Baseball is known as America’s favorite pastime, however Major League Baseball has turned America’s favorite pastime into a multi-billionaire business. According to Forbes the MLB’s revenue for 2018 was $10.3 billion, baseball being the second highest earning professional sport in the world, right behind the NBA. A variety of factors come together to create revenue for the MLB, such as merchandise, ticket sales, food and drink sales, online advertising, TV commercials, and sponsorships (Brown, 2019). The MLB is the only professional sport that does not have a salary cap, meaning that there is no limit on what the teams can spend and the amount given to the players. This allows multi-billion contracts to be given out to hundreds of players, making the economics of the MLB very different from other professional sports.
The franchises of the MLB operate like a business by measuring their costs and profits of picking up and transferring players, building a new stadium, or even relocating their whole franchise to another state. All of these decisions are analyzed in a way that maximizes their profits as much as possible and minimize their costs. The demand for the MLB ranges from the casual interest of some viewers to fanatical followers. The MLB has stimulated the growth of other industries that work complementary to its organization, such as sports magazines, sports television channels, radio stations, and fans clothing stores (Haupert). I will be analyzing the different factors that help create the economy of the MLB, such as the income of the players, the economics of the postseason, and the effects the World Series has on the economy.
Economics of the Baseball Player
The MLB business revolves around the player, the average MLB player earns around $4.35 million dollars annually. However, this average is distorted because of outliers such as Bryce Harper or Mike Trout that have annual salaries of $26 and $33.2 million. The median annual salary of $1.35 million is a better representation for average player in the league (Zirin, 2019). In any professional sport there is a trade-off between the player and the owner of the franchise, the player is trading off their talent and physical skills for an income, while the franchise is trading money in order to get a certain talent out of a player. However, in this type of trade-off, money can be decreased or even increased if the player puts out more skill than expected or underperforms. In order to have some type of stability in their careers, players sign contracts with franchises that promises their loyalty to team for a certain amount of years and a salary that is divided equally among those promised years.
Similar to other professional sports, once the athlete bypasses the collegiate level they are now open to paid endorsements. Baseball lacks popularity among the youth, that is why the sport falls behind other sports such as football and basketball in regards to endorsements. The highest paid baseball players only receive an annual income of $500,000 to $2.5 million in paid endorsements, which usually comes from companies such as Nike, Under Armour, Adidas, Wilson, and Mizuno. These types of endorsements are an example of how outside industries can have an impact on the economy of the MLB (Haupert). They can influence the type of gear the players use, certain advertisements being broadcasted, and the products sold in the stadium. The players are not exclusive in their partnership with these sponsorships, franchises and clubs can be sponsored by certain brands in order to receive free uniforms or gear.
As stated before, the MLB is the only professional sport that does not have a salary cap, this may be a benefit to the players they are most wanted, however this can be an issue for less talented or wanted players. Mike Trout recently signed the world’s largest sport contract in history, being paid $435 million over the course of his twelve years with the Los Angeles Angels. However, this contract affected many more people and franchises than Mike Trout and the Los Angeles Angels. The contract resulted in three teams having their payroll cut, The Pittsburgh Pirates had a cut of more than $15 million annually. Not only does Trout’s rise in salary affect franchises but it impacts free agent players and middle-class players. About one hundred free agent players will find themselves teamless next year due to Trout’s new contract, and even less money will be granted to players that are less known and “talented” than the all-stars of the league (Zirin, 2019). This reveals a major issue of having no salary cap on this multi-billionaire business.
Economics of the Postseason
The opportunity to play in the postseason is an amazing accomplishment for the club, however it is also a huge opportunity for the local economy of the state and city in which the team resides in. Once a team reaches the postseason its city has the opportunity to begin preparing for the large influx of people entering and visiting nearby restaurants, hotels, airports, and parking garages. With the increase rate of tourism occuring, the tourism industry increases and adds more revenue to the national GDP. However, the postseason of the MLB also creates more seasonal jobs for the economy, this creates a shift in the frictional unemployment rate in the economy. New jobs pertaining to ticket box offices, parking garage monitors, concession stand workers, and retailers workers in the staudium’s merchandise store are now open and lower the current unemployment rate of the given region. The postseason of the MLB not only provides entertainment for the country but acts as a source of income and revenue for all of the team’s economies.
