Another look at competition: a regime–switching aproach

Abstract

Measuring the level of competition in an industry is an empirical task with a lengthy history. Many of the traditional measures offer a snapshot of the industry, where the distribution of market share is examined at a given point in time. The purpose of this inquiry is to utilize a regime-switching model which highlights the importance of intra-industry movement. The empirical results suggest that even in an environment where the distribution of market share is improving, an industry can still be persistently dominated by the same collection of leading firms.

Notes

 It is true that competition in sports is fundamentally different than competition in non-sports industries. In non-sports industries, the elimination of competition will enhance the profitability of an individual firm. As noted by Rottenberg (1956) and El-Hodiri and Quirk (1971), competition is necessary to the survival of a sports franchise. After all, without opposition the New York Yankees would be 25 oddly dressed men chasing after a small ball with a stick. However, the issue here is about social optimality and is therefore from a social planner view the issues remain the same.

 For example, consider the audience a live broadcast of the World Series can draw. Such a broadcast will generally attract more viewers than a re-broadcast of the greatest series ever played.

 Furthermore, the source provides information on the number of teams within the American and National Leagues. As was mentioned in the introduction and as is highlighted in Table I, each League has expanded several times in the post-1960 period. In which case, the value of N changes across time. Specifically, N = 8 for the American League over the 1901–1960 period, N = 10 from 1961–1968, N = 12 from 1969–1976, and N = 14 from 1977–1998. As for the National League, N = 8 over the 1901–1961 period, N = 10 from 1962–1968, N = 12 from 1969–1992, N = 14 from 1993–1997, and N = 16 for 1998. Also, the Milwaukee Brewers moved from the American to the National League after the 1997 season. Finally, the introduction of inter-league play in 1997 allows for each league's μ to differ from (0.5).

 Bud Selig, the commissioner of Major League Baseball, argued during the 2002 season that the lack of competitive balance in Major League Baseball has had such a detrimental effect that between 6–8 teams would be bankrupt by the end of 2003.

 The Commissioner's Blue Ribbon Panel on Baseball Economics was convened by Major League Baseball to investigate the issues of competitive balance and economic health. Specifically, the panel's stated purpose was to “examine the question of whether Baseball's current economic system has created a problem of competitive imbalance in the game” (Levine et al., 2000)

 In order to estimate Equation 1 and its associate results, we used the MSVAR OX package written by Hans-Martin Krolzig. The package is available at http://hicks.nuff.ox.ac.uk/Users/Doornik/index.html. The MSM option was chosen for the estimation. Other alternatives produced different estimates but the general conclusions where robust to these.

 At present there exist 30 Major League Baseball teams. However, teams which entered the market, through expansion, after 1970 are excluded as these six teams had less than 30 data points.

 These follow directly from the transitional probabilities.

 These are the smoothed estimates and therefore do not exactly correspond to the results of Table 1. See Krolzig (1998).