In my microeconomics class this week I talked about monopsony, when there is only one buyer. Before 1976, baseball players could only play for one team, the one they were currently under contract to. Starting in 1965, each player coming out of high school or college was drafted by one of the teams. That player could never leave that team and try to make a deal with another team. Before 1965, they could sign with the team that gave them the best offer. But then they were tied to that team for as long as they played baseball or until they were traded.
An economist in the 1970s, Gerald Scully, wrote an article showing that players were getting paid alot less than the revenue they generate (their "marginal revenue product"). Why would teams pay less? They could get away with it since they had monopsony power. Other teams could not outbid them for the player. But after players with seven years in the major leagues were allowed to become "free agents" and could negotiate deals with other teams, salaries shot up.
Where do teams today get the money to pay such high salaries? Major league baseball had about $7 billion in revenue in 2010. With 30 teams, that works out to about $233 million each. Each team has 25 players. At $3.3 million per player, that is an average payroll of $82.5 million. Subtract that from $233 million, and the average team has about $150 million left over. See Baseball's picture bright amid economic gloom.
During the World Series, FOX was able to charge $450,000 for each 30-second commercial. New team owners are willing to pay alot to buy a ball club. The Cubs were sold for $845 million and the Rangers were sold for $593 million.
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