by Daniel Gettinger
In the wake of the Yankee’s latest trip to the big-league toy store, many fans can once again be found clamoring for a payroll cap*. Their logic makes intuitive sense: if all teams are forced to compete within a smaller payroll range, then competitive balance is sure to increase. Many analysts have argued a payroll cap will have little impact on competitive balance. This may or not be true, but the real problem is a payroll cap would not good for baseball fans.
*Because footnotes are impractical in blog posts, I will, in this instance, borrow from Joe Posnanski the use of the asterisk. Anyway, Payroll caps are often inappropriately referred to as “salary caps.” A salary cap suggests the institution of a maximum salary for any individual player, whereas a payroll cap puts a ceiling on the summation of a team’s individual salaries.
For a payroll cap to increase competitive balance, higher spending on players must currently result in greater on-field success. Unfortunately, merely looking at the correlation between payroll and some measure of success (such as playoff appearances), is inherently biased. As Keith Law explained to The Big Lead:
If a team enters an offseason thinking it has a chance to contend in the following year, that team will spend more to acquire talent because the marginal benefit of adding, say, a four-win player is higher. (The financial gain to a team of reaching the playoffs - think of it as turning playoffs=0 into playoffs=1 in your revenue equation - is substantial.) A team that knows it won’t compete in the short term will tend to trim its payroll, shedding expensive players who are not likely to be around when the team is competitive again and acquiring inexpensive players with longer periods of control remaining. This is just good business.
The next logical place to look for correlation would be team revenue. Again though, there is a problem. In Baseball Prospectus’s Baseball Between the Numbers, Neil Demause points out that “postseason appearances increase revenue…not only are playoff tickets a lucrative item, but a winning team typically sees regular-season sales soar.” While Demause finds that the number of playoff appearances from 1995-2004, and average revenue from that same period have an (R-squared) of 0.51, the data could just as easily be interpreted as “telling us that half of team revenue can be explained by who gets to the postseason,” rather than the other way around.
To get around this problem, Demause compares postseason appearances with TV market size rather than revenue or team payroll. His 2005 study found market size accounts for only 11 percent of playoff appearances. Keeping market size constant, I updated the data to include results from the 2006, 2007, and 2008 seasons. Due to successful seasons by many of the large market teams in this period, the R-square doubled from 0.11 to 0.22.
This jump is alarming, and causes me to think that market size may have more to do with on-field success than previous research indicates. Perhaps, in the past, large market teams spent their money unwisely, while smaller market teams, knowing they could not compete with large payrolls, were more progressive in developing new player evaluation models, and instead spent the money they did have more wisely. However, the big market teams may have caught on, and are now using the same progressive processes. Combining “small-market smarts” with the ability to spend lavishly, large market teams may now be maximizing their inherent advantages.
Another possible explanation is that in recent years, the advantage of playing in a large market has increased, with teams finding new ways to generate revenue. I am sure there are many more explanations, but regardless, I am not prepared to rule on whether market size has anything to do with a team’s ability to be competitive.
While further research is necessary to reach a more definitive conclusion, it should not affect the payroll cap debate. Traditionally, player unions have only accepted payroll caps that guarantee players a certain percentage of league revenues and contain a payroll floor as well. A few weeks ago Sean Hoffman at B.P. concluded (subscription required) not only would the payroll floor affect more teams than the payroll cap, but also many teams would be unable to afford even the minimum required level of spending. Basically, a payroll cap would cripple, even putting out of business, the teams it is intended to help.
Not only are some small market teams (and their fans) potentially hurt by a payroll cap, but I argue perfect parity is not good for baseball, nor the fans. Large market teams, almost by definition, have more fans than small market teams. These teams should make the playoffs more than teams with fewer fans.
To understand this logic, lets consider a hypothetical world with four teams. Team 1 has one fan, Team 2 has two fans, Team 3 has four fans, and Team 4 has six fans*. In total, there are thirteen fans, of which ten support one of two teams. It seems pretty clear that aggregate fan utility would be maximized by creating a system which allows teams 3 and 4 to win more than teams 1 and 2, while still providing some hope to fans of team 1 and 2. I admit, this example was artificially contrived, and overstates the benefits of having the Yankees and Red Sox win more than all other teams. However, it does a good job of illustrating perfect parity is not something that would be good for baseball fans.
*The ratios that can be calculated between teams in this example are very close to the corresponding market sizes between the Royals, Twins, Red Sox, and Yankees.
Okay, I recognize I have begun to babble on too long (actually, that happened about 500 words ago), so let me sum things up:
1) Market size may or may not have an effect on competitive balance.
2) Even if market size affects competitive balance, a payroll cap would not be good for baseball fans. This is because:
a. The corresponding payroll floor has the potential to cripple a number of smaller market teams, possibly putting them out of business.
b. Complete parity is not actually good for the aggregate utility of baseball fans.
***Note: This article argues baseball fans in general will be unhappy with the results of a payroll cap. A payroll cap will benefit some fans, but hurt others. I am not sure what the effect on Padre fans will be.