Frequently Asked Questions about the Baseball Labor Negoti..

Frequently Asked Questions About the Baseball Labor Negotiations
by David Grabiner

Last modified:
11/14/07: Possible collusion charges for owners exchanging information
about team needs (C7)
10/14/07: No changes
9/18/07: Updated steroid test data (A5)

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.TakeThisOut@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?
A5. What is the status of negotiations about steroids?

B.Anti-trust exemption
B1. Why does baseball have an anti-trust exemption?
B2. Are other sports also exempt?
B3. What are the effects of the anti-trust exemption?

C. Other economic issues
C1. What effect would X have on ticket prices?
C2. Have ticket prices gone up?
C3. Why do players make so much? What is the market value of a player?
C4. How are salaries determined for players who have X years of service?
C5. How does arbitration work? Does it force teams to overpay for players?
C6. Are teams losing money?
C7. What is collusion?
C8. What are the owners' rights under labor law?
C9. What is the situation in the umpires' labor action?

D. Credits

E. 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; the Red Sox paid $4M at a 30% rate.
In 2006, the Yankees paid $26M at the 40% rate, and the Red Sox paid
$500K at the 40% rate; these two teams will owe 40% tax in 2007.

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 as the same amount of
sharing 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 will go 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 have gone up at about the rate of inflation,
they drew fewer fans than the 1987 and 1991 Twins which also won titles
unexpectedly.

A5. What is the status of negotiations about steroids?

George Mitchell is leading an investigation into the use of steroids in
baserball. He has no subpoena power and thus cannot force anyone to
testify; however, Mitchell has warned that a lack of cooperation will
"significantly increase" the chance that Congress will insist on its own
investigation. The only person obligated to testify before Mitchell was
former Mets clubhouse attendant Kirk Radomski, because he agreed to
testify before both Mitchell and the government as part of a plea deal.

Likewise, the commissioner's office has limited power to
force a player to testify unless the player is already subject to
discipline. The union will advise players who have questions, and is
recommending that players get legal advice, but is not making a blanket
recommendation that players should or should not cooperate. The
commissioner's office and union negotiated a plan for Jason Giambi to
testify under threat of suspension, because Giambi had admitted to
previous use of steroids. However, since Giambi only admitted to using
steroids before the current policy came into effect, he would 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.

Players 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. 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
records 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 opposes
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.

Players who are subject to legal cases will be unlikely to cooperate, as
they do not want to say anything at MLB hearings in order to protect
their rights in court. In particular, Barry Bonds' lawyer says that he
cannot cooperate as long as he is under investigation for perjury for
lying to the grand jury in the BALCO case.

On November 15, 2005, the commissioner and union agreed to a revised
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.

The first player suspended under the new steroid policy was Jason
Grimsley, who was arrested for possession of human growth hormone and
suspended for 50 days. (He was also released.) Three major-league
players have tested positive so far in 2007 and three tested positive in
2006, in comparison with 13 under the previous policy in 2005.

If there was no new labor contract by August 1, 2006, the union had the
right to consider the new steroid policy to end with the current labor
agreement, on December 19, 2006. If that happened and the 2007 season
were played under the expired agreement, the previous steroid-testing
policy, which applied in the 2005 season, would apply 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.)

On January 13, 2005, the commissioner and union agreed to the previous
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, which will act as an additional deterrent; players testing
positive and not suspended under the old agreement did not have their
names made public. It was initially announced that players could not
defer the penalty during an appeal, but that appears not to be the
current rule; Rafael Palmeiro was allowed to appeal his suspension and
served a suspension in August for a positive test in May.

The survey testing in 2003 had 96 tests out of 1438 which were positive
for steroids or elevated testosterone levels; this testing was
anonymous, and there were no penalties, but it did put into effect a
policy with possible penalties. However, these penalties were very
weak; first-time offenders would receive counseling but would not be
suspended. Even the weak penalties may have had some deterrent effect,
as only 12 out of 1133 tests in 2004 were positive. (The numbers of
positive tests were released in a document that MLB gave to the
Congressional investigation.) Thirteen MLB players tested positive
and were suspended for ten days in 2005, with Rafael Palmeiro the
only star.

The minor leagues have a stronger policy, with four tests per year, both
during and outside the season, and a 15-game suspension for a first
positive test. The older major-league policy is close to the
minor-league policy; the new policy has much harsher penalties, but the
minor-league policy may also be changed.

