May the Best Team Win: Making Baseball Competitive

The World Series of October 2001 between the Arizona Diamondbacks and the New York Yankees was more than just scintillating baseball. In that seven-game series, America's pastime became a healing ritual, and baseball helped bring the nation together after the shocking terror attacks of September 11. But the world of baseball was not what it may have seemed during that brief interval. Much was—and is still—amiss.

Just one month after the 2001 World Series ended, baseball commissioner Bud Selig went before Congress to plead poverty for his industry. To get its economic house in order, Major League Baseball proposed to eliminate two or more teams—at the same time that several potential host cities, including the nation's capital, were begging for a major league team. Meanwhile, various team owners were demanding public subsidies from their host cities for new stadiums—and threatening to move their teams if the subventions were not forthcoming. High-revenue teams such as the Yankees maintained their dominance over low-revenue teams, and threats of another player strike sapped fan interest. Ticket prices climbed ever higher, and attendance continued to fall, with 20 of the 30 major league teams dropping at the gate in 2002. Overall, attendance fell 6 percent in 2002 and, as of the All-Star break, attendance was down another 5 percent in 2003.

These recurrent problems are all related to baseball's special status as an unregulated legal monopoly. Alone among team sports, Major League Baseball enjoys a presumed exemption from the nation's antitrust laws. It is the only top-level professional baseball enterprise in the country, and each of its teams is assigned an exclusive territory (in a few megacities the territory is shared by two teams). Until 1992 the industry claimed that its "independent" commissioner would guard against abuses of baseball's market power and privilege. But the few commissioners who ever consistently behaved independently of the owners' wishes were usually dispensed with in short order by unappreciative owners. And even the illusion of independence was shattered in 1992 when Bud Selig, owner of the Milwaukee Brewers, was appointed acting commissioner—and then full commissioner in 1998.

The Antitrust Exemption

Baseball's antitrust exemption has been linked to its player reserve system, which for almost a century gave a team sole rights over a player and forbade players to solicit competitive bids for their services. In 1976, however, a collective-bargaining agreement between Major League Baseball and the Players Association ended that reserve system, lifting the reserve clause from players with six years of major league experience and instituting a system of limited "free agency." And in 1998 Congress passed legislation that lifted baseball's antitrust exemption as applied to labor relations. But even though the reserve system has been in history's dustbin for more than a quarter-century, the antitrust exemption itself remains—though its convoluted history is one for the books.

The exemption is founded in the 1922 Federal Baseball case. In Federal Baseball the Supreme Court affirmed a U.S. District of Columbia Court of Appeals ruling that baseball was a sport, not interstate commerce—and thus not subject to the Sherman Antitrust Act. In 1948 the Second Circuit Court of Appeals, calling the reserve clause "shockingly repugnant to moral principles...that have been basic in America...[since] the Thirteenth Amendment...condemning 'involuntary servitude,'" ruled that baseball was subject to antitrust law. But the Circuit Court suit was settled out of court before the Supreme Court could rule on appeal—and thus was born the ambiguity about whether baseball is subject to antitrust. That same ambiguity explains why the antitrust exemption is often referred to as baseball's "presumed" antitrust exemption.

In 1951, Major League Baseball requested Congress to affirm its exemption. The House Subcommittee on the Study of Monopoly Power held protracted hearings on the subject but passed no legislation. Many observers believe that the House committee thought that the 1948 ruling had superseded the 1922 ruling and that the failure to pass new legislation to grant MLB an exemption meant that the sport would be subject to the nation's antitrust laws.

Yet, in 1953, the Supreme Court reaffirmed the 1922 decision and handed the ball back to Congress, observing that "in Federal Baseball...this Court held that...professional baseball...was not within the scope of the federal antitrust laws. Congress had the ruling under consideration but has not seen fit to bring such business under these laws by legislation.... We think that if there are evils in this field which now warrant application to it of the antitrust laws it should be done by legislation."

Baseball's exemption became still more anomalous in 1957 when the Supreme Court ruled, in Radovich v. NFL, that the National Football League is subject to antitrust statutes. And in 1972 (in Flood v. Kuhn et al.) the Court once more affirmed the 1922 decision while calling it an "aberration" and an "anomaly"—prompting the New York Times to opine, "The Supreme Court made a mistake the first time it considered the subject 50 years ago and now feels obliged to keep on making the same mistake because Congress does not act to repeal the exemption it never ordered."

