The reason for this is that in order to compete with one another teams have to spend resources investing in talent in order to compete. Szymanski shows that the Nash equilibrium of this game is inefficient because teams invest too much in the transfer market. In particular weak teams invest too much relative to stronger teams in an attempt to improve their relative position. This result arises like the excessive entry argument in IO because when each team invests in the transfer market it not only improves its own position but it also makes it harder for other teams to compete. There is a business stealing effect. This is an externality each team imposes on its rivals.But why do we care about cares about maximising the total gate receipts of all clubs taken together? As Adam Smith pointed out more than 240 years ago, "Consumption is the sole end and purpose of all production". So surely we should want to maximise the total utility of fans, the consumers, rather than the revenues of the producers. And if fans get utility from competition, then more is preferred to less.
The social planner in contrast only cares about maximising the total gate receipts of all clubs taken together. This requires equating the marginal revenue of higher gate receipts to the marginal cost of acquiring players. Under the market solution clubs invest more than this in the transfer market because they equate marginal costs not only with higher total gate receipts but also with the gate receipts that they will gain at the expense of other teams.
Monday, 13 October 2008
Is there too much competition in English football?
This is the somewhat strange sounding question asked over at Oxonomics. In a posting, Is there too much competition in English Football?, Mark Koyama summaries work by Stefan Szymanski. The Szymanski argument is that it would be more socially efficient if the Premiership was less rather than more competitive. Koyama writes