Frequently Asked Questions about the Baseball Labor Negoti..

Frequently Asked Questions About the Baseball Labor Negotiations
by David Grabiner

Last modified:
3/14/08: No players named in Mitchell report investigated or penalized
yet (B3)

2/14/08: More players admit steroid use (new section B5), drug testing
not to be done by a fully independent third party (B2), Congressional
testimony (B4), Gibbons and Guillen suspended before Mitchell report
came out (B3), possibility of suspending work visas for accused players
(B3)

1/14/08: Grimsley and Radomski affidavits unsealed (B4), several of
Mitchell's recommendations adopted (B2), Roberts admits trying steroids
once (B2), 2007 luxury tax figures (A1), other minor changes

This is an attempt to get quick answers to some common questions, to
reduce repetitive discussion from newcomers who often don't understand
the issues, and to provide single, authoritative answers so that
rec.sport.baseball doesn't get overwhelmed with several people making
the same point, whether correct or incorrect.

Constructive comments, corrections, and suggested additions are welcome;
please send them to me at grabiner.DeleteThis@alumni.princeton.edu.
In particular, I would appreciate suggestions from people who have some
expertise. I have left square brackets in several sections; comments
there would be particularly appreciated.

If you want to comment on an economic or legal point, make sure that you
understand the underlying economics or law first.

You can get a current copy of this FAQ in the Usenet group
rec.sport.baseball, or from

http://remarque.org/~grabiner/laborfaq.html
http://remarque.org/~grabiner/laborfaq.txt

Table of Contents

A. Labor negotiation issues
A1. What are the terms of the new agreement?
A2. Why were the last two agreements reached with no strike?
A3. What are the effects of a salary cap, tax, or revenue sharing?
A4. What is the status of contraction?

B. Steroids and other performance-enhancing substances
B1. What is the history of MLB's policies on steroids?
B2. What are the conclusions and recommendations of the Mitchell report?
B3. What penalties have been imposed on players?
B4. Who provided information to Mitchell? Why did few
players provide information?
B5. Which players admitted using steroids after the
Mitchell report came out?

C.Anti-trust exemption
C1. Why does baseball have an anti-trust exemption?
C2. Are other sports also exempt?
C3. What are the effects of the anti-trust exemption?

D. Other economic issues
D1. What effect would X have on ticket prices?
D2. Have ticket prices gone up?
D3. Why do players make so much? What is the market value of a player?
D4. How are salaries determined for players who have X years of service?
D5. How does arbitration work? Does it force teams to overpay for players?
D6. Are teams losing money?
D7. What is collusion?
D8. What are the owners' rights under labor law?
D9. What is the situation in the umpires' labor action?

E. Credits

F. Copyright and disclaimers

A. Salary cap and tax plans

A1. What are the terms of the new agreement?

The new agreement was reached on October 24, 2006, was approved by the
owners on November 3, 2006, and was approved by the players' union on
December 7, 2006. The terms are close to those of the 2002-2006
contract. In contrast to previous negotiations, neither side publicly
announced its proposals. The contract will run through December 11,
2011; thus, if the contract expires in 2011 with no agreement, players
will have some time to sign contracts in the 2011-2012 off-season before
a lockout is possible.

The luxury tax will be imposed on the portion of payrolls over $148M in
2007, $155M in 2008, $162M in 2009, $170M in 2010, and $178M in
2011. The tax rate depends on the number of times a team has gone over
the cap. It will be 22.5% for the first time, 30% for the second time,
and 40% for the third or subsequent time; any team which went over in
2006 will pay 40% in 2007 as well.

Many of the minor details have not been disclosed but are probably the
same as in the 2003-2006 CBA. Payrolls are figured based on the average
value of multi-year contracts for all players on the 40-man roster,
earned bonuses, and benefits; as a result, the tax payrolls are higher
than the officially reported payrolls. Team payrolls are based on the
money actually being paid to players; if a team trades a high-salaried
player away, along with $5M to help pay the player's salary, the $5M
counts against the tax limit for the team paying it. (The luxury tax in
the 1997-2002 CBA charged the entire salary to the team for which the
player was playing, regardless of which team paid the salary; the old
rule still applies to players traded before September 30, 2002.) The
tax money will be used for MLB-wide expenses: player benefits, an
industry growth fund, and the development of players in countries
lacking organized high-school baseball.

$25M of luxury tax money from the 2003-2006 CBA had been designated for
player benefits but had not been spent. $12M of this total was used
to settle outstanding grievances and collusion claims from 2002-2003.

The Yankees were the only team to pay the tax in 2003, with a payroll
$66M over the limit and thus a tax of $11M. In 2004, the Yankees were
$83M over the limit and paid a tax of $25M; the Red Sox were $14M over,
and the Angels were $4M over, both paying small taxes. In 2005, the
Yankees paid $34M at a 40% rate, and the Red Sox paid $4M at a 30% rate.
In 2006, the Yankees paid $26M at a 40% rate, and the Red Sox paid
$500K at a 40% rate. In 2007, the Yankees paid $24M at a 40% rate,
and the Red Sox paid $6M at a 40% rate.

The net effect of the tax is that there is only a small incentive for
teams not to go over the limit once while making a short-term push to
win, but a strong incentive for teams not to go well over the limit for
a long period.

Revenue sharing will be 31% of all local revenue, distributed evenly
among all teams, and a split pool based on past rather than current
revenues which is distributed equally to teams below the median in
revenue. The total shared will be the same amount as the $326M which
was shared in 2006. The equal distribution means that an increase of
$10M in local revenue will mean an increase of $3.1M in payments or a
decrease of $3.1M in receipts for any team. In the 2003-2006 agreement,
there was some unequal distribution, which resulted in low-revenue clubs
losing 48% of any increase in local revenue, and high-revenue clubs
losing only 40%; this had the possibly unintended effect of giving more
incentive for high-revenue clubs to increase revenue.

However, the owners agreed on March 26, 2007 to give $110M of the shared
revenue through 2009 to teams spending more than 65% of their revenue on
payroll (excluding teams with new or renovated stadiums, or teams sold
after the agreement), to get the ratio down to 65%. If there is enough
money for this sharing, it will guarantee minimum revenue to such teams,
removing any incentive for these teams to increase revenue from
non-payroll sources (such as negotiating a better TV contract), and
providing an incentive for them to take risks with player contracts.

