SALARY CAPS AND COMPETITIVE BALANCE

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Owners/management of sports leagues have often argued that a salary cap is needed to improve competitive balance. Has competitive balance improved in leagues that have salary caps (e.g. NBA, NFL and NHL)? Has competitive balance possibly changed due to other factors?

  1. Procedure
    A. The salary caps for the NFL, NBA and NHL were in place for the 1994, 1982-83 and 2005-06 seasons, respectively. Using winning percent data, produce a Microsoft Excel file with the team name and winning percent for each team for the 20-year time periods for each league. Produce separate worksheets within the Microsoft Excel file with the following columns: team name and winning percent. Cull out all teams that did not play during the 20 seasons in question (make sure you do not delete a team that only played some of the seasons!).

Note: for the NHL, the 2004-05 season was cancelled due to the NHL’s lockout of its players prior to the salary cap being established for the 2005-06 season. Therefore, the 10-year period post-salary cap is from 2005-06 to 2014-15.

B. Within the worksheets in part A, calculate the Ratio of Standard Deviation (RSD) of winning percent for all 20 years in your spreadsheet for each league. Calculate the average of RSD for each 10-year period before and after salary caps were in place for each league. Create line charts for each league which show the RSDs for each league across the 20-year period. Make sure to standardize the values on your axes for comparative purposes. Insert a trend line in each chart.

C. In separate worksheets (within the same Excel file), collect all the championship winners and runners-up for the whole 20-year period for each league. Calculate the Hirfindahl-Hirschman Index (HHI) for each league for each 10-year period before and after the imposition of the salary cap. Hint: the number of teams within the leagues may not remain constant during the time periods.

Note: NBA Championships and the Stanley Cup playoffs are played in the second year listed for the regular season. Specifically, for the 1992-93 NBA and NHL seasons, the NBA championship and Stanley Cup were played in 1993. For the NFL, the Super Bowl is played in the January/February of the year after the regular season (e.g. for the 1995 season, Super Bowl XXX was played in January 1996). Make sure to align your champions and runners-up to the correct regular season.

D. In a separate Microsoft Excel worksheet (within the same Excel file), create a summary table of the 10-year average RSDs (calculated in Part B) and HHIs (calculated in Part C) for all of the leagues pre-and-post the salary cap being imposed. Calculate the percentage change in both the average RSDs and the HHI for all of the leagues pre-and-post the salary cap being imposed.

  1. Analysis
    This section provides the structure of what work needs to be completed/questions to be answered in the Analysis section of the paper. It also provides the structure of the section.

2.1Theory. Modern professional sports leagues in North America have experienced significant structural changes over the past several decades. What does Rottenberg’s Invariance Principle predict for the trends in competitive balance with the introduction of a salary cap? Use Fort’s MR-Win% Model to support your analysis in this section.

2.2Data/Procedure. Briefly summarize the data collection process and the manipulation of the data (e.g. what variables were calculated) from the Procedure section for the reader. Make sure to identify the data sources used for the reader.

2.3Regular Season Competitive Balance. Describe the trends in the RSD of winning percent before and after the start of salary caps in the leagues. Did regular season competitive balance increase, decrease or stay the same after the imposition of a salary cap? Are the results consistent across the leagues? Are the results consistent with the predictions of Rottenberg’s Invariance Principle?

2.4Championship Competitive Balance. Describe the trends in the HHI before and after the start of salary caps in the leagues. Did championship competitive balance increase, decrease or stay the same after the imposition of a salary cap? Are the results consistent across the leagues? Are the results consistent with the predictions of Rottenberg’s Invariance Principle?

2.5Other Factors Influencing Competitive Balance. What factors, other than a salary cap, could have influenced changes in competitive balance during this period? Hint: think things like league expansion, the introduction of/changes to the amateur draft, free agency, revenue sharing, luxury taxes, new stadium development, etc. Note: the hints are not intended to be a comprehensive list. Research the factors that are relevant to this league during the time period in question.

Data Sources
The information you need can be found at Rodney Fort’s Sports Business Data website. You will find your information under the MLB folder under the following sub-folders:

NBAWinPercIndex.xls in NBAWinning tab
NFLWinPercIndex.xls in NFLWinning tab
NHLWinPercIndex.xls in NHLWinning tab

NHL Championship (Stanley Cup) Data
http://en.wikipedia.org/wiki/List_of_Stanley_Cup_champions

NFL Championship (Super Bowl) Data
http://www.nfl.com/superbowl/history

Sample Solution

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