A Theoretical Framework
Taylor Brinkman has published a thoughtful paper at Vanderbilt University entitled Sharing the Wealth in the “New NHL”: The Implications of Revenue Sharing for Competitive Balance, Payroll Spending, and Profit.
Brinkman has a good grasp of the issues and the explanation of the revenue sharing plan is excellent. He is not optimistic about real improvement in competitive balance.
More often than not, differing opinions about competitive balance are a matter of perspective. If we adopt the definition of competitive balance espoused by the writers of baseball?s Blue Ribbon Panel Report, which essentially says that balance is the fans? perceived probability that their team will reach the playoffs at the beginning of the season, then the new CBA has positively affected balance without a doubt…
Despite this change in perceived balance, the NHL?s new revenue sharing system will do little to improve competitive balance statistically, assuming profit-maximization by team owners… [W]e would expect [the revenue sharing arrangements in the new CBA] to exacerbate balance, not make it better…
It should be kept in mind, however, that all of these conclusions are based entirely on a theoretical framework. The existence of a good model does not change the fact that it is impossible to predict the behavior of team owners in the real world. While some owners are profit-maximizers as we assume in our analysis, others surely prefer to maximize wins, while others base their behavior on finding the most preferable combination of the two (utility-maximizers). These differences in owner preferences may cause the NHL?s actual experience with revenue sharing and the new economic system to be different then what we espouse here. Still, our predictions offer a good starting point for future analysis.
Brinkman’s arguments make sense and the conclusions seem reasonable to me. We’ll see how closely reality fits the theoretical framework.
Looks like the link is no good. repost?
Sorry about that. It’s working now, at least for me. If it is still not working for you, here’s the page with the link to the PDF file.
I have 2 major problems with this paper:
#1 Despite mentioning the “diminishing returns” revenue sharing early in the paper, the author completely neglects it for his Carolina example. He did a perfectly good analysis IF the “diminishing returns” part wasn’t in place, but it is. And that makes sitting at the payroll floor forever a poor choice, as you will not increase revenues, and eventually, you won’t get revenue sharing cheques either.
#2 He is solely looking at Revenue sharing. He hints in the conclusion that the cap will cause “payroll compression” at the top, which will in turn help competive balance. To do a proper analysis, I believe you must compare the two systems in their entirety.
Having said that, what this paper shows is that revenue sharing isn’t the be all and end all for competitive balance. I think Baseball shows this clearly (though they don’t have a diminishing returns problem).
What about the opportunity cost of doing nothing and its effect on competitive balance? The question is not: ‘does the revenue sharing advance competitive balance inside a vacuum’, but rather, ‘does revenue sharing provide for more competitive balance than before’.
I don’t understand his comment about exacerbating balance but not making it better. I’m assuming more balance = better, so exacerbating balance should = better.
If we assume all owners were win maximizers, then it appears that revenue sharing/salary cap would be exactly optimal for ensuring competitive balance. However if there are profit maximizers and utility maximizers, it still holds that between win maximizers the salary cap would provide more competitive balance. So at the beginning of the season fans have to ask, ‘Is my team trying to win?’ and if the answer is yes the new CBA gives all the fans of all the teams trying to win a balanced shot at that ideal.
What about the opportunity cost of doing nothing and its effect on competitive balance? The question is not: ‘does the revenue sharing advance competitive balance inside a vacuum’, but rather, ‘does revenue sharing provide for more competitive balance than before’.
Do you mean real competitive balance – as determined by the frequency of winners and statistically via standard deviations – or do you mean perceived competitive balance?
If you define competitive balance like Gary Bettman does, it is better on the perceptions alone. In other words it is better because Gary and his media declares it to be better.
If you are talking real competitive balance, it is very difficult to improve on what existed. The standard deviation averaged .100. This is a very tight distribution when it would be .060 if every team had a 50/50 chance to win every game.
As far as real competitive balance is concerned, the old system will very be difficult to top.
I don’t have the concerns Egil notes because even Brinkman isn’t claiming his outcome is certain. It is far more complicated than any model can manage in my view.
I’m fairly condfident in saying that the NHL does not know how it will work out either. All of the incentives that existed before are out the window. In combination the measures that change those incentives will affect the behaviour of the teams in ways that I don’t think can be foreseen at all. Under Brinkman’s set of assumptions, the results won’t be good. That’s just one indicator.
As Egil points out, Brinkman doesn’t really address the diminishing returns part of the argument, but we’ll have to see how that works out too. I think it is badly designed too. (I don’t think a system like this can be well designed though.)
First it doesn’t affect anything if NHL revenues don’t grow, which is another can of worms. He also doesn’t discuss the disincentives to revenue growth either. The Blues actually have an incentive to have revenues very low this year. The penalties for bad revenue growth don’t kick in until next year. What better way to assure the Blues can grow enough next year to qualify for full sharing than to have a low base this year? Particularly when every dollar they drop in revenue gives them anothr dollar in revenue sharing? Is that why they raised prices this year? The other issue on this side is disincentives for the top revenue earners. Of every extra dollar the Leafs earn, 54 cents goes to the players and increases the amount of revenue sharing they have to pay.
Second, teams are going to lose revenue when the team stops winning. Buffalo and Ottawa qualify (or nearly qualify in Ottawa’a case) with near peak revenues. What if the Sens continue to lose? Their revenues will drop and as they drop they lose revenue sharing just when they need it the most.