Contraction will not occur through the 2011 season.

Teams not signing draft picks in the first three rounds will receive
compensation picks. For a first-round or second-round pick, the
compensation pick will be in the same spot as the unsigned pick; for a
third-round pick, the compensation pick will be following the third
round. (This is an increase of one round from the 2006 agreement.) If
the compensation pick is unsigned, there is no further compensation.
This should decrease signing bonuses for high picks because it reduces
the players' leverage. A first-round pick can no longer threaten to
cost his team the rights to a potential star. However, if the team does
not sign the player, the replacement pick in the next year will have
full leverage, and may thus demand a higher signing bonus, in addition
to the one-year delay the team will have in getting a good player, and
the extra expense in scouting the player.

The draft-pick compensation for free-agent signings has been reduced.
A club losing a Type A player still receives a first-round or
second-round pick from the signing club, but Type A is now the top 20% at
each position rather than the top 30%. Clubs losing Type B players,
ranked 20%-40%, rather than 30%-50%, now receive only a sandwich pick.
Type C players, formerly 50%-60% in the rankings, have been eliminated.
The net effect is that mid-caliber free agents will get slightly higher
salaries, as the team signing them no longer loses a draft pick.

The commissioner retains the $10M discretionary fund, to be distributed
among teams according to his own policies with no more than $3M going to
any one team. The discretionary fund has been used to compensate the
Toronto Blue Jays for losses resulting from the weak Canadian dollar.

A2. Why were the last two agreements reached with no strike?

Any negotiated agreement requires that both sides be willing to
negotiate. If one side takes a position which the other side considers
unreasonable, and refuses to compromise, there will be no agreement.
Every labor negotiation before 2002, except for 1985, involved the
owners taking such a position.

In the 2002 negotiations, the main issues were increased revenue sharing
and a luxury tax. Both are issues on which the union has been willing
to negotiate, and the owners were willing to negotiate on the values.
The bargaining on the luxury tax is a good illustration of succesful
bargaining. The union did not want a tax to carry over to 2007 and thus
proposed plans with no tax in 2006; the owners wanted a tax for every
year of the agreement. The final compromise had a tax in 2006, but the
tax would not carry over if the 2007 season was played under an expired
agreement.

The 2006 negotiations were carried out with no public negotiations, but
the final deals in 2002 and 2006 have similar structures, and it does
not appear that either side made requests on which the other side was
unwilling to negotiate. The union also had additional leverage from the
lack of a 2007 tax if the agreement expired; the owners could only avoid
this by negotiating a new contract, either in cooperative negotiations
or after a lockout.

In contrast, in the 1994 negotiations, the owners proposed a salary cap
which would have resulted in a 15% reduction in total salaries. The
union opposes a salary cap on principle, and had no reason to believe
that one was necessary; the owners' official figures showed that MLB had
been profitable for nine consecutive years, and the union had access to
the actual numbers which presumably showed higher profits. The owners
refused to make any proposal other than the salary cap until November
17, 1994, three months into the strike, and that proposal had a luxury
tax which was so strong that it would have been a virtual cap. With the
owners making demands that the union could not accept, the strike
continued until stopped by the court ruling that the owners had not been
negotiating in good faith and could not unilaterally impose the cap.
(In contrast, if negotiations had reached an impasse after the
productive bargaining of August 2002, the owners probably could have
imposed their last proposal, as it was the result of good-faith
negotiations.)

The previous long strikes and lockouts were the result of similar
issues. In the first strike, in 1972, the union requested that pensions
and health-care benefits be increased to keep up with the increased
costs; the money was already available because of a surplus in the
pension fund. The owners refused to make the increased payments until
after the union struck. In 1976, the union had won the right to free
agency with the Messersmith-McNally decision, and the owners locked the
players out in spring training while proposing that free agency be
severely limited. In 1980 spring training and 1981 during the season,
the owners proposed that a team signing a quality free agent could
protect 15 players on its 40-man roster, and the team losing the free
agent could take any of the others as compensation. The union saw this
as destroying the value of free agents, and struck. In 1990, the owners
first proposed a salary cap, and a lockout was already under way before
the proposals changed.

While a strike or lockout could result from demands which were made by
either side, it appears from the previous paragraph that the owners were
making all of the rejected demands. The reason is that the union never
demanded, nor received, any significant concessions in these
negotiations. The union's most important gains were grievance
arbitration in 1970 and salary arbitration in 1973, both obtained in
negotiations without strikes; and free agency in 1975, which was the
result of an arbitrator's ruling. The 1976 negotiations defined the
terms of free agency (which was completely unrestricted under the 1975
ruling, although neither side expected that to remain), and the union's
goal in subsequent negotiations was primarily to preserve the status
quo. Even in 1972, the union's goal was essentially to get benefits to
keep up with their costs.

The only short strike which actually affected games was in 1985. There
was no issue seen as non-negotiable, with the main issue the delay of
arbitration eligibility from two years to three. An agreement was
reached after only two days. Similarly, on May 23, 1980, the union had
announced a strike on the issue of free-agent compensation. When the
owners and union agreed to create a study committee, postponing
implementation for one year, the non-negotiable issue was gone, and the
strike was settled after five hours. (The settlement was temporary, as
the study committee was not able to reach a recommendation acceptable to
both sides, leading to the strike in 1981.)

A3. What are the effects of a salary cap, tax, or revenue sharing?

A salary cap is an agreement which places an upper limit (and sometimes
a lower limit) on the money each team can spend on player salaries. In
the 1994 negotiations, the owners proposed to limit each team's salaries
to 50% of average team revenues for the previous year; every team would
be required to have salaries between 84% and 110% of that level.
(Before the strike, the players got 58% of average team revenues,
according to the owners' methodology; the actual reduction in salaries
would be greater because salaries of players on the 40-man roster and
incidental expenses such as meal money would be counted against the
cap.)

A decision by an individual team to set a budget is not a cap. Several
teams did this, publicly announcing their budgets, with no complaints of
collusion.