Leaked grand jury testimony in the BALCO case reported that several MLB
stars were using steroids. This created a public perception that
steroids were a serious problem in MLB. The union and owners both
decided that it would be in baseball's interest to develop a new policy.
It is rare for labor and management to agree to a change to a labor
agreement, but the January 2005 steroid agreement was seen by both sides
as in their interest. Similarly, the threat of Congressional action
convinced both labor and management to establish the November 2005
steroid policy, as otherwise Congress could have changed the labor
agreement on its own.

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.

B. Anti-trust exemption

B1. Why does baseball have an anti-trust exemption?

It is not 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.

B2. 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.

B3. 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. (The current CBA specifies triple damages for collusion.)

C. Other economic issues

C1. 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.

C2. 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.

C3. 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.

C4. 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 $500,000 instead of $200,000 for $2M worth of production
is still a good deal, and may make the player more likely to stay for
below market value when he becomes a free agent.

The top 17% of third-year players, and all players with at least three
years of service, are eligible for arbitration. They may still
negotiate with their teams for salaries. However, their teams cannot
force them to accept an offer or go without a job. If a player and his
team cannot agree on a salary, the team may choose to release the player
or offer arbitration. The player cannot force the team to offer
arbitration. If the team releases the player, he becomes a free agent,
and the team which released him is not entitled to any compensation.

A player with less than six years of service must accept arbitration; a
player with six years or more may refuse arbitration and become a free
agent. The signing team may be required to give a draft pick as
compensation to the team which lost him if he is a type A free agent
(the top 20% of players according to a complicated formula). Except for
the value of the draft pick, this is essentially a free-market
negotiation. The player can demand X years for Y million dollars, but
he won't get it unless at least one owner thinks he is worth that much.

A player in the middle of a long-term contract can ask to renegotiate
the contract. However, the team is under no obligation to renegotiate;
it can require the player to fulfill the previous contract. The team
might agree to renegotiation in the interest of good will, hoping to
retain the player when the contract expires. This rarely happens, but
it has happened occasionally. An important example is Rickey Henderson,
who signed an artificially low contract because of collusion, and wanted
to renegotiate for his fair market value after the collusion had been
exposed.

C5. How does arbitration work? Does it force teams to overpay for players?

The arbitration procedure was added to a previous CBA at the request of
the owners; it was modified in the 1997-2001 CBA.

Arbitrators are members of the American Arbitration Association. Any
member of the AAA may volunteer to be in the "pool" of arbitrators
eligible to hear baseball cases. Lists of volunteers are examined by
representatives of the players and the owners; an arbitrator must be
approved by both groups to be in the pool. (This discourages
arbitrators from appearing biased for either side; such arbitrators will
be dropped from the pool.) The arbitrator for an individual case is
chosen at random from the pool. Cases are heard by a panel of three
people, with one arbitrator chosen from the pool, and one chosen by each
side.

Arbitration can be offered only by the team; a player cannot force his
team to offer arbitration, although he can refuse an offer of
arbitration if he is eligible for free agency. The player and the team
submit their proposed salaries to an arbitrator, and present their
cases. The CBA specifies that team finances, including the luxury tax,
may not be considered in arbitration; thus players do not have their
arbitration salaries reduced because the team's payroll causes a tax to
be imposed. The arbitrator must choose one figure or the other; this
discourages unreasonable demands from either side. Contracts awarded in
arbitration are always for one year, with no incentive clauses.
However, the team and player may settle on some figure in between the
two, or on a long-term or incentive-based deal, before the decision has
been announced.

The arbitrator's decision is based on the salaries of comparable
players. Thus, if other players and owners negotiate or arbitrate
contracts which are unreasonably high or low, these will be considered
as comparisons. This is why owners and fans talk about arbitration as
"enshrining previous mistakes." However, a single anomalous contract is
not likely to have a major effect on arbitration, since an arbitrator
can recognize it as an anomaly.

Arbitration is unlikely to force an owner to pay a player more than his
value. If the owner expects that the player will request and earn more
than his value in arbitration, he can release the player instead of
offering arbitration. This is a good economic decision if the player
would have earned more than his value; that is, if the amount of salary
saved is more than the amount of revenue lost. This rarely happened
before the strike, but it has become more common recently. A fair
number of players were released in 1995 rather than being offered
arbitration. In 1997 and again in 2003, some of the top free agents
were not offered arbitration; their teams thus gave up the draft pick
they would receive as compensation, but avoided the risk of paying these
players arbitration salaries which would be more than the teams were
willing to pay.

