PROFIT-MAXIMIZING GATE REVENUE SHARING IN SPORTS LEAGUES

Thomas Peeters

Economic Inquiry, 2015, vol. 53, issue 2, 1275-1291

Abstract: type="main" xml:id="ecin12184-abs-0001"> In this article, I examine how sports leagues can use gate revenue sharing to coordinate talent investments and maximize club profits. Gate revenue sharing reduces incentives to invest in talent. Initially lower investments boost profits, because total costs go down, but investing less also shrinks revenues, which harms profits at higher levels of sharing. The league maximizes profits by setting a sharing rule, which balances these two effects. Gate revenue sharing decreases talent investments more strongly in leagues with heterogeneous rather than homogeneous local market sizes. As a result, the profit-maximizing level of sharing is higher for relatively homogeneous leagues. This implies that more balanced leagues are expected to share more gate revenues than less balanced leagues. It also explains why gate revenue sharing is widely used in the U.S. major leagues, while it is largely absent in European soccer. ( JEL L41, L83)

Date: 2015
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