For example, if the Tigers refuse to spend more than $80M on salaries,
they can do that without a cap. If that means that they have $75M
already allocated and there is a player (either one of their own players
or a free agent who is interested in playing for them) who wants $10M,
they have to do without that player. And if the Yankees think that the
player is worth $10M to them and are willing to pay that, he will become
a Yankee. The Tigers cannot do anything to stop this except for going
over their budget. They might decide to do this; for example, if the
player at stake is a hometown hero, he could produce a lot of revenue
for the Tigers.

A salary cap would force every team to have the same budget. Thus, in
the above example, say that the cap is $80M. Now the Tigers cannot pay
more than $5M for the player. If the Yankees are already at or near the
cap, they cannot make a better offer; if he receives no better offer,
the player will probably sign with the Tigers for $5M. If the Yankees
have $7M or more free under the cap, they can offer $7M to the player,
and the Tigers will not be allowed to match the offer; now the player
will sign with the Yankees at a reduced salary.

This is an essential feature of the salary cap; the Yankees and Tigers
have an agreement which affects what the Yankees can pay for a Tigers
player.

A very high tax rate would have the same effect as a cap. Consider the
example in the section on the cap, but now assume that the Tigers are
over the limit and subject to a 100% tax rate on any increase in their
payroll. Thus, if the Tigers want to sign the player for $10M, they
would pay an additional $10M in tax, for a total cost of $20M to make an
offer of $10M. Meanwhile, if the Yankees are under the limit, they could
offer $7M to the player at a cost of only $7M to the team. This would
make it almost impossible for teams which are in the high tax range to
compete for free agents, but not completely impossible as a cap would.
If the Tigers really want to keep the player, they can offer $10M and pay
an extra $10M in tax, but they would expect to lose a lot of money by
doing this.

A lower tax rate will reduce salaries but not prevent teams over the
limit from competing. For example, if the tax rate were 11% rather than
100%, the Tigers could offer $9M (paying taxes of $990K) for a player
worth $10M. This would reduce the player's value to the Tigers by 10%.
He might accept that offer to stay with the Tigers, either for
non-economic reasons or because no team offered the $10M.

If the tax money is redistributed to small-payroll owners, or the tax is
imposed on small-payroll owners and redistributed evenly, it may have
the same effect on them. For example, if the Yankees are under the tax
limit and will get 11% of the difference between their payroll and the
league average, they will lose $990K in tax receipts if they sign the
player for $9M. In this case, the player's value to the Yankees is
also reduced by 10%. If every player's value to every team is reduced
by 10%, salaries should drop by 10% across the board, and owners'
profits should increase by the amount that salaries drop.

The effect on the players of a tax on revenue, or of revenue sharing,
would be similar. If the Tigers pay a 10% tax on revenue or must share
10% of their revenue, then the player who adds $10M in revenue is only
worth $9M, because the Tigers don't get to keep the other $1M. (The
effect on the owners would be different, because owners with high
revenues would pay a higher fixed sum with a tax on revenues than with a
tax on payrolls. The revenue-tax plan would do more to help low-revenue
teams make a profit and reduce high-revenue teams' profits.) This is
why the union offered lower tax rates in plans which accepted the
owners' revenue sharing plan in the previous labor negotiations.

This effect may have contributed to the decline in free-agent salaries
in recent years. _Sports Business Journal_ reports that the average
free agent in 2004 took a 26.6% pay cut. All teams paid revenue-sharing
money, and the Yankees, who paid the most for free agents, were facing a
30% tax in 2004 and a 40% tax in 2005 and 2006, and continue to face it
in 2007.

Note that the effect of all of these proposals depends on the
*marginal* tax rate. A 5% payroll tax across the board and a 50% tax on
the top payrolls might raise the same amount of revenue, but the 50%
tax on the top payrolls might do more to reduce salaries because it
would force teams down to the tax level.

A4. What is the status of contraction?

While contraction was ultimately postponed in 2003 until at least 2007,
the threat of contraction in 2002 and 2003 was an important issue both
in the labor negotiations and in negotiations among owners. The owners
had the right to contract two teams in 2007 without the union filing a
grievance, but they would still have to deal with lawsuits from other
parties such as the cities with which they have signed stadium leases.
There was no talk of contraction in 2006, and thus the agreement not to
contract teams in the 2007-2011 agreement is only a minor issue.

The owners announced on November 7, 2001 that two teams would be
contracted before the 2002 season. The two teams were not announced,
and the details had not been worked out. The owners claimed that they
did not need the union's approval to contract two teams because the
labor contract had not yet expired (it expired November ; the union
challenged this and asked for an arbitrator to rule on it. The owners
and union tried to negotiate a compromise but failed; the arbitrator's
ruling was postponed several times, and may have been put on hold
pending the outcome of the labor negotiations. The labor agreement made
the ruling moot.

In addition, the commission which owns the Metrodome obtained an
injunction forcing the Twins to honor their lease for the 2002 season,
which they had already exercised the option to renew; this injunction
was upheld by the Minnesota Court of Appeals, and the Minnesota Supreme
Court refused to hear the case. As a result, contraction was postponed
to 2003. The Twins renewed their lease for 2003, and the stadium
commission settled a lawsuit against MLB with an agreement that the
Twins could not be contracted in 2003.

If two teams are eliminated, profits for the remaining teams will
increase, because the national revenue will be divided among fewer
teams, and the revenue-sharing money which would have gone to these
teams is more than the shared revenue which they provided for other
teams. However, the owners of the teams involved will need to be paid
enough by the remaining teams to make the deal acceptable.

The two teams were believed to be the Expos and Twins. The Expos had no
local buyer available; the owners probably wanted to either be bought
out or move the team. (Instead, MLB took over the team.) The Twins had
been discouraging potential buyers at the time contraction was under
discussion, but Donald Watkins had been negotiating for purchase. It is
probable that the Twins could receive more if they are contracted; if
MLB contracts the Expos, it must contract a second team as well, and
thus the Twins will have bargaining power and may receive more than
their market value. Watkins himself said that he would pay market
value, not contraction value, for the Twins. If Watkins had bought the
Twins and refused to be contracted, some other team would have been
contracted and the value of the Twins would have gone up.

Contraction was unlikely to happen in 2002 from the beginning; it was
more likely to be an opening move in the new labor negotiations. The
owners reportedly told the union in September that it was not feasible
to contract for 2002; contracting after this promise could have been
seen as failing to bargain in good faith, a violation of labor law.

