The Case for Federal oversight of the Major Leagues

Senator John McCain, a rare politician for whom Base10 feels a great deal of respect, made a public statement that Congress should look into reported cases of steroid abuse on the part of Major League Baseball players. Click here for a news account. While not limited to baseball (click here for the most recent accusations in the seemingly endless doping claims against track star Marion Jones), steroid use in baseball is growing concern among fans. With stars like Jason Giambi admitting use and future Hall of Famer Barry Bonds making a ridiculous claim that he ingested steroids but had no idea what they were, fans are just about fed up with the situation. Base10 has himself advocated that steroid users be banned from baseball. An attempt at an internal fix is being ironed out between the Player's Association and MLB. Even the President has jumped on the bandwagon and called for "strong steps" toward reform.

Many conservatives however are uncomfortable with the idea of Federal oversight of Major League Baseball. A typical counter argument is found here by the excellent Tom Bevan of RealClearPolitics.com where he argues that the free market will correct the situation by itself since it will cause the branding of Major League Baseball to be diminished and thus encourage players and owners to regulate themselves.

Base10 disagrees. But first let's get one thing out of the way. One of the justifications for regulation is the antitrust exemption that baseball enjoys. Click here for a good summary of its features. While the law is anomalous, the Supreme Court decided in 1922 that Major League Baseball did not constitute interstate commerce and thus did not fall within the scope of federal antitrust laws. The Court has consistently upheld this decision in the face of several challenges almost admitting its reasoning is little more than an effort to preserve tradition. The court has made clear that Congress can remove this exemption at any time. A removal of the exemption would affect the ability of teams to move from state to state and certain aspects of player's contracts and the draft. Some have argued, particularly John McCain, that this exemption itself is justification to regulate baseball. Base10 does not agree on those grounds.

Anyone with a minimum of training in economics knows the simple conclusion that if certain assumptions are made about a market for goods or services, the resulting equilibrium price that results from the interplay between buyer and seller is the optimal amount where everyone is better off. A price too high and there is a surplus, one too low results in a shortage. The measure of benefit--consumer and producer surplus--is maximized at the market equilibrium point. While this post is not meant to be a textbook in price theory, this is the starting point.

The efficiency of markets is premised on several assumptions. The realization of these assumptions can result in a market failure and a sub-optimal conditions. Some of these assumptions are (1) limited numbers of buyers/sellers with barriers to entry, (2) asymmetric information, (3) externalities, and (4) whether the good or service in question is a "public good."

Number (1) is the case of monopoly/monopsony and does not apply here by virtue of the antitrust exemption. Base10 cannot decide to start his own baseball team and play the Yankees. Isn't this what Sen. McCain is saying? Not exactly. Baseball is only a monopoly by virtue of its legal exemption which can be yanked. Indeed the nuclear option would be for Congress to do this and hope that an alternative league would sprout up that would be drug free (or the pressure from this possibility would force MLB reform). In any event there are other reasons to regulate.

(In the interest of completeness, number (4) does not apply either, although it makes for a good sound bite. Public goods constitute things like bridges, public parks, etc. The economic problem that surrounds them is the so-called free rider problem and the decision on how much the government should pay for these items).

How does this apply to baseball? Mr. Bevan's argument would go something like this. MLB's steroid policy up until now is too lax. It results in too many athletes using steroids. This has implications to the fans. Steroids are often illegal and could result in arrest and scandal. Also, baseball fans tend to be traditionalists who protest when records are broken by perceived "cheaters" on steroids. This results in a reduction of demand for the product of baseball. Owners and players, both of whom have a stake in this, make the steroid policy stricter, but not so strict that its cost to implement would be greater than the reduction in baseball profit by not implementing it.

Base10 believes the other market failures haunt the steroid issue. The problem of asymmetrical information occurs when either the buyer or the seller do not have perfect information about market conditions. A good example of a very efficient market is the stock market. Almost all publicly available information is available instantaneously to anyone interested. (And strict penalties apply to those who trade based on insider information not available to the public). This applies to the steroid situation in baseball like this: the consumer values performance either by individual achievement or by team accomplishments. The consumer is willing to pay to see these activities. The consumer however feels a great deal of ambivalence about what they feel are "false" successes involving drugs. Owners interests lie somewhere else. They want their players to perform, but don't want the scandal of being caught. The only person who actually has the information is the player. The fan cannot pick and chose which players or teams to watch (although many fans seem to think that steroid use among certain players is obvious). The fans are being cheated out of their preference because they can't distinguish the two products.

The other market failure that could justify government intervention is the presence of externalities. In short an externality is an additional value or cost associated with the consumption or production of a good or service. For example, a factory along a river might produce a valuable commodity but also adds some pollution to the river. The pollution can be cleaned or is tolerable in certain quantities, but the societal cost of the pollution is not a cost of production and thus is not factored into the price the market sets for the good. Like it or not, Baseball has many positive externalities. The American public views it as the "National Pastime." Parents use it as a vehicle for teaching their children the virtues of teamwork and good sportsmanship. A casual observer can see this every day during the summer in any one of thousands of Little League games. In addition, baseball is seen as the quintessential American sport and is a great source of national pride. A scandal in baseball is as embarrassing to Americans as a hockey scandal would be to Canadians. These arguments may seem sentimental, but millions of Americans agree with them and these same Americans part with a pretty penny every year. They do not want their children learning that it's okay to cheat and use drugs as long as you don't get caught (which seems to be MLB's position on the matter up until now).

In any event, Base10 thinks baseball must change. Whether it be through government intervention or through the eventual action of the free market (in which case Congress should act and repeal any antitrust exemption that now exists).

Tomorrow, Base10's arguments about game theory and how it encourages steroid use.
- posted by Base10 @ 8:39 AM