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How many football teams should there be?
IPA REVIEW ARTICLE
Competition is good for consumers-it leads to lower prices and better quality, with less efficient firms exiting the industry. Sports, apparently, are an exception to that rule. Consumers are better off when teams compete on the playing field, but not off-field. Open slather competition off-field, we are told, would result in a small number of ‘super-teams' that dominate the league and undermine consumer satisfaction. The ‘solution' is to allow sporting associations to form cartels. The Australian Football League (AFL) is such a cartel.
In principle, the AFL and its constituent clubs provide an on-field spectacle that results in high attendance at games, greater membership of clubs, greater media ratings, greater merchandising opportunities, and greater industry profits. The objective of the sports cartel-like any cartel-is to grow the market, and ensure that weaker teams (firms) do not fail.
But just how competitive is the AFL competition? A well-known measure of competition is the Herfindahl Index where the market shares of firms are used to measure the extent of industry concentration. The inverse of that index is how many equally sized firms would give rise to that level of concentration (in the figure below this is the ‘optimal number of teams'). Using data from the official statistical history of the AFL, it is possible to calculate a Herfindahl Index based on the number of winning games in the home and away competition for each year from 1974-2007. For example, Geelong with 18 wins in 2007 had about a 10 per cent market share of total possible wins.
Over the 34 year period, the number of teams in the competition has increased from 12 to 16. But the figure reveals that there are, on average, two too many teams in the competition.
The AFL has recently announced plans to grow the market by an additional two teams. That implies an additional game per weekend.
If the AFL is already carrying two teams, is the market strong enough to carry four? Equalisation policies have allowed the AFL to grow the market but have not reduced the number of excess teams. What more can the AFL do to suppress off-field competition?