The threat of contraction also risks the owners' goodwill. The senators
from Minnesota threatened to introduce a bill removing MLB's anti-trust
exemption; in the past, such bills have been threatened by senators and
congressmen to ensure expansion to their home states. The Twins offered
to pay employees several months' salary after their jobs were lost to
contraction, in order to discourage them from leaving for more secure
jobs. Businesses are less likely to buy season tickets, and players may
be less likely to sign with teams that may not exist.

The Twins' 2002 attendance is a good illustration of the cost of
goodwill; even though the Twins had a huge lead for most of the season,
and their ticket prices had gone up at about the rate of inflation,
they drew fewer fans than the 1987 and 1991 Twins which also won titles
unexpectedly.

B. Steroids and other performance-enhancing substances

B1. What is the history of MLB's policies on steroids?

Baseball has long banned the use of illegal drugs and unauthorized use
of prescription drugs. Steroids were officially listed as prohibited in
1991, but the drug policy was not part of the Basic Agreement at the
time, and thus the commissioner's office had to negotiate procedures for
individual cases with the union, both for steroids and for illegal drugs
such as cocaine. An informal agreement allowed players to be tested
under "reasonable cause", but the negotiation of reasonable cause
allowed players considerable advance notice. No players tested positive
for steroids under this testing.

In 2001, Commissioner Selig unilaterally implemented a drug testing
program on the minor leagues; it only applied to players who were not on
the 40-man roster of MLB clubs because such players were not subject to
the CBA. Players were subject to up to three tests per year (later
increased to four, including tests outside the season), and a 15-game
suspension for a first positive test. Androstenedione (a steroid
precursor which was still legal at the time) and human growth hormone
were added to the list in 2002. When the MLB penalties were
increased in 2005, the minor-league penalties became the same.

The 2003-2006 CBA was the first agreement to include a steroid policy.
For 2003, testing would be anonymous "survey testing"; the names of
players testing positive would not be released, and if at least 5% of
the steroid tests were positive, mandatory random tests would begin in
2004. First-time offenders in 2004 would receive counseling but would
not be suspended and their names would not be made public. Even the
weak penalties may have had some deterrent effect, as only 12 out of
1133 tests in 2004 were positive; for comparison in 2003, 96 tests out
of 1438 were positive for steroids or elevated testosterone levels.
(The numbers for 2003 were released in a document that MLB gave to the
Congressional investigation.) Under the terms of the agreement,
androstenedione was automatically added to the list of banned drugs when
Congress declared it a controlled substance in 2004.

On January 13, 2005, the commissioner and union agreed to a stronger
steroid-testing policy. Players were tested randomly, both during the
season and in the off-season, with at least one test during the season.
The substances banned included anabolic steroids (including "designer
steroids" such as THG), steroid precursors such as androstenedione, and
masking agents and diuretics. Amphetamines were not banned. A player
testing positive was suspended without pay for 10 days for a first
offense, 30 days for a second offense, 60 days for a third offense, and
one year for a fourth offense. In addition, the positive tests were
made public; first-time tests under the previous agreement were not made
public. It was initially announced that players could not defer the
penalty during an appeal, but that was apparently not enforced; Rafael
Palmeiro was allowed to appeal his suspension and served a suspension in
August for a positive test in May.

On November 15, 2005, the commissioner and union agreed to a further
revision of the steroid-testing policy; it is maintained in the
2007-2011 CBA. This policy was reached under threat of Congressional
legislation which would have imposed even harsher penalties. A player
testing positive for steroids will be suspended without pay for 50 days
for a first offense, 100 days for a second offense, and for life for a
third offense. Positive tests under the previous steroid policy will
not count as prior offenses. A player banned for life may petition for
reinstatement after two years, and this review will be subject to
arbitration. The union yielded to the commissioner's proposal on the
length of suspensions, in return for the right of arbitration. Players
will also be tested for amphetamines, with a first offense leading only
to more frequent additional testing, and suspensions for 25 days for a
second offense and 80 days for a third offense. A first-offense
positive for amphetamines is supposed to be kept confidential, although
it apparently leaked that Barry Bonds tested positive. Players will be
tested during spring training and randomly during the year, with at
least one test during the season.

If there was no new labor contract by August 1, 2006, the union had the
right to consider the 2006 steroid policy to end with that labor
agreement, on December 19, 2006. If that had happened and the 2007
season were played under the expired agreement, the previous
steroid-testing policy, which applied in the 2005 season, would have
applied until a new labor contract is reached. (While the union had the
right to take that step, it was unlikely; there would be a significant
cost in good will, and if the union wanted to change the steroid policy,
its main interest would be in getting a long-term change in the new
labor contract.)

It is rare for labor and management to agree to a change to an existing
labor agreement, but the January 2005 steroid agreement was seen by both
sides as in their interest. At that time, leaked grand jury testimony
in the BALCO case reported that several MLB stars were using steroids;
the union and owners both decided that it would be in baseball's
interest to develop a new policy. Similarly, the threat of Congressional
action convinced both labor and management to establish the November
2005 steroid policy, as otherwise Congress could have imposed its own
regulations.

B2. What are the conclusions and recommendations of the Mitchell report?

This section is based on the Mitchell report at http://files.mlb.com/mitchrpt.pdf
Information from the report is presented here with little comment.
There is no official union response yet, as the union had little advance
notice of the release of the report. The commissioner's office and
union would have to agree to most of the recommendations.

The most notable conclusion is that steroid use is a serious problem,
and that it became serious because everyone involved allowed it to
continue as a serious problem rather than taking action. The purpose of
the report is to obtain closure on the past, and to make recommendations
for the future.

The magnitude of the problem is indicated by the list of current and
former MLB players who are linked to steroid use, along with the
evidence of use by each player. Different sources count the number of
players as 85 to 90, depending on which players are considered "linked".

Many of the players involved have direct links, including their own
testimony, written prescriptions, checks written to to Kirk Radomski,
Radomski's phone records, and documents provided in law enforcement
investigations. However, the list of players includes some players for
which the only evidence appears to be uncorroborated accusations. For
example, Larry Bigbie, who admitted to using steroids and cooperated
with a federal investigation, reports that two players told him they
used steroids but does not say that he observed either one. (One of
those two players, Brian Roberts, later admitted to having tried
steroids once.) Other players are listed based on news reports.

