Ted Leavengood, father of Claire Leavengood-Boxer ’11, was on campus recently for Family Weekend and took the opportunity to sit in on a course on baseball economics offered by Jo Beth Mertens, associate professor of economics. Coincidentally, Leavengood writes for the baseball blog Seamheads.com and featured the course in his blog entry.

“Professor Mertens models the business of baseball as a unique hook for the economically curious and she is having great success doing it,” he writes. Leavengood goes on to say, “…her goal at the end of the day is for her students to better understand classic micro-economics rather than baseball.”

The article explains how Mertens told her class about economic return-looking at star quality of players such as Michael Jordan, or A-Rod, McGwire and Sosa who “drew fans to the MLB brand name” in terms of the value they add to the game itself rather than whether or not they are individually overpaid. The article also points out that the size of the market matters. The larger markets more often than not field the most successful teams.

He writes, “According to Professor Mertens, measures to curb the advantage of the richest teams such as revenue sharing and last-first drafts have little or no effect. The rich stay rich, the poor stay poor.”

Leavengood concludes by noting that nothing is absolute: “Baseball is here to stay and if there is anything that economics teaches us, it is that in the long term nothing is sacred. Brands like GM and Ford can lose out. Market giants like Lehmann Brothers vanish overnight. Brand loyalty for the Rays that stretches across the state to Orlando is hard to conceive today, but stuff happens. True can become false, even in a marketplace as unlikely as baseball’s.”

The full article appears below.

Seamheads.com
“Baseball Economics: Size Matters, True or False?”
Ted Leavengood • October 9, 2008

“My students will slog through the toughest micro-economic theorem if I teach it in terms of baseball economics,” says the chair of the economics department at Hobart and William Smith Colleges, JoBeth Mertens.

Professor Mertens models the business of baseball as a unique hook for the economically curious and she is having great success doing it. Her syllabus includes books by Andrew Zimbalist and other baseball economists, but her goal at the end of the day is for her students to better understand classic micro-economics rather than baseball. Mertens intersperses true-false questions during her lectures to enliven the discussion and challenge conventional wisdoms of her students. For example one question was whether Alex Rodriguez is an over-valued economic commodity. The classroom filled with green flash cards signaling agreement with the statement by her students who accept that he is overly compensated. Not so says the professor. Big name athletes don’t earn their salaries solely on the basis of their performance on the field, so much as in terms of their economic return.

The star quality of exceptional players like Michael Jordan can never be fully compensated, according to Professor Mertens. Players like A-Rod or McGwire and Sosa a few years ago and Barry Bonds most recently drew fans to the MLB brand name. That allure has no easily quantifiable price tag because of the value it adds to the game itself. So even at $25 million annually, A-Rod is probably under-valued to the Yankees and more than earns back his salary in revenues for the “Yes Network,” of New York television sports.”Salaries should be understood in terms of profitability to the owners, not in terms of winning percentage,” says Professor Mertens. Such a concept may be heresy to rotisserie stat heads, but not to economists. Despite the Yankees’ failure to make the playoffs in 2008, the team made money, lots of it. More important to understanding baseball as a hugely profitable mega-business is understanding the importance not just of ARod to baseball, but of the Yankees brand itself. According to Professor Mertens “everyone wins when the Yankees win.” The economic value of the Yankee, and for that matter New York City sports teams generally is illustrated by the following chart.

Source: Forbes Magazine

The chart makes a resounding point: size matters. The size of the New York sports market-as measured by the value of the two NYC teams, what Professor Mertens calls “the demand curve,” far outpaces any other. The bad news for competitive balance in baseball is the high correlation between winning percentage and salary expenditure. All statistical measures of team value bear out the advantage accruing to large market teams like the Mets and Yankees-at least over the long term. There may be anomalies, but even in the current playoffs-where several small market teams are doing remarkably well-five of the eight teams are from the top tier of teams in revenue and value.

In baseball’s closed system-made more rigid by its monopoly status-competitive advantage has more legs than competitive balance. According to Professor Mertens, measures to curb the advantage of the richest teams such as revenue sharing and last-first drafts have little or no effect. The rich stay rich, the poor stay poor.

However, Professor Mertens admits that there can be shifts in the demand curve and that factors such as the zealousness of fans with a somewhat smaller market-think Red Sox Nation-can add significant value. So the television revenues and overall income for the Red Sox exceeds the relative size of the city. Professor Mertens suggests that opening the market place, bringing in new teams or creating whole new leagues would greatly increase the chance for new Red Sox Nations to be born. But more than any other sport, baseball has withstood attempts to introduce greater competition, and so the balance in the league remains largely frozen.

But I am not ready to waive my green card, professor. Size matters, but is it absolute?

The Tampa Bay Rays are alive in the 2008 playoffs and have amassed a hugely talented lineup and deep organization to fuel them for the future. They seemingly have no potential however, to overturn the status quo. They’re poor and the poor stay poor. But consider the State of Florida has a population of 18 million potential baseball fans divided by only two teams. New York City has made much of a market of only 8 million persons, so objectively the potential market in Florida is comparable.

New York City has had more than a century to amass its advantage and it looks insurmountable. But time is on Tampa Bay’s side. Baseball is here to stay and if there is anything that economics teaches us, it is that in the long term nothing is sacred. Brands like GM and Ford can lose out. Market giants like Lehmann Brothers vanish overnight. Brand loyalty for the Rays that stretches across the state to Orlando is hard to conceive today, but stuff happens. True can become false, even in a marketplace as unlikely as baseball’s.