It is often pointed out that players get huge raises in arbitration, but
this is the result of the artificially lowered salaries for
non-arbitration-eligible players. A player with two years of service will
have to accept whatever the team offers, which may be near the minimum
if he is not a star; when he has three years of service, arbitration
increases his salary closer to his fair value.

C6. Are teams losing money?

While most businesses have an incentive to report high profits, MLB
teams have an incentive to report low profits, and can manipulate
reported profits more easily and legally than publicly traded
corporations. Public corporations must make their audited records
available; privately held businesses such as MLB teams need only report
to their own owners. Public corporations improve their stock value, and
thus their market value, by reporting profits; privately traded
businesses are not valued in a stock market, but by potential buyers who
know the true finances. The value of an MLB team does not depend
directly on reported profits, but teams reporting losses are in a
stronger position for negotiating with the public for new stadiums,
lease concessions, and other benefits. In addition, the revenue-sharing
rules give teams an incentive to minimize reported sharable revenue.

MLB claims to have operated at a loss every year from 1975 to 1985, then
at a profit every year from then until the strike, although the profit
was only $22M in 1992 and $36M in 1993. The strike led to large losses;
the reported figures were $375M in 1994, $326M in 1995, and $185M in
1996; attendance was still down by 15% in 1996 from its pre-strike
level. Reported losses have continued since then, $176M in 1997, $138M
in 1998, $212M in 1999, about $500M in 2000, and $519M in 2001. The small
reported profit in 1993 would be consistent with 12 of 28 teams losing
money, which is what Bud Selig claimed. MLB's official figures claim
that 25 of 30 teams lost money in 2001.

Other sources claim much smaller losses. Forbes magazine,
estimating finances from publicly available data, reported a profit of
$130M in 2000, with ten teams losing money; a profit of $75M in 2001,
with eight teams losing money; a loss of $39M in 2002, with sixteen
teams losing money; a loss of $57M in 2003, with fifteen teams losing
money; a profit of $132M in 2004, with ten teams losing money; a
profit of $360M in 2005, with five teams losing money; and a profit of
$496M in 2006, with only the Yankees losing money. Older figures
show similar differences. Financial World magazine
reported profit of $168M in 1993, with eight teams losing money, a loss
of $123M in 1994, and a profit of $59M in 1995. The Rockies' ownership
claimed during the strike that seven teams lost money in 1993; The
Sporting News reported in August 1995 that only three teams were
losing money.

Which numbers are correct? It's difficult to tell without open books;
however, it is almost certain that some of the teams which MLB claims
are losing money are not actually losing any. When the owners opened
their books to economist Roger Noll in the 1985 negotiations, he found
enough hidden revenue and accounting techniques to turn the claimed $50M
loss for 1984 into a $9M profit. Since the current books have not been
opened for public analysis (although Noll looked at the 1993 books, and
2001 figures were released to Congress), it is impossible to tell how
much such techniques are still being used. The 2001 figures were
audited, but this means only that all transactions were counted, not
that they were fairly valued.

The details of Noll's analysis are given in Baseball and Billions.

One of the biggest problems in determining a team's real profit or loss
is the use of related-party transactions; that is, transactions between
two entities which provide money to the same people. For example, AOL
Time Warner owns both the Braves and TBS, so the Braves' TV contract can
be set arbitrarilty to cause either the Braves or TBS to show an
artificially low profit. In MLB's official 2001 figures, the Braves'
contract was at about the MLB average, despite the superstation; the Cubs
(WGN is also owned by the Tribune Company) and the Dodgers (owned by
Fox) showed similarly small deals. Similarly, Wayne Huizenga used to
own both the Marlins and their stadium, so he could set the stadium rent
at whatever price he wants, and assign luxury box revenue to either the
team or the stadium. He could thus cause the Marlins to show an
artifically high or low book profit. This is the basis for his claim
that the Marlins would lose money in 1997 even if they sold out every
game. Andrew Zimbalist anayzed the reported numbers, and concluded that
the Marlins' actual profit in 1997 was $13.8M with a reported loss of
$29.3M. Another possibility is for the team to pay a large salary or
loan interest to the owner or to relatives of the owner, instead of
distributing the same money as profits; the Brewers were reported to be
doing this.