The report also discusses the effectiveness of the current policies and
makes further recommendations; the following discussion is based on
Section X of the report. The report quotes the established principles
of an effective drug program, from a report at the Duke Conference on
Doping at Duke's Center for Sports Law and Policy: "independence of the
program administrator; transparency and accountability; effective,
year-round, unannounced testing; adherence to best practices as they
develop; due process for athletes; adequate funding; and a robust
education program."

Independence has been improved because the 2006 program now has an
independent adminstrator rather than being administered jointly through
the commissioner's office and the union. The administrator is still not
independent, as he can be removed by either side for any reason.

Transparency has been a failure of the current program. There are no
aggregate reports, and they have not been audited. The data which
Mitchell needed to compile aggregate reports had been destroyed, so it
is not possible to determine what happened to most negative tests, or
how well integrity and chain-of-custody procedures work. In addition,
current best practices for testing depend on variations between the
results of tests taken over time; a player with a naturally high
testosterone level could prove the natural level with previous tests
which were negative but just below the limit, or which were above the
current limit but below the limit in effect at the time of those tests.

There are unannounced tests during the season, but given the difficulty
of locating players during the off-season, there are fewer off-season
tests (68 tests in 2006) and players may have up to three days notice
before a test.

There are several failures in best practices. Diuretics and other
masking agents, which are forbidden by the World Anti-Doping Agency, are
not explicitly forbidden in MLB; the burden of proof is on the
independent program administrator to show that the player took the
masking substance with the intent to avoid accurate testing. Human
growth hormone is not detectable in current urine tests, and blood tests
are not allowed. Players are reported to have used human growth hormone
rather than steroids specifically because there is no current test being
used.

Mitchell was unable to investigate due process but has no reason to
believe that the rights of players were not protected. Funding was also
adequate. Education was provided but was apparently not adequately
emphasized.

The primary recommendations are given in Section XI of the report; many
of them were put into effect quickly, although some are subject to
collective bargaining.

The commissioner's office should have an independent department of
investigations. The department should be headed by an official with law
enforcement experience who can cooperate with law enforcement
agencies. The deparemnt should interview players when it receives
allegations (from law enforcement, for example) that they are involved
with performance-enhancing substances. MLB announced that it would
create such a department; there are ongoing discussions with the union,
and Selig said that the department would have more independence than the
current office but would not be a completely independent third party.

There is already a policy requiring clubs to report evidence of drug
use, but it is not well publicized and has not been enforced. The
policy should be enforced; all club officials, except for physicians and
trainers for whom the information would be protected under patient
confidentiality, must certify that they have reported all evidence, and
the commissioner should have power to enforce the rule under the "best
interests of the game" clause. MLB has announced that it will
impletment this rule, requiring team officials to sign a statement that
they have no undisclosed knowledge.

Packages received for players at ballparks should be logged. The
contents would not be recorded, but information about the sender and
recipient would be available if the sender were subsequently linked to
steroid distribution. MLB has adopted this rule.

Several deterrent provisions do not require collective bargaining
approval because they do not directly affect the union. Clubhouse
personnel should be subject to background checks and drug testing. An
anoymous tip line should be available. MLB has done both of these. In
addition, the top 100 prospects should be tested before the major league
draft; this has not yet been put into effect.

Education about gambling and player safety have received much more
emphasis than education about steroids; it is recommended that the
emphasis on all three be comparable. An educational video on the use
of performance-enhancing substances is shown to all players in spring
training, and there are educational meetings. However, some players do
not remember these programs, and others criticize the shallowness.
There should be testimonials and presentations from physicians and law
enforcement, and information about the risks of illegal purchases. The
report gives examples of several effective presenters. The rules
against gambling are posted in every major league clubhouse; the steroid
policy and information about the risks should also be displayed in
clubhouses and training rooms.

B3. What penalties have been imposed on players?

The report does not recommend that any players be disciplined for past
violations of the policies, including players named in the report,
except when the commissioner determines that "the conduct is so serious
that discipline is necessary to maintain the integrity of the game."
The primary reason is that the report's purpose is closure, and
continued proceedings against the players named will emphasize the past
problems. In addition, there is little cause for penalty, because
the incidents are several years old, and would have to be penalized
under the rules in effect at the time; the 2006 penalties cannot be
imposed for violations in 2004.

Commissioner Selig announced that discipline for players in the report
would be on a case-by-case basis, but no player has been investigated
based on the Mitchell report, making any discipline unlikely. The only
player interviewed after the report came out was Paul Byrd, who admitted
before the report came out to using human growth hormone; he has not yet
been disciplined. Any disciplinary action based on the report would be
subject to the usual procedure for union grievances.

Jay Gibbons and Jose Guillen were each suspended for 15 days on December
6, 2007, which is before the Mitchell report came out. Both players
were suspended for receiving shipments of human growth hormone in 2005
(and in previous years, but HGH was not banned in baseball at the time);
they were also named in the Mitchell report. The union has filed
grievances against both suspensions.

Thirteen major-league players tested positive in 2005, receiving 10-day
suspensions. Three players tested positive in 2006 and four in 2007,
receiving 50-day suspensions. In addition, Jason Grimsley was suspended
for 50 days after receiving a package of human growth hormone and
admitting in a Federal investigation that he had used it; the
Diamondbacks also released him. The drug policy did not specifically
provide for this suspension, so it was imposed under the "best interests
of baseball" clause. The union filed a grievance, and a negotiated
settlement established that the 50-game suspension was acceptable but
that, given the established penalty, the team could not further penalize
the player by terminating his guaranteed contract. (As part of the
settlement, Grimsley received the remainder of his salary but donated it
to charity.)

Barry Bonds is the only player facing legal charges. He was not charged
with a crime for using or buying steroids; rather, he was indicted for
perjury and obstruction of justice for lying about his steroid use in
the BALCO case. In general, as the Mitchell report points out, criminal
charges are brought against the manufacturers and distributors of
steroids, not the purchasers.

