Baseball loses big with team in D.C.

January 29, 2002|By Steve Walters

BASEBALL COMMISSIONER Bud Selig has antagonized fans and players all winter with his ham-fisted handling of baseball's financial and labor woes, so it's no surprise he'd eventually anger one of his own.

Orioles owner Peter Angelos must have blown a gasket when he heard Mr. Selig remark recently that "relocation is coming" and Washington is the "prime candidate" to get a new franchise.

Publicly, Mr. Angelos has walked a fine diplomatic line on this issue. With as many as a quarter of his customers coming from Washington and its environs, he doesn't want to appear to be the Grinch who prevents them from getting their own team.

But he's no fool. The Baltimore-Washington metro area has more than 7 million potential fans, and he knows his bottom line will be much healthier if he doesn't have to share them.

In this case, however, what's good for the Orioles is also good for the country. If the Lords of Baseball really want to make their sport both more competitive for fans and more profitable for themselves, then moving Montreal's hapless Expos is a good start. But the destination should be northern New Jersey rather than northern Virginia. To see why requires some study of the game's peculiar economics.

Players' salaries account for about 57 percent of baseball's operating costs, so the way teams evaluate and compensate talent is a crucial determinant of their competitive and financial performance. Of course, there's a right way and a wrong way to do it. Guess which is customarily used in baseball?

The right way is to pay a player his contribution to team revenues. Superior players produce more team wins and revenue by converting potential customers into actual ticket-buyers and telecast-watchers. Luckily, performance data are abundant in baseball, so it's easy to estimate each player's contribution to team wins and then to translate this into his marginal revenue contribution. Paying more than this amount is like burning money.

The wrong way is to use the salaries paid by other teams as reference points and simply match them for players of similar ability. Real estate appraisers call this the "comparable sales method," and it works fine - so long as the effects of location are considered. One should not assume that if a three-bedroom townhouse is worth a million bucks in Manhattan, that's what you've got to pay in Hampden.

But that's exactly what baseball teams have been doing. Each new contract sets the bar for subsequent negotiations and salary arbitration decisions. Of course, there are really 30 different markets out there, not just one.

New York, for example, has 20 million potential fans. Even if the Yankees and Mets claim equal shares, each has a fan base 50 percent greater than that of the Orioles - and six times those of Milwaukee and Kansas City. Thus, a pitcher such as Mike Mussina or a slugger such as Jason Giambi simply delivers more marginal revenue in the Big Apple than in Baltimore or anywhere else.

So when the Yankees signed Mr. Mussina and Mr. Giambi and "set the market" in each of the last two years' free agent auctions, smaller-market teams had two unappetizing choices. They could pay New York prices for talent (i.e., salaries above players' local marginal revenue contributions) and lose money hand over fist, or they could lose talented players and sink in the standings.

But there's a simple solution. If baseball insists on paying players as if there's a single standard for market value, then its various markets must be made more equal in size. In other words, if baseball wants to cut its losses, it should cut its biggest market down to size with a relocation or two.

Forty percent of the "New York market" is in northern New Jersey. If these 6 million potential fans had their own team, the Yankees necessarily would be more restrained in bidding for talent, since extra wins would produce less marginal revenue. Presto: more competition in the sport's largest market dampens the ratchet effect on salaries, alleviating financial pressure industry-wide.

Nothing short of a cap on players' salaries (which will happen only over the lifeless body of the players' union) would do as much for baseball's fiscal and competitive balance as moving the Expos to New Jersey.

Moving them to Washington would simply create two more small markets while leaving its largest one - and the main source of its problems - intact.

If Mr. Angelos can use his considerable rhetorical skills to persuade Commissioner Selig of these economic facts, it would do an awful lot to avoid a strike and stabilize the national pastime. Oh, and it wouldn't do him any harm, either.

Steve Walters teaches economics at Loyola College in Maryland.

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