Finally Something Positive from the Cubs!

The Chicago Cubs hold the record for
the longest championship drought in the four major US sports, not giving their fans a World Series victory since 1908. But for as much heartache and disappointment the team has given its fans over the years, it also offers the local community something uniquely positive; what economists call a positive externality.

The Cubs have played their home games in Wrigley Field since 1916, two years after the iconic ballpark was built. The stadium sits right across the street from apartment buildings that rise above the outfield bleachers. Residents high enough up in the buildings or people on the roof can see into the ballpark and watch the game as it’s being played. That unique view of the ballpark action led some entrepreneurial building owners to put bleachers on their roofs and sell tickets.

Economically, the good the Cubs produce (the entertainment provided from watching baseball games) is non-excludable because the private firm (the Cubs) cannot prevent some people from consuming the good without paying. When people other than the consumers that purchase any good, gain something from the good’s production, economists call that a positive externality.

Firms that produce goods that give positive externalities do not receive the full economic reward associated with producing the good because they are not paid by everyone who uses it. Those firms can increase profits if they can find a way to make their good excludable and thus, deny the “free” use of their good.

As of the start of this season, it appears the Cubs might be trying to do just that. As a part of a planned stadium renovation, the Cubs have proposed building a large scoreboard that will block the views from neighboring rooftops. Aside from increased advertising that the new scoreboard would bring, it should also help to make their good scarcer and increase demand for tickets, driving prices up.

Where does the story go from here? The team hopes to begin construction this fall, but owners of neighboring buildings have threatened legal action, saying a new scoreboard will “drive them out of business” though it’s possible that an agreement which benefits all the firms involved can be reached (either privately or with the help of local government) before the issue goes to court.

Discussion Questions

Suppose that the Cubs could determine the number of home games they play based solely on attendance, rather than by a schedule set by Major League Baseball.

1. In this scenario, if the team does not get paid when people watch the game from rooftop seats, will the number of games played be socially optimal? What if the team does collect money from rooftop viewers? Explain why.

2. When the outcome is not optimal, will there be too many games played or too few?

3. Propose a policy that the local government could implement to fix the inefficiency and get the team to produce the socially optimal number of games.

4. Economists say a good is rivalrous if one person’s consumption of the good prevents another person from enjoying it. For example, you and I cannot eat the same hamburger. Would you consider the good the Cubs produce to be rivalrous? Does the way a fan sees the game influence your answer?

Innovation and Diffusion in Baseball

Managerial innovation often involves the use of new ideas that allow a firm to produce at a lower cost than rival firms and, in turn, earn higher profits. Yet, as word of profitable innovation diffuses, other firms will mimic the innovator until prices adjust and the innovator's initial cost advantage disappears. The labor market for baseball players at the turn of the 21st century offers an example of managerial innovation and diffusion. The innovator, according to Michael Lewis's Moneyball, was the Oakland Athletics headed by general manager (GM) Billy Beane. Beane was the first GM to make use of an idea that was formerly relegated to the realm of baseball stat geeks: the notion that on-base percentage is a much more important indicator of batting performance than baseball managers realized.

Let's assume that professional baseball teams earn more revenue when they win more games. In this case, profit-maximizing baseball teams will strive to maximize the production of wins while keeping the team payroll as low as possible. Winning requires scoring more runs than the opponent. We can think of batters as the run producers. A batter's value to a team is tied to his ability to produce runs and, by extension, wins.

Like any other productive resource, economic theory suggests batters should be paid according to their marginal productivity: that is, the amount their talents contribute to runs scored by the team. Of course, there is no way to measure this amount precisely. So summary statistics, such as batting average (the player's hits divided by at-bats), slugging percentage (the player's total bases divided by at-bats), and on-base percentage (the number of times a player reaches base divided by plate appearances) must be used. GMs must decide how to value each of the various batting attributes so as to acquire batters capable of scoring runs and winning games.

In a recent journal article, economists Jahn Hakes and Raymond Sauer (founder of The Sports Economist blog) show that, at the turn of the 21st century, player pay did not adequately reflect the contribution of on-base percentage to winning games. That is, in paying batters, GMs paid too little for on-base percentage and probably paid too much for other, somewhat less important attributes. Oakland's managerial innovation--emphasizing on-base percentage in the evaluation of prospective batters--exploited the inefficiencies in baseball's labor market and allowed Oakland to acquire players with high on-base percentages at a relatively low cost. As a result, the A's built a series of playoff contending teams but spent much less on payroll than clubs with a similar number of wins. Read the first few pages and the concluding remarks of the Hakes and Sauer article to find out more about the Oakland innovation and how its diffusion changed the labor market for ball-players.

1. According to pages 3 and 4 of the paper, what do batting average, slugging percentage, and on-base percentage measure? Compared to batting average, what additional information about a hitter's productivity does slugging percentage capture? What about on-base percentage? According to the authors, which measure, on-base percentage or slugging percentage, has a bigger impact on wins?

2. What do the authors conclude about the diffusion of Oakland's managerial innovation? Had the value that GMs placed on on-base percentage changed by the time Lewis's Moneyball was published?

3. Steven Levitt, co-author of Freakonomics, criticized Moneyball for over-emphasizing the role of batting and under-emphasizing the role of pitching in Oakland's recent success. Levitt argued that pitching generated most of the A's success. Remember, winning requires scoring more runs than the opponent. Part of a team's success in out-scoring opponents comes from the ability of its pitchers to keep the other team from scoring runs. During the 2000-2004 period, Oakland found a way to acquire inexpensive but productive offense and managed to assemble a stellar pitching staff. Do you think Oakland's offensive innovation helped free up the resources needed to acquire pitching talent?

4. What can the labor market for baseball players tell us about the labor market for corporate executives? Might boards of large corporations mis-price leadership attributes when they determine executive compensation? That is, do corporate boards overvalue certain characteristics of business leaders and undervalue other, potentially more important indicators of competence?