Session
3 — Oligopolies
Case Study 7.3e_02 "Free Agency and the Rising Cost of Baseball"
Directions: Complete the following case study and record your answers on a separate sheet of paper.
Topic: How unrestricted competition for resources increases the costs of running a business and restricts free market competition.
Objective: To demonstrate how competition for limited resources increases the price of those resources and allocates them to the buyers who are most able to afford them.
| Key Terms: | competition | professional association |
| oligopoly | ||
| Careers: | announcer | lawyer |
| Web Site Links: | cbs.sportsline.com/u/baseball/mlb/salaries/index.html | |
| www.majorleaguebaseball.com | ||
| www.salary.com | ||
CS Question #1: What factors have contributed to the increase in professional baseball players' salaries?
Free agency was established in 1976. The lawyers for the Professional Association of Baseball Players negotiated with the owners of the teams for unrestricted free agency approval. Free agency allows any player who has been in the league for six years to become an unrestricted free agent. Free agents are allowed to sign with any team that offers them the best compensation for their services. This has created economic competition among the teams. The most talented players become the subjects of a bidding war between two or more teams that are interested in their services. The bidding wars have contributed to the great increase in players' salaries. Free agency has also decreased the level of loyalty that players have to a particular team.
CS Question #2: Who did unrestricted free agency benefit? Why?
In 1990, free agency received an additional boost from an increase in television revenues. The effect of the increase was immediate and the average yearly salary rose over $200,000. For small-market teams existing in small cities, this increase in costs has been devastating. These teams do not make the same profits as do teams in larger markets such as Los Angeles or New York. They do not have the television revenues of teams with national cable television stations such as Chicago and Atlanta. Teams with higher profits are able to bid more money for the services of free agents. They are able to keep talented players on the team because they can pay huge salaries. For example, in the 1998 World Series the largest-market team (New York Yankees) played a smaller-market team (San Diego Padres). The New York Yankees' annual team salary was over $80 million. The San Diego Padres' annual team salary was under $50 million. The New York Yankees had an inherent advantage over the San Diego Padres. Because this team was able to pay higher salaries, it could attract the most talented players in the league.
CS Question #3: Why can the New York Yankees spend $80 million on players' salaries while the San Diego Padres can pay their players only $50 million? Is this fair?
Major league baseball is trying to develop solutions to remedy the oligopoly created by the few very profitable teams. Many solutions have been suggested, including:
Each of these methods would lower costs and increase profits for the smaller-market teams. However, these actions would reduce players' salaries and decrease profits for the larger-market teams. Millions of baseball fans enjoy the game baseball each year. This support may diminish if the only teams that have a chance to win are the teams that can pay outrageous salaries!
CS Question #4: What are some solutions to eliminate the oligopoly of the profitable teams?
Further Thought: