When sports teams are businesses, they might not try to win

This week in my ECONS101 class, we covered firms with market power. Market power is the ability to have an influence over market prices. Usually, we discuss firms that are sellers with market power - their market power allows them (as sellers) to set the price that will maximise their profits. They do this by pushing the price upwards. If there is only one seller in the market, and there are few close substitutes, the seller is a monopoly. However, sometimes it is the buyer that has market power. If there is only one buyer, then that buyer is a monopsony, and they would use their market power to push the price downwards (since paying a lower price would increase their profits).

Unsurprisingly, there are fewer examples of monopsony than monopoly, and most of the time when monopsony is discussed it is in the context of labour markets. One potentially monopsonistic labour market situation that was in the news recently was Major League Baseball in the U.S. (which is not surprising, as the baseball season is about to begin). In MLB, the teams are the buyers of baseball players' services. Now, MLB isn't a monopsony in the sense that there is only one buyer. However, if all the baseball teams work together (that is, if they collude), then the result would be as if there is just one buyer. And we'd expect to see low player salaries. Which appears to be the case, as Deadspin reported back in January:

Certainly, there are reasons to be suspicious. MLB owners are rolling in dough—league-wide revenues hit a staggering $10.3 billion last year, nearly quintupling since 1992 even after accounting for inflation. Yet owners are not, by and large, spending that windfall on player salaries as you might expect: The average MLB salary actually dropped in 2018, for only the fourth time in 50 years.

And then, of course, it’s reasonable to assume collusion when this is a league whose owners have been caught colluding before. (One of those four years of falling average salaries, in fact, was 1987, the year that Expos outfielder Andre Dawson, frustrated at remaining unsigned through March, gave in and signed a blank contract with the Cubs, ultimately turning in an MVP season at the bargain price of $500,000.) So: Owners raking in tons of money, players getting lowballed on contract offers, a league with a history of illegal labor actions, and it all adds up to dirty business, right?

So the MLB teams are paying players lower salaries. It seems like a slam-dunk (oops, wrong sport!) that this is a case of collusion and monopsony power. However, maybe it isn't quite that simple.

You would think that sports teams are trying to win, and that to win you want to have the best players. They would then compete with other teams for those players by paying higher salaries. Player salaries would increase over time.

However, the Deadspin article goes on to note (correctly) that teams are not trying to maximise wins, they are trying to maximise their profits. Having more wins does not necessarily increase the team's profits. The main source of team revenue (television rights) are shared between all MLB teams, and don't vary depending on the number of wins. More wins does probably bring more fans into the stands and increase ticket revenue, and generate more merchandise sales, but then you have to subtract the higher player salaries that are necessary to generate those extra wins. So, in fact it is possible that teams that have more wins may receive lower profits.

A low number of wins is probably associated with low profits (because ticket sales and merchandise sales will be low). A high number of wins is probably associated with low profits (because player salaries will be high). There is some sweet spot in between, where the team is maximising its profits by not having too high a salary bill, and yet generating enough wins to keep the fans interested in showing up to the games and to keep the merchandise selling. And since a team in the sweet spot isn't interested in competing for the best players, those players' salaries will be lower.

The MLB teams don't need to collude in order to keep players' salaries low. They just need to be keeping an eye on their profits.