It would be fascinating to see what Brinkman would make of the amateur draft. Every major team sport in North America uses incoming amateur players to deliver a competitive balance input. So you could argue that system wide optimal competitive balancing is not for all teams to go 50/50 but to each rise and fall sequentially, each getting in turn an opportunity to sign the ‘best’ new players. Would Brinkman think the draft inefficient at delivering competitive balance? ineffective? It seems it would be very hard to argue that no draft would make the league more competitively balanced.
It would be fascinating to see what Brinkman would make of the amateur draft.
Huh? Why? I imagine he would say that it helps competitive balance in the absence of any other factors simply because players are worth more in the big markets.
With this stupid CBA they can do away with it (and the entry level system) without doing anything to competitive balance. They probably should do away with it. They can simplify everything by letting every player become a free agent with every expired contract. Why have a draft? Why have restricted free agents?
All of that is beside any possible point in this piece. Brinkman is not against competitive balance. He just doesn’t think the revenue sharing system will improve it and he raises the possibility that it will itself lead to imbalances by creating financial reasons for teams to adopt a revenue sharing maximization strategy.
To add to what Egil said about the Carolina example is that in 05-06 Carolina didn’t behave at all as he expected them to. The reason being is that he assumed that owners would behave rationaly.
Well, I would agree that if an amateur draft is not helping with competitive balance it should be eliminated. To me the important questions are: Is competitive balance something a league should strive for? and if the answer to that question is yes, then what institutional processes should a league institute to achieve competitive balance? All the arguments about the CBA, rules and procedures, then boil down to, ‘does it help competitive balance or doesn’t it’. IMHO the new CBA was an attempt to encourage competitive balance, if it doesn’t move the league further toward that goal it should be changed, but whether that favours or hampers players fortunes, I’m agnostic.
Is competitive balance something a league should strive for?
The first question is to define competitive balance. If you define it like Gary Bettman, the best way to assure it is with a fantasy draft every year. That maximises player movement and assuming reasonable luck all the way around, we can sell a new team in every market every year.
What fans really want in my view is fairness. They do not want the size of the market to be a large factor. As long as everybody has more or less the same chance to become great, it is fair. The best way to assure that is to severely limit player movement.
The old CBA sorted teams into one of five categories. This CBA is designed to eliminate elite teams with the salary cap and eliminate bottom feeders with revenue sharing. That’s the theory anyway. It is certainly eliminating the elite teams. That’s what Brinkman means when he talks about compression at the top.
He is also saying that he does not think bottom feeders will be eliminated because for the low revenue teams profits may be maximised by being a bottom feeder.
Really,
No elite teams? If you want to define competitive balance Tom, then you have to define ‘elite team’ as well. Because in my mind, I’m seeing at least 3 elite level teams (Ana, SJ, Buff) in this year’s edition of the NHL with a couple more rounding into shape after rough starts (Car, Cal).
This is an assertion by you that you’ve been making since before the lockout started that I’ve yet to see you prove or have proven, or more explicitly, even define. When you have tried to define it, you’ve done nothing more than provide opinion and conjecture.
The long-term effect of the salary cap is that management will look at individual players the same way the players have looked at individual teams, an opportunity for personal maximization. That which has changed is the metric by which this maximization is defined. The lower UFA age means that a team must place more value in its system of development rather than the individual player developed. There is no longer time to fret over the loss of a particular player unless one has not stocked the pipeline with his replacement. See Buffalo as an example of competent stocking and Tampa as an example of fretting the loss of a particular player.
We in Buffalo are not fretting the loss, for example, of either Briere or Drury because Connolly and Zagrapan are there to replace the one lost. While in Tampa, their big 3 were signed to huge deals which had to be made b/c they had no replacements in the system should they let one of them bolt for more cash. Nowhere is the difference between these two teams evident than on the ice.
While the CBA may be designed, as you assert, to eliminate both bottom feeders and elite teams, the reality, so far, is completely different. It’s the shame of unintended consequences in trying to manage a chaotic/dynamic system. In other words, there’s no substitute for incompetent management.
Ta,
Tom L,
Speaking of chaotic/dynamic systems, you completely ignore the fact that the NHL is in a state of transition. Every single team you cite was in a different stage of development due to the old CBA conditions, and now are making adjustments as needed as they mature under the new CBA. Tampa was hit first and hardest as the cap was too low given the league’s revenues (but no one could be expected to predict that). Buffalo did not have to face the new circumstances until this past summer, but the next 1-2 years will be much more entertaining seeing that Buffalo started the season with less than $100 K of cap space. (I know the Tim Connolly injury will allow them to exceed by $2.8MM if hes stays on longterm IR.)
Just as your claim that TB’s assessments may be premature, your claim that no one is fretting is a bit premature in my humble opinion when one considers how renewals the team faces this summer. Briere, Drury, Numminen, Biron, and Vanek are due for renewals this summer; Hecht,Kalinin, & Campbell are up in 2008. That’s just the guys somewhat close to $1 MM or higher. If you have less than $100 K of cap space this year, what will the next year look like?
More importantly, when everyone cycles through the draft/development carried over from the old system, I’d like to see who has what in the pipeline after 3-5 years of finishing in the top 4 spots in the NHL and/or winning the Cup. You have to lose and lose often to get top draft picks. Buffalo is simply reaping the rewards today of something started 5-7 years ago.