It is unlikely that any active players will be punished by MLB as a
result of the BALCO case. There was some discussion of the Yankees
threatening to void Jason Giambi's contract. However, the union would
be able to challenge such a move, forcing the Yankees to demonstrate to
an arbitrator that Giambi violated the contract. Victor Conte, the
director of BALCO, pleaded guilty rather than allowing a trial, so there
will be no open court testimony of MLB players' steroid use from that
trial. Thus the Yankees' evidence could not be that Giambi admitted
using steroids, only that the San Francisco Chronicle said that Giambi
admitted using steroids.

US immigration authorities have discussed denying work visas to foreign
players named in the Mitchell report, but no action was taken and these
players were allowed to report to spring training.

B4. Who provided information to Mitchell? Why did few players provide
information?

George Mitchell led the steroid investigation on behalf of baseball. He
has no subpoena power and thus cannot force anyone to testify. He did
warn that a lack of cooperation would "significantly increase" the
chance that Congress will insist on its own investigation. In fact,
after the Mitchell report, Congress launched an investigation, and
compelled several players and former players named in the report to
testify.

The only player required to testify before Mitchell was Jason Giambi,
because the commissioner's office and union negotiated a plan for him to
testify under threat of suspension. However, since Giambi only admitted
to using steroids before the current policy came into effect, he might
not be subject to suspension for using them. He agreed to testify only
about his own use, not naming other players, in order to avoid a legal
battle with the commissioner's office; the commissioner announced that
Giambi would not be disciplined. Several other people, such as
clubhouse attendant Kirk Radomski, agreed to testify before Mitchell as
part of agreements with law enforcement.

Most of the people interviewed were employees of the teams and the
commissioner's office, former team employees, and former players. The
only active player who testified voluntarily was Frank Thomas. The
teams and commissioner's office also provided a large number of
documents; other information came from public records such as legal
investigations.

Players who could be subject to legal cases will be unlikely to
cooperate, as they do not want to say anything at MLB hearings that
could then be used against them in court. This applies directly to
Barry Bonds, who was under investigation. But the fear of discipline by
MLB is just as significant; anything that a player said in the Mitchell
report could be used against him, or against other players, in a
disciplinary hearing. Mitchell did recommend against punishing players
because of his report, but Selig was not bound by that recommendation
and did not give any advance indication that he would follow it. (Even
after the report came out, Selig said that punishments would be handled
on a case-by-case basis.)

The union agreed to advise players who had questions, and recommended
recommending that players get legal advice. It did not make a blanket
recommendation that players should or should not cooperate, but the
memo gave details of the union's reasons to discourage active players
from cooperating. The union's memo said, "Commissioner Selig has not
ruled out disciplining...players as a result of information gathered by
the Mitchell investigation. Therefore, you should be aware that any
information provided could lead to discipline of you and/or others."
The memo also warned that Mitchell could not promise complete
confidentiality; any statements which Mitchell agreed to keep
confidential could be subpoenaed in a legal case, which would result in
the statements becoming public and might cause them to be used against
the player. The union's final warning was, "Any comments made to
Senator Mitchell -- Commissioner Selig's lawyer -- by an individual
player regarding the operation of the [negotiated steroid] Program might
well be used by the owners in future bargaining with the union."

The union had legitimate reasons to be concerned about confidentiality.
In the BALCO investigation, federal agents seized data from two firms
which had conducted the survey tests in 2003; the seized information
identified players who had tested positive in 2003. The commissioner's
office and union agreed to a moratorium on testing, and the union
notified the players who had tested positive. A legal case seeking the
return of the seized material was still ongoing as of the time of the
investigation.

Independent of legal issues, players have privacy concerns. They have
an interest in protecting their own names from public allegations of
steroid use (whether true or not), and the union has made several
attempts to protect these rights. For example, the union denied
Mitchell's request for anonymized medical records, because of concerns
that the records would not remain anonymous because information such as
age, height, weight, and blood type would identify the player.

The Associated Press and Hearst Corporation requested the official
affidavits used in searches of former pitcher Jason Grimsley and former
Mets clubhouse attendant Kirk Radomski, both of whom reportedly named
multiple MLB players who used steroids. The news organizations claimed
that the government could not selectively disclose records to Mitchell
and not to the news organizations; the US attorney's office opposed
disclosure of the names, saying that the names were blacked out in the
disclosure to Mitchell. The union joined the cases on the government's
side, opposing disclosure, and the documents were not disclosed at the
time they were requested. However, following the Mitchell report and
the winding down of the criminal cases, the affidavits no longer needed
to be sealed to protect an ongoing investigation, and the government
released them on December 19 and 20, 2007. The Grimsley affidavit named
four players who were not mentioned in the Mitchell report, and the
Radomski affidavit named two more.

B5. Which players admitted using steroids after the Mitchell report came out?

Andy Pettite admitted using human growth hormone in open Congressional
testimony. Chuck Knoblauch admitted using performance-enhancing drugs
in a recorded interview with the Congressional committee. These are the
only players to have reported their own use under oath. Brian McNamee,
testified before Congress that he injected Clemens with steroids, but
Clemens denied it. Pettite also accused Clemens, but only based on an
admission which he heard from Clemens; Clemens claims Pettite
misunderstood the statement.

Immediately after the report came out, several players named in it
voluntarily admitted their use. Gary Bennett, Brian Roberts, and
F.P. Santangelo all admitted their use. Fernando Vina, who was named in
the report as having used both HGH and steroids, admitted using HGH but
denied using steroids.

Matt Herges and Glenallen Hill later admitted their use in statements
which were made public on the same day as the Congressional testimony.

John Rocker admitted to failing a steroid test in 2000, and reports that
Comissioner Selig knew about the failed test. However, under the policy
at the time, he was not subject to discipline, and the test was required
to be kept confidential under the terms of the Employee Assistance
Program. (Rocker was under suspension at the time for making
insensitive racial and ethnic remarks.)

C. Anti-trust exemption

C1. Why does baseball have an anti-trust exemption?

It is not directly written into the law; it is the result of a Supreme
Court decision.

The Federal League, which played as a rival major league in 1914-1915,
filed an anti-trust suit against MLB. In 1922, the Supreme Court ruled
for MLB, on the basis that MLB was not interstate commerce and thus was
not subject to federal anti-trust laws.