By participating in the postseason, players and clubs earn a bonus from the additional revenue they earned participating in additional games to the regular season, this is known as the Postseason Shares. The Postseason Shares consists of revenue from all gate and ticket sales of postseason games, including the World Series. The additional bonuses must be split between the players and the owners of the clubs, this is where it can become challenging. It is required that all shares end in an agreement of who gets the shares and the amount they should be given. Since ten teams are apart of the postseason, all ten teams get a share of the total postseason share, however the percentage they receive is determined by their placing in the tournament. According to Craig Calcaterra, in 2018 the Postseason Share was $88,188,633.49, while the World Series winner, the Boston Red Sox received 36% of this total and the runner up received 24% of the total. The rest of the share is split among the other eight teams that made it to the postseason (Calcaterra, 2018). The Postseason Share is only one way the athlete can receive more income from playing in the postseason. By playing in the postseason, players have the opportunity being endorsed and the chance to rise next year’s annual salary if they are a free agent.
Economics of the World Series
The postseason is already a tremendous opportunity for an increase in economic activity, however the World Series alone has a huge impact on the economy. There is already a bonus in place for the teams that make it to the postseason, however once a team makes it to the World Series their sharing of this postseason bonus increases exponentially. The World Series has the greatest economic impact to the cities that host home games, on average $10 to $20 millions can be estimated to be earned per-home game during the World Series (Matheson & Baade, 2005). It is very common for franchises to use this as an incentive for their city and local economy to support new stadiums being built and the increase of money being spent to improve the talent on their team. This past World Series was the first time ever the Nationals made it to the series, while also winning. However, Gregory McCarthy, the senior vice president of community engagement is more focused on the economic benefits of the series rather than the win itself. Stating that the benefits the team brought to the economy was worth the amount of investments they put into the franchise (D.C., 2019). The World Series is a once in a lifetime opportunity to watch the highest level of baseball, this can be shown in the price of tickets. Since the demand for these tickets are so high they are able to mark the prices at extremely high prices compared to regular season game tickets. The high demand of tickets creates scarcity among the public, tickets selling out once they go on sale causes people to be willing to pay almost any price to attend the game. The average cost of a World Series ticket can range from $500 to $1,500 once reselling takes place. Similar to the Superbowl, the World Series is a great opportunity for companies to broadcast advertisements that have the potential to be viewed by millions. The largest and most influential companies have the income to pay for these advertisements, which only strengthened the influence they have on the public. A thirty second advertisement during the World Series costs an average of $500,000, while the 2019 World Series is predicted to earn on average $45.7 million per game from ad revenue (Kiergan, 2019). The winner of the World Series is rewarded with the Commissioner’s Trophy that is created by Tiffany Company, being created out of gold and silver and being a total price of $19,000. The World Series has an effect on other industries besides the industry of sports, this can be shown through the Commissioner’s Trophy and the money that is granted to Tiffany Company which belongs to the retail industry of jewelry.
The economics of the MLB consists of many other factors and contributions. However, it is impossible to list all of the factors while still going into great depth. Other factors could be hotel packages, food and drink partnerships, gear sponpoorshipments, and merchandise deals. The MLB is not only a baseball organization, it is a multi-billion business that provides thousands of jobs for the nations while also providing a means of entertainment for percentage of the population. The professional sports economy alone is a huge contributor to the national economy because it incorporates and works with a variety of differing industries. Both complementing one another and making the national GDP grow. This project made me realize that economics is all around us, money makes the world go round, therefore economics is apart of every aspect of your life whether you want it to be or not.