We analyze the formation of rival leagues and deterrence by incumbent leagues in professional team sports, which is one of the least studied forms of competition in sports. We first survey the economic history of professional sport leagues in North America and develop stylized facts about rival league formation. We then develop a game-theoretical model to explain some of these interesting stylized facts, showing that if the bargaining power of the incumbent league is sufficiently small—i.e., less than a certain cutoff—the incumbent should choose expansion to deter the rival league formation; otherwise, it is optimal for the incumbent league to allow a rival league formation and then merge with it, conditional on rival league success. We further show that the incumbent league may pay players relatively high salaries as an alternative way to deter formation by a rival league.
Review of Industrial Organization – Springer Journals
Published: Aug 29, 2014
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