In later rulings, the Supreme Court has called the 1922 decision "an
anomaly", but has let it stand as a precedent, saying that it is
Congress's responsibility to overturn the exemption. Bills to overturn
the exemption have frequently been introduced in Congress, but they did
not make it out of committee. The Court's interpretation of this action
was that Congress intends to keep the exemption.

In the 1996 labor agreement, players and owners agreed to ask Congress
to overturn the anti-trust exemption with respect to labor relations in
major-league baseball. This bill was signed on October 27, 1998. This
also effectively enshrines in law the ruling that baseball is exempt
from anti-trust laws in other areas.

C2. Are other sports also exempt?

They are not legally exempt; the Supreme Court has ruled that the 1922
decision applies only to baseball.

However, it is legal to agree to terms in a labor contract which would
normally be in violation of anti-trust law, provided that the contract
was obtained in fair collective bargaining. For example, if the
anti-trust exemption were repealed, MLB and the players' union could
still agree to maintain the current system of free agency and
arbitration. However, it might not be binding on minor-league players,
who are not union members. [Zimbalist claims that it wouldn't be; do
any labor experts have an opinion?]

As an illustration of the labor exemption, the NFL and NBA drafts
are legal even though they prevent drafted players from offering their
services to multiple teams. However, Maurice Clarett temporarily won a
court challenge in 2004 against the NFL's attempt to exclude him from
the draft. The court ruled that he was not a party to the union
agreement which included the draft (since he was not being allowed to
join the union), and thus anti-trust law applied. (The ruling was
overturned on appeal.)

By act of Congress, all sports leagues are exempt from anti-trust in
their negotiation of national broadcasting contracts. This allows the
leagues to negotiate internal restrictions, such as baseball's rule that
The Baseball Network had exclusive rights to all games on its date.
Such an arrangement would also be legal in the NFL or NBA; an NBA
restriction on superstation broadcasts was upheld by the Seventh Circuit
in September 1996.

C3. What are the effects of the anti-trust exemption?

The owners in MLB have full control over franchise movement and probably
more control over ownership. When the NFL tried to block the Oakland
Raiders from moving to Los Angeles in 1982, team owner Al Davis won a
suit against the NFL for restraint of trade. Without the anti-trust
exemption, a team in MLB could probably have freely moved to Washington,
which is further from Baltimore than Los Angeles was from the existing
team in Anaheim; instead, it was MLB's decision when to allow the Expos
to move to Washington, and to negotiate compensation to the Orioles for
their territorial rights. (I have no idea of the anti-trust status of
MLB taking over the Expos; a court might have ruled under anti-trust law
that the team had to be sold as soon as bidders were available.)
Likewise, when Nintendo wanted to buy a majority share in the Mariners,
MLB forced the deal to be restructured because of a policy against
foreign ownership; this might have been challenged under anti-trust law.

The exemption also allows the owners to create exclusive deals, even
when they are anti-competitive measures. The right to such deals could
also hurt a rival league (although it might not matter; the USFL won $1
in damages in an anti-trust case). MLB could sign a contract with ESPN
which allowed ESPN to broadcast a certain number of its own baseball
games, and no games from any other league during the MLB season. The
rival league would then be unable to negotiate with ESPN.

The owners are also claiming that their reserve rules are protected by
anti-trust law. That is, players who do not have signed contracts but
were not eligible for free agency under the expired CBA may not sign
with teams in a rival league; MLB can claim that the players are still
under contract. Blacklisting players who move to the rival league would
also be possible. For example, in the 1950's, several players signed
with the new Mexican League. The Commissioner barred any Mexican League
players from playing for MLB for five years, and this was upheld by the
courts.

The minor-league agreements might also be forbidden by anti-trust law,
because they bind a player who is not a member of the union to a single
team's minor-league system.

An agreement which would normally be in violation of anti-trust law is
allowed if it is reached in collective bargaining with a union. The
NBA's salary cap was recently upheld in court because it was reached in
such an agreement. (If the cap is imposed after a failure to negotiate
in good faith, it is forbidden by labor law rather than anti-trust law.)
A June 1996 Supreme Court decision affirmed this principle; a union
cannot file an anti-trust suit on behalf of its members.

However, anti-trust law may still have an effect on labor relations.
The NFL players decertified the union in 1987, which removed the labor
exception and allowed the players to sue the NFL under anti-trust. The
baseball players could have done the same to overturn the imposed cap if
anti-trust law had applied in 1994. It now applies to MLB's labor
negotiations.

Collusion would be forbidden by the anti-trust laws if they applied to
baseball; instead, it is officially forbidden by the collective
bargaining agreement. When the owners colluded in the free-agent market
in 1985-1987, they paid their penalty under the terms of the CBA, which
limited the penalty to the actual damages. If the players' union had
been able to sue under anti-trust law, the damages would have been
tripled. (All subsequent current CBAs specify triple damages for
collusion.)

D. Other economic issues

D1. What effect would X have on ticket prices?

The answer to this question is usually "none", regardless of X. Most
commonly, X is something like "higher salaries" or "a smaller TV
contract"; in these cases, "none" is correct.

Baseball owners, like most business owners, are interested in maximizing
profits or minimizing losses. Thus they set ticket prices with that
goal in mind. Since having an additional fan attend the game does not
have much effect on the cost of holding a game, this means that prices
are set to maximize revenues.

For example, if there are two million fans willing to pay $10 to see the
game, but only 1.6 million willing to pay $12, then it would not be a
good economic decision to raise ticket prices from $10 to $12, because
it will decrease revenues and profits. But suppose instead that there
are 1.7 million willing to pay $12. In that case, ticket prices will be
raised to $12, because the increase will generate an extra $400,000 of
revenue.

Now, suppose something happens which affects the team's profit, without
affecting the number of fans who want to attend games at any given
ticket price. For example, the team could get less money from a new TV
deal, or could have its payroll increase as several good young players
became eligible for arbitration and others were kept as free agents, or
the owner could lose money when one of his other businesses went
bankrupt. The ticket price which maximizes revenue would not change, so
the owner would continue to charge the same price, but make a lower
profit.

