance and; (4) the impact of race on salary. In these areas, the book is largely successful in its stated objective of updating economic analyses of professional sports provided in the volume Government and the Sports Business, edited by Roger G. Noll |1~.

The three papers in Part I examine how operating procedures in major-league baseball can affect the labor market for players. The first paper by George G. Daly describes the potential effects of contracting structure on competitive balance and contest legitimacy. In particular, Rottenberg |2~ proposes that resource allocation is invariant to ownership rights to player services; Daly examines circumstances when this application of the Coase theorem might break down. He argues that prior contractual agreements limiting players' negotiating options with professional sports leagues (e.g., the reserve clause) may be economically efficient because it protects, and thereby encourages, transaction-specific investments. These investments have real effects that can include a larger level of league output, higher-quality athletic performances, enhancement of league legitimacy and competitive balance. A second paper, by Frederick et al., distinguishes empirically between three competing hypotheses of arbitrator behavior in final-offer arbitration. They find that behavior differs for second-time versus first-time participants in salary arbitration; specifically, repeated arbitration narrows the spread between salaries proposed by a player and his team, suggesting that final-offer arbitration converges to the player's "true" market value. The final paper in this chapter by Paul L. Burgess and Daniel R. Marburger estimates the "bargaining-power effect" of arbitration eligibility. By comparing the salaries of arbitration-eligible players with those who are not, they find that hitters, starting pitchers, and relief pitchers obtain, respectively, an 86, 89, and 58 percent salary increase subsequent to eligibility. They conclude that final-offer arbitration serves to encourage negotiations between players and clubs, which reduces the apparent monopsony power of team owners.

Part II contains three papers that examine the role of the fan in determining the team winning percentage, ticket sales, and value of baseball cards. Philip K. Porter develops a theoretical model and provides empirical support for the contention that "fan fickleness" directs players to markets where the demand for high quality is greatest. A team is thus rewarded for acquiring players that fans want to see most, and its viability depends, not only on the number of fans, but their demand for quality. A paper by David J. Salant models season ticket holders as having an implicit contract that provides the option to purchase tickets for high demand games (e.g., playoff tickets) at below-market prices in exchange for their initial precommitment to purchase season tickets. Thus, if teams charge high ticket prices in good times it violates their implicit contract and lowers the value of season tickets in the future. Thus, offering below-market prices for playoff tickets to season ticket holders is a method of increasing ticket sales in bad years and smoothing gate receipts over time. Finally, John A. Vernon provides a case study of the picture-card industry in its infancy. The paper details the restraint-of-trade action filed before the Federal Trade Commission by one bubble-gum card manufacturer against another.

Part III includes two papers that examine the relationship between a player's pay and performance. A paper by Andrew Zimbalist expands upon an empirical technique proposed by Scully |3~ to determine player contributions to team earnings by using more robust measures of player performance. The paper also presents an alternative method of calculating a player's marginal revenue product; estimates support prior evidence of monopsony power of the league and the author offers some normative assessments of its impact on the game. Rodney Fort uses salary data over twenty-five years to test the relative importance of various salary determinants during the "reserve-clause" versus "free-agency" period. The determinants of salary, while changing somewhat over the period, collectively explain a greater percentage of the variation in salary over time; it is hypothesized that this is due both to the redistribution of income towards players and the increase in the demand for the output of major-league baseball. However, salary inequality between players also appears to increase over time, especially in recent years when free agency and a union are introduced. This phenomenon is not explained.

The final section is comprised of two papers that address whether racial discrimination is present in major-league baseball. A survey by Lawrence M. Kahn, while finding little evidence of salary or hiring discrimination, indicates some unexplained racial differences in career length and persistent, but declining, segregation by position. Bruce K. Johnson finds, however, that a player's salary may depend on the racial composition of his team. Specifically, white players who play on a relatively black teams earn more than those who play on teams that have a racial mix that includes more white players. This finding is consistent with employee discrimination models that predict whites require a premium to work with blacks; however, this result could also arise if fans prefer, on average, to watch white players.

Overall, the book offers an interesting look at how recent changes in baseball affect the game both on and off the field, and is likely to be enjoyable reading material for most baseball aficionados. A possible shortcoming of the book is that it deemphasizes the implications of its findings for industries beyond professional sports that are of broader scholarly interest. Nonetheless, a majority of the analyses make clever use of the unique institutional setting provided by major-league baseball and its detailed data to test hypotheses that could not be otherwise examined using more traditional industries. Larry D. Singell, Jr. University of Oregon

References

1. Noll, Roger G., ed. Government and the Sports Business. Brookings, 1974.

2. Rottenberg, Simon, "The Baseball Players' Labor Market." Journal of Political Economy, 64, 242-58.

3. Scully, Gerald W., "Pay and Performance in Major League Baseball." American Economic Review, 64, 1974, 915-30.