A Level Playing Field

     In 2009, the New York Yankees replaced Yankee Stadium, a historic cathedral to baseball, with the New Yankee Stadium, a $2.3 billion cathedral to luxury. The fourth largest high definition screen in the world occupies the center field backdrop, directly above a bar sponsored by Mohegan Sun Casino. Beyond right field sits NYY Steak, a steakhouse whose menu includes a New York strip priced at $50. And on the way to your seat, keep an eye out for an art gallery and a butcher serving up lamb chops and more steaks.

     At the same time, in July of 2009, construction began on a new stadium for the Florida Marlins – a stadium that the team had been fighting for since its inception in 1993. Countless proposals were rejected as Florida lawmakers debated the value of a new stadium for a team drawing among the smallest crowds in Major League Baseball. After fifteen years of debate, and threats of relocation, an agreement was finally reached on a stadium near downtown Miami. The park’s budget stands at $515 million – one quarter the cost of the new Yankee Stadium.

    It does not take a professional economist to recognize the financial gap between large market and small market teams in Major League Baseball. Organizations in populous markets have large pools of resources from which to draw, and teams in smaller cities simply cannot compete financially. The effects of this disparity, however, run far deeper than stadium financing. Small market teams must limit their payrolls to a fraction of those of large market teams, hindering their ability to sign or retain players. An inability to afford quality rosters inhibits their capacity to compete on the field, creating a culture of local disinterest that can further perpetuate their financial weakness.

     The debate surrounding MLB’s financial inequalities has been both polarizing and inconclusive. Supporters of small market teams argue that the league must adopt a strict salary cap and revenue sharing system. Opponents of such plans assert that on-field success is not solely dependent on team finances. Indeed, teams like the Oakland Athletics have used their resources prudently and established themselves as one of the most competitive clubs throughout the 2000s, despite their small market status. The inconclusiveness of the debate has resulted in the installation of a weak “luxury tax” system, a surcharge on high payrolls, which has penalized only four teams since its inauguration in 2003.
    fIt is clear that the current system is both ineffective and unsustainable. In formulating a viable economic structure, administrators must analyze more closely the factors that have created MLB’s financial environment. A thorough investigation of the relevant factors can help MLB produce an enduring economic solution.

A Recent Phenomenon  

     The modern economic structure of professional baseball can be traced to the mid 1800s. However, extreme financial disparity among teams has been a concern for little more than a quarter century. It is important to understand how small markets have historically succeeded in supporting teams, before we attempt to regulate a system that has, for the most part, worked well.

      The rise of player salaries has threatened teams’ solvency since 1869, when the Cincinnati Red Stockings became the first team to reimburse players.  Shortly thereafter, with few regulations in place, salaries skyrocketed.  Teams would frequently “steal” players from other teams, mid-season, by offering higher wages.  The sport’s weak administrative system could not control this, and the upheaval threatened the stability of the league.  

    For the owners, however, this free-market system meant more than instability. It also limited their profits. Unlimited player mobility forced teams to compensate free agents with higher and higher salaries, as owners bid up player contracts. Through this, growing industry revenues funneled directly into players’ pockets, and the owners kept little. Team owners worried that such a system would threaten their ability to operate profitably. 

Yankee Stadium - $2.3 Billion "Cathedral to Luxury"  

     Throughout the 1900s, the Reserve Clause repeatedly fell under legal attack. The first major threat came when the Federal League (FL), a competitor of MLB, sued in 1915 to fight the market dominance maintained by MLB owners. The case was resolved in settlement, but not all FL owners were content with the decision. Unsatisfied FL owners sued to reverse the Reserve Clause in the 1922 case Federal Baseball Club v. National League, claiming that the policy hindered industry competition. However, the Supreme Court ruled that baseball did not qualify as interstate commerce and was therefore exempt from antitrust legislation, protecting MLB’s monopsony for fifty more years.

     The ruling did not prevent players from challenging MLB policy. In 1970, all-star outfielder Curt Flood dealt the Reserve Clause a crippling blow. After being traded from the St. Louis Cardinals following a request for a raise, Flood sued MLB Commissioner Bowie Kuhn, claiming that the Reserve Clause violated antitrust laws.  Although the Supreme Court ultimately ruled against Flood, citing stare decisis, the majority opinion admitted that the exemption was suspect and should be reviewed by Congress.

     The court’s noncommittal opinion encouraged further legal challenge. The Reserve Clause stated that, if a player and his team had not agreed on a new contract following the expiration of the original, the player would be forced to play one season without a contract for that team. However, the clause was not explicit about the actions to be taken subsequently. Marvin Miller, president of the MLB Player’s Association (the players’ union, formed in 1952) convinced Andy Messersmith of the Los Angeles Dodgers and Dave McNally of the Baltimore Orioles to play under “reserve” contracts through 1975 and challenge the clause the following year. On December 23, 1975, arbitrator Peter Seitz ruled that players were free to sign with any Major League team after one year under such a contract. The owners, in protest, staged a lockout before the 1976 season, but eventually consented to the ruling. Shortly thereafter, owners were forced to enter into collective bargaining agreements with the MLBPA and could no longer impose imperfect market structures without player oversight.

     The modern era of free agency, in which owners bid for players’ services without market protections, has precipitously accelerated salary growth. Wages doubled the year following the Seitz ruling and tripled over the next five years. The average salary rose from $135,400 in 1970 to almost $2,400,000 in 2002 (both in 2002 dollars – see chart “Average MLB Salary”).  The nullification of the Reserve Clause in 1975 gave way to upward pressure on payrolls, which has since threatened the ability of small market teams to compete.