When would a change affect ticket prices? Only if it affected the
demand for tickets. This might happen if the team was improved by
signing free agents; however, the teams which lost those free agents
would have the opposite effect, so this would not cause ticket prices to
change on a league-wide basis. The opening of a new stadium, or
improvements in an existing stadium, might result in higher ticket
prices for a better product; this is one of the main causes of recent
ticket price increases. The end of a recession in the city would
increase disposable income, and thus might increase the optimal ticket
price.

Even in these cases, it isn't clear that ticket prices will go up. If
the change means that 20% more people are willing to buy tickets at any
price, then revenue for a fixed price will go up by 20%, so the optimal
price won't change; however, revenues and thus profits will increase.

However, there is a current trend which may cause prices to go up. In
some cities, the team is so popular that the park sells out regularly.
If the team becomes more popular, demand will go up at a constant ticket
price, but revenue will not go up with demand because some people who
want to buy tickets cannot get them. (Some of the extra revenue would
be collected by ticket agencies and scalpers instead of the team, since
there are people who do not have tickets but who are willing to pay more
than the ticket prices.) Thus these teams will have to increase ticket
prices to maximize revenue, even if demand goes up by the same constant
factor at all prices. This is why Fenway, the smallest park in
baseball, has by far the highest ticket prices.

D2. Have ticket prices gone up?

Yes, they have gone up faster than inflation in recent years, primarily
because of new parks, and the increasing popularity of the game in older
parks which sell out. This is a new trend; a study in Baseball
and Billions, by Andrew Zimbalist, compares average ticket prices
to the cost of living from 1950 to 1990. There are minor fluctuations
(adjusted prices were highest in 1970 by a small amount), but they have
been essentially constant over time.

There are 10 teams which played in the same park in 1991 and 2006 (not
counting Oakland, which raised its average ticket price by removing the
cheap seats in 2006). Only the Royals and Blue Jays increased prices at
about the rate of inflation over those 15 years. Most of the others are
big-city parks which sell out. The Red Sox have the largest increase,
but this is because they sold out almost every game even back in 1991,
so the only way they could capture the increased demand was to raise
prices. The Twins are the one unusual case; they have capitalized on
their 2002-2004 success by raising ticket prices rather than drawing
more fans at the same price.

However, the new parks usually have much higher ticket prices than the
old parks they replace; most new parks had about a 50% ticket price
increase. Fans are paying more for a better product when they pay the
higher prices for games in modern ballparks. Once the new parks have
opened, there is no tendency for ticket prices to outpace inflation. Of
the 14 teams that opened a new park between 1992 and 2001, two have
lowered prices since the park opened (and neither was just a lowering
from an overpriced first year), one barely raised them, eight were close
to inflation, two were significantly above, and only the Orioles, who
actually lowered their prices when Camden Yards opened, raised prices
far more than inflation.

You will often see comparisons which say, "It costs a family of four
$170 to attend a game today," along with some ticket price from the
past. This comparison is meaningless unless it is adjusted both for
inflation and for the difference between what is being purchased. The
Fan Cost Index used in these figures is the cost of a once-a-year family
trip, not a trip for regular fans; it includes tickets, food for
everyone, and several souvenirs. If the tickets alone cost $25 thirty
years ago and $90 now, the price has not increased in real value; the
family which now makes $90,000 probably would have made only $25,000
back then in similar jobs, and now pays $1800 monthly to rent a house
which rented for $500 then.

D3. Why do players make so much? What is the market value of a player?

The value of a player to his team is his marginal revenue; this is the
amount of revenue which the team makes with him but would not make
without him. If he is a good player, his team will win more games if he
plays for them, and will thus sell more tickets, collect more from
concessions, get more TV viewers, and have a better chance at World
Series money. If he has extra drawing power as an individual, he will
also help sell more tickets. All of these may be worth a lot of money
to the team. If the team expects the player to be worth $4M in
additional revenue, it should be willing to pay the player up to $4M,
since it will make a profit on the deal; if he asks for more than that,
it should let him go.

For baseball players, such a high value is reasonable. A study in
Baseball and Billions estimates that the value of an extra win to a
team in 1984-1989 was $400,000, independent of the team's market size.
Projecting this to current revenues, that would be $2M, which means that
a player worth five extra wins (typical for a superstar) would generate
$10M in extra revenue. A later study by Nate Silver in Baseball Between
the Numbers estimates that the value of an extra win averages
$1.8M, but the value varies beteen $.7M and $4.5M, with the highest
figure for teams expecting to win 90 games because wins around 90 have
the greatest effect on the probability that a team will make the
playoffs. A team expecting to win 84-96 games could pay over $15M for a
player worth five wins.

The market value of a player is what he would earn if there were open
competitive bidding for his services. In theory, this should be the
expected value of the player to the team for which he has the
second-highest expected value, since the team for which he is most
valuable can offer that amount and nobody will beat it. This would be
the player's actual salary in a free market.

Players who are not subject to a free market may not make their
expected marginal value. Players who aren't eligible for arbitration
usually make much less, because they have very little option. Players
who are eligible for arbitration still tend to make less than their
marginal value (see below). Players who are under long-term contracts
may make more or less than their marginal value in one particular year;
however, when the contract was offered, it was probably offered for the
expected value or less, and both sides are now taking the risk. If a
team misjudges expected values and signs players for more than their
value, it should pay for its bad business decisions.

The same principles apply to any worker who is free to market his or her
services. If employers X, Y, and Z all believe that you will generate
$30,000 in additional revenue if they hire you, then all three will be
willing to match each other's salary offers if they are under that
level. If Z is stupid enough to offer you $35,000, you'll take the
offer, and if Z makes too many of these mistakes, its profits will
drop, and its executives will lose their jobs or the company will go
bankrupt. If Z offers you $35,000 because it believes you are worth
$40,000, and it turns out to be right, its profits will go up, and if Z
makes more of these good deals, X and Y will be in trouble.

D4. How are salaries determined for players who have X years of service?

Players with less than two years of service, and the 83% of players with
the lowest service time among third-year players, have no negotiating
rights with their teams. The teams can offer whatever they want,
subject only to the minimum salary. The players' only leverage is to
refuse to sign any contract at all; they may not attempt to negotiate
with another team. Such players often don't get just the minimum
salary, partly because of the team's interest in maintaining good will;
paying a player $50...(message truncated)