Since 1990 several judicial rulings on the status of baseball's exemption have resolved little. One state ruling and one federal ruling have held that the exemption applies narrowly to baseball's (now defunct) reserve clause and to no other aspects of the industry. One state and two federal rulings have held that it applies broadly to the entire business of baseball. Together the rulings cover only three of the eleven judicial circuits in the United States, leaving ample ambiguity in the status of the scope of the exemption in the remaining circuits.

Baseball's Ups and Downs

Despite the lingering presumed antitrust exemption, the fortunes of baseball (and its competitive balance) steadily improved between 1965 and the end of the 1980s, aided by the demise of the reserve system and by a reverse-order amateur draft in which teams with the worst records choose first. Before free agency, when players were stuck with a team for their whole careers unless they were traded or released, big-city owners bought good players from small-city owners. The extra revenue produced by these top players went to the owners, not the players, and high-revenue teams disproportionately accumulated player talent. The free-agent market allowed weak teams to improve themselves rapidly and made it more difficult for winning teams to hold together. Competitive balance improved and the era of team dynasties seemed to be gone forever.

Then came the 1990s. Baseball's 1990–93 national television contract with CBS and ESPN awarded each team roughly $19 million a year—almost 40 percent of the average team revenue—from baseball's central coffers to help equalize team strength and keep baseball competitive. But the value of the new 1994 TV contract fell more than 60 percent. With centrally distributed monies falling below $8 million per club, big-market teams like the Yankees and teams like the Baltimore Orioles with new, big-revenue-generating stadiums found their revenue edge growing rapidly.

The revenue disparity between the richest and poorest teams grew from around $30 million in 1989 to $208 million in 2001. As franchise values rapidly escalated, owners increasingly had to be extraordinarily wealthy individuals or corporations that frequently owned other businesses with ties to the baseball teams. In 2001 the Anaheim Angels, Atlanta Braves, Toronto Blue Jays, Chicago Cubs, Los Angeles Dodgers, Cleveland Indians, and Texas Rangers were owned by media companies or media moguls. And the Yankees, Boston Red Sox, and Philadelphia Phillies either owned media companies outright or had joint ventures with them. The baseball teams themselves were only small cogs in large enterprises, but teams like the Yankees and the Braves—inundated with revenue from many sources—grew into dynasties that smaller, low-revenue franchises could not hope to match.

Although baseball has seen and survived past dynasties, such as the storied Yankee teams of the 1950s and early 1960s, the game today is more vulnerable than it was half a century ago. Teams that perform poorly year after year and have few prospects for becoming competitive risk losing fans for good. The game's core base of fans is aging, and younger audiences are enticed by a growing list of professional sports and entertainment options.

Meanwhile, the problem of real and threatened franchise movement continues. Baseball's monopoly allows it to restrict artificially the number of franchises and to dally with cities that have no team—to hold out to them the elusive promise of a franchise, pressuring existing host cities to build new stadiums or otherwise do MLB's bidding. As a consequence, cities and states compete against each other, leading to exorbitant stadium-financing packages and sweetheart leases. Cities have attempted on their own to include lease provisions that deter team relocation and provide a more equitable sharing of the facility returns. But usually only the largest cities have sufficient bargaining leverage to accomplish even part of these aims.

Moreover, baseball's insulation from competition has also contributed to a lax and inefficient management culture. Consider the World Series you are about to watch. Home field advantage this year for the first time was decided by the winner of this year's All-Star Game. Why? Not because it made any logical or competitive sense, but because baseball was desperately grasping for a way to boost its flagging ratings for the mid-season classic. (Despite this artificial inflation, the 2003 All-Star Game failed to improve its television ratings and even saw its ratings fall 9.7 percent in the key 18–34 male demographic relative to its record-low ratings in 2002.) The pattern here is well established. Grab for the proximate dollar and never mind about the long-term consequences.

Or consider the revealing message in Michael Lewis's new book Moneyball: The Art of Winning an Unfair Game. For decades, baseball teams' front offices were run by "good old boys" who followed a dubious lore of player evaluation as if it were catechism. The enlightening statistical analyses of the game by innovators like Bill James went ignored until Sandy Alderson in Oakland decided that his team could benefit from James's insights in the mid-1990s. And benefit they did, creating a first-class competitive team on a shoestring budget. Now, after a 25-year delay, several teams are beginning to change their ways and introduce the teachings of Bill James and his followers.

Or take the absence of a Major League Baseball team in our nation's capital, the eighth-largest media market. The National Football League, the National Basketball Association, and the National Hockey League, all without antitrust exemptions, have teams in Washington, D.C., but not Major League Baseball.

