THE PECULIAR EXTERNALITIES OF PROFESSIONAL TEAM SPORTS

The economics literature has long been divided regarding whether competing sports teams can achieve the same, efficient allocation of playing skills that a revenue‐maximizing league monopolist would choose despite the external effects the teams impose on each other in their pursuit of athletic talent. In this article an explicit consideration of the arbitrage incentives that underlie the marketing and pricing of playing skills indicates that decentralized franchises generally fail to allocate talent efficiently. For fans concerned about the championship prospects of their preferred team, the popular complaint has merit: “Big‐city teams win too much.”(JEL L83)