Now that the baseball season has ended with a stunning victory by the Astros, two things are obvious.
One — baseball is beginning to make a comeback. As NFL rating continue to plummet, more and more viewers are rediscovering our national pastime as an alternative to football. For the second year in a row, the World Series has achieved higher ratings than Sunday Night Football. It’s a small step, but it’s certainly a shift.
Two — baseball as a business is booming. Major League Baseball is estimated to have revenues of over ten billion dollars a year. The average player salary is over $4 million, and the highest-paid players earn in excess of $20 million a year — not counting the $100 per day in meal money they receive.
Why is this the case? How is it that even mediocre players can make this much and owners of consistently losing franchises still profit? How did our national pastime become such a big business?
Ultimately, it’s because baseball is what an economist would call a bilateral monopoly. Major League Baseball is itself a monopoly, and has been for many years. But the owners’ power has been balanced by the players’ union, which also essentially functions as a monopoly. The combined effect of the two is a system that works extremely well for both owners and players, but has in some respects contributed to the sport’s fall in popularity.
William Hulbert was the founder of the modern business of baseball, organizing the National League of Professional Baseball Clubs in 1876. He established what economists call a cartel — an agreement among producers not to compete, or a loose monopoly. The eight clubs that made up the original National League excluded newcomers unless they paid a substantial entry fee and did not play in any of the cities controlled by the original clubs. The League also ensured that all clubs finished their schedules and abided by league rules.
Most importantly, in 1879 the league instituted what became known as the “reserve system.” Each team could set aside a certain number of players — originally five, eventually all of them — who could not move to other teams. The players agreed to allow the team to “reserve” their services for the season following that year’s contract. This would prevent one successful team from acquiring all of the best talent in the league and destroying competitive balance.
For many years, the League was the only producer of professional baseball, and it was the only purchaser of professional baseball labor. It wasn’t until in 1901, when Ban Johnson created today’s American League as a rival to the NL, that MLB as we know it emerged. In 1903 the NL accepted the equal status of the AL, what was called the National Agreement formed a two-league cartel, and the modern World Series was established.
For the next fifty years, MLB was the dominant spectator sport in the United States. There were sixteen teams in ten cities, with no movement or expansion franchises. Owners invested millions of dollars in new steel-and-concrete stadiums. These were civic monuments, cathedrals of sport, in big American cities. Wrigley in Chicago and Fenway in Boston are the last remaining. In 1919, the philosopher Morris Cohen argued that “baseball is a religion, and the only one that is not sectarian but national.”
Baseball’s quasi-religious status in American culture was affirmed when the Supreme Court decided that antitrust laws did not apply to baseball. Though baseball was certainly a business, it was not “commerce among the states” that Congress had the power to regulate. The Court would later expand its definition of interstate commerce to include just about everything imaginable, but it reaffirmed this decision in later challenges — even though all other professional sports were held to be liable to the antitrust laws.
After this decision, MLB continued to enjoy monopoly profits and to exploit — in a technical, economic sense — the players. Player salaries declined to a low of about 20 percent of MLB revenues by 1970. (They are estimated to have peaked at 67 percent in 2002, and are over 50 percent today.) But because of this monopoly, the owners were very reluctant to innovate, resisting new technology that could have increased profit. Some of this resistance was sheer stupidity, as their belief that radio broadcasting, night games, and television would depress attendance. But monopolists can afford to be stupid — at least for a time.
Eventually, two major challenges confronted the owners’ monopoly. One was the competition from other sports, football and basketball especially, which spurred some innovation and growth.
The second came in the 1960s with the formation of the Major League Baseball Players Union.
Marvin Miller, a labor organizer, economist, and counsel to the United Steelworkers Union since 1950, took over a moribund players association in 1966. He convinced the players that their issues — things like pension contributions and meal money — were not just questions of economic interest, but of human rights. Riding the wave of the rights revolution that had been building at least since the civil rights movement, in 1968 he won the first collective bargaining agreement in professional sports. Applying the 1935 National Labor Relations Act to baseball players made it possible for a majority of workers to compel their employers to bargain exclusively with whatever organization they chose to represent them. Baseball is therefore considered interstate commerce under the labor laws, if not under the antitrust laws.
Thus the transformation of Major League Baseball into the bilateral monopoly it is today was, ironically, in part a by-product of the cultural revolution of the 1960s. The combined force of unionization and free agency increased the players’ salaries exponentially, allowing some, like Derek Jeter, to themselves become owners. It also made the owners more profit-minded, resulting in better broadcasting deals, more expansion teams, an extended postseason, and more merchandising and branding.
On the other hand, the bilateral monopoly also made it more difficult for baseball to compete with other sports. Even though baseball players receive higher salaries than football players, football on the whole rakes in far more revenue and, postseason excepted, far more attention. Baseball is no longer a part of every American boy’s life; they are as likely to play the global game of soccer as baseball.
There’s no denying that we’re seeing a shift in sports — and that baseball is benefiting. But if it ever wants to compete with football, the League will have to make some serious changes.
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