Baseball may finally have mismanaged itself into a position where Congress may be willing to enact some meaningful public policy reforms to curtail MLB's monopoly powers. Congressional initiatives in this area, however, would have to rise above a history plagued by local chauvinism and myopia. In the past, sponsors of legislation have invariably reacted to a team movement problem in their state or district, opportunistically seizing the occasion to posture in defense of their constituents. While it is arguable that there could be a small gain in net global welfare when a team relocates from a smaller to a larger city, it is clear that proper public policy should be oriented toward increasing the supply of baseball franchises so that all economically viable cities have a team. In this as in other problem areas, the solution is to strip MLB of its antitrust exemption, exposing it to judicial review and additional competitive pressure.

Solving the Problem

In a 1972 decision involving the reserve clause, the chief justice of the Supreme Court stated, "It is time the Congress acted to solve the [antitrust exemption] problem." Nothing has transpired in the ensuing 30 years to lessen the urgency of that appeal.

But even if Congress were to resolve the ambiguity over the scope of baseball's presumed exemption in favor of judicial review and competition, lifting the exemption would not guarantee competition in the industry. It would merely potentially put a check on restrictive behavior—and encourage much-needed judicial discovery of facts and analytical challenge of baseball's assertions. To promote competition and resolve the problems noted above, Congress should contemplate a forced divestiture of MLB into two competing business entities. The entities would be allowed to collaborate on playing rules and on interleague and postseason play, but not to divide up metropolitan areas, establish common drafts or players' markets, or collude on broadcasting policy. Under these circumstances neither league would be inclined to vacate an economically viable city, and, if it did, the competing league would be likely to jump in, just as McDonald's and Burger King rush to beat the other to any viable strip mall. Other consumer-friendly consequences would flow from such an arrangement, and lower local, state, and federal subsidies would scale down team revenues, owner profits, and player salaries. But competition would compel more efficient management practices and teams would remain solvent, albeit with reduced cost structures.

When he was still baseball commissioner, Fay Vincent referred to Washington, D.C., as an "asset" of baseball even though no team was playing in the nation's capital. Why? Because D.C. was and is a potential host of a team and could be used to leverage better deals from other cities. Baseball treated D.C., in a sense, as if it owned the town. This sense of ownership, in turn, derives from the artificial scarcity of franchises that baseball enforces as a monopolist. Were there two competing major leagues, Washington would have one franchise, or perhaps two, in a heartbeat.

With two competing baseball leagues, most, if not all, of MLB's competitive-balance issues would be resolved. Not only would cities now bereft of baseball find themselves hosting teams, but some host cities might find an additional team or two in their market. If sharing the New York City market with the two existing teams offered better prospects for a franchise than, say, having New Orleans to itself, New York City might once again have three (or more) baseball teams. If the Yankees and Mets had to share New York with additional teams, much of their competitive advantage over smaller markets would disappear. Indeed, with competition over time one would expect teams to allocate themselves across the country so as to equalize the expected incremental revenue from each venue.

One potential downside to divestiture is that competition between two leagues will tend over time to result in one league growing stronger and the other weaker. The weaker league may see some of its franchises fail and may eventually be absorbed by the stronger league. The result would first be instability, followed by the possible reassertion of monopoly. This possibility, however, seems both remediable (divestiture could be legislated again in the future) and a modest price to pay given the expected benefits of competition.

Play Ball!

The U.S. House of Representatives and Senate have been prompted to consider public policy remedies for baseball more than 60 times since 1950, 16 times since 1990. Congress has never acted either to regulate or to break up MLB. With one minor exception, it has also never acted to take away baseball's presumed antitrust exemption.

It is useful to remember that in the past, rational public policy toward baseball has been impeded by "rational politics"—that is, politics where politicians act in their own best interest. As sports franchises have skyrocketed in value, today's owners tend to be some of America's wealthiest and most powerful individuals and corporations. As such, baseball ownership has important and close ties to members of Congress and, needless to say, to the man in the Oval Office. Congressional reluctance to curtail MLB's monopoly powers is hardly surprising.

But while most baseball issues taken up by Congress over the years have been local in nature, baseball sometimes seems to do its best to agitate the whole country at once. The announced intention of the owners to eliminate at least two teams along with their minor league affiliates out of a dozen or so contraction candidates in 2001 (now postponed until 2006) may arouse enough members of Congress to undo the historical record of inaction. There is no reason for public policymakers to sit back and hope that baseball's barons will finally get it right.