Undervaluation of related-party transactions may also reduce a team's
revenue-sharing payments, and thus add to the team's actual profit. If
a local TV contract is undervalued by $10M and revenue is shared at 30%,
the team saves $3M which would otherwise go to the revenue-sharing pool.
MLB was reportedly auditing the Yankees' deal with YES in an attempt to
collect the shared revenue on the undervaluation.

Another problem, which could be resolved by open books, is the use (or
abuse) of accounting practices. For US (but not Canadian) tax purposes,
half the purchase price of a team may be attributed to player contracts.
This is considered to be a purchase of short-term assets, which may be
amortized. Amortization is normally used to reflect the declining value
of assets which will expire, so that a new patent is worth more than a
similar patent which will expire in one year. This does not make sense
in MLB, because the true asset is not the specific players, but the
right to acquire players for below their market value. Similarly, teams
which own their stadium can depreciate the stadium, reducing its book
value by a fixed percentage every year; while depreciation of buildings
does make sense because buildings do eventually need to be replaced, the
rate allowed by accounting principles is much faster than the actual
deterioration rate of the building. The depreciation and amortization
losses are paper losses, useful for their tax benefits, which will be
regained by the owner when the team is sold at its real franchise value.
MLB's own figures released to Congress in 2001 show $116M in interest
and $174M in depreciation and amortization.

Also, part of the profits of owning a baseball team (as with other
investments) comes from the appreciation of the franchise value. If you
buy a team for $100M, break even in cash flow for five years, and then
sell it for $150M, you have made a substantial profit, just as if you
had bought $100M worth of real estate and it became worth $150M. And if
you buy the team for $100M by taking out $40M in loans, show an
operating loss equal to the after-tax interest you pay on the loans, and
then sell it for $150M and pay off the loan balance yourself, you have
made exactly the same real (economic) profit; the $40M loans allowed you
to invest an extra $40M somewhere else.

It is possible for a team to lose money without overpaying for players,
because the true values of the individual players, plus non-salary
expenses such as stadium rent and player development, are not guaranteed
to cover the total revenue in a particular team. If there are teams in
this position, they could benefit from revenue sharing, or from a tax or
salary cap which lowered salaries, and such moves might be necessary to
keep teams in these cities.

But it is also possible that teams which are losing money are losing it
because they are paying players, particularly free agents, more than
their value. Some of these may simply be unlucky decisions, paying
large contracts to players who got hurt or declined unexpectedly. This
is a risk which should be calculated in the value of the contract, along
with the potential gain if the player performs unexpectedly well; once
this risk is considered, the problem won't consistently affect any team,
although it may lead to single-year losses.

It is also probable that many players are overpaid because of poor
talent judgment; for example, paying a 32-year-old player the value of
his performance at ages 26-29, expecting him to repeat it, is usually a
bad economic move. Such moves are made almost every time a free agent
over 30 is signed. Owners who lose money because of such bad moves have
the same interest in making a profit as other owners, and may be more
likely to make a profit by a salary cap. From a free-market point of
view, this is not a good idea; the free market will drive out
incompetence, as such owners can make a profit by selling their teams to
competent ownership or replacing their general managers.

C7. What is collusion?

Collusion occurs when a group acts in concert in business. Thus, if
several owners agree not to make offers to each other's free agents, or
to limit their offers, they are guilty of collusion; this is what
happened in 1985-1987. (The cases were based on actual evidence of such
communications, not simply the fact that some players received no
offers.) It would also be collusion if the owners agreed to follow a
salary cap without getting it in the CBA.

It is not collusion if owners act independently to reduce expenses.
Many teams have publicly announced their budgets; this is fine as long
as no team can control another team's budget. Likewise, if a free agent
asks for $3M and he receives no offers because no owner thinks he is
worth that much, this is not collusion; it happened to Jody Reed and
Chris Sabo.

There is a clause in the CBA forbidding players or teams from acting in
collusion. It was put there at the request of the owners, to prevent
players from staging joint holdouts. In 1985-1987, the players charged
the owners with violations of this clause. As specified in the CBA, the
hearings were held before an arbitrator, not in a lawsuit.

There were rumors of collusion in the April 1995 free-agent signings,
because so many players took large salary cuts. Charges were filed by
the union, and there were some complaints by agents. However, this is
probably not collusion; most of the owners discovered that they had less
money after the strike and would make less in 1995, and were thus more
careful where they spent it. There were similar rumors of collusion
charges in 2002 and 2003. The union never filed any formal charges, but
continued to negotiate privately with the owners. The charges were
settled along with a list of other unresolv...(message truncated)