The Market Size Myth

Baseball’s Blue Ribbon Panel, after examining five years of data from 1995 through 1999, argued that Major League Baseball teams located in smaller markets were unable to compete in baseball. Consequently the panel concluded baseball had a competitive balance problem that could only be rectified by redistributing baseball’s resources from larger market clubs to teams toiling in baseball’s less adequate locations.

It is important to note that market size was measured with team payroll by the panel. Such a measure yields some rather odd conclusions. In 1999 the Cleveland Indians had the 4th highest payroll in the baseball. According to the Blue Ribbon Panel, though, the Indians – playing in a market with less than 3 million people – were a large market team. In contrast, only six teams spent less than the Chicago White Sox that season. So by the Blue Ribbon Panel’s definition, the White Sox were a small market team.

Obviously market size is best defined by the number of people living in the market. Still, despite the problem the panel had defining market size, theoretically the Blue Ribbon Panel was right: Teams in larger markets should have an advantage over small market clubs.

The theory proceeds as follows: Teams in larger markets have potentially a larger fan base. With a larger fan base the team can attract more people to the ballpark, and potentially charge higher prices for the scarce tickets the team sells. This allows larger market teams to earn more revenue. With more revenue the team can afford a larger payroll. And if player pay corresponds to player productivity, the higher payroll will lead to more wins.

At least, that is the theory. Reality appears to be a bit different. As we note in The Wages of Wins, from 1985 to 1994 there was no statistical relationship between market size – correctly defined in terms of population – and team wins in baseball. A similar result was uncovered for the NFL and the NBA. Each of these leagues was examined from 1995 to 2004 and again team wins and population were not statistically related.

If we look at baseball from 1995 to 2006 we do find a statistically significant relationship. Specifically market size explains about 16% of team wins. Okay, it is not much of a relationship, but at the 95% level of significance (not the 99% level of significance) it is there.

If you just drop the New York Yankees from the sample, though, the significance of the relationship vanishes. In other words, the result we find for market size and wins, which is quite weak to begin with, appears to depend upon one observation.

If we just look at the data we can see the weakness of this relationship. Teams were ranked in terms of how many wins the team accumulated from 1995 to 2006. At the top of this ranking is the New York Yankees, the team that also happens to play in baseball’s largest market. Ranked 13th on the list is the New York Mets. The Mets also play in baseball’s largest market. Despite the Mets performance this year, for much of the past twelve years the Mets have been disappointing to New York fans.

If we move out of New York we see that of the top ten teams in terms of wins, only the Dodgers and White Sox play in a market with more than five million people. And the Dodgers and White Sox are ranked 9th and 10th in total wins. The teams ranked 2nd to 8th all play in markets with less than 5 million people. These teams include Oakland, Cleveland, and St. Louis. All of these teams are in relatively small markets. All of these teams have done better than the Dodgers or Mets.

Exactly why is the relationship between market size and wins so weak? There are a number of reasons. First of all, as the Florida Marlins demonstrated this year, it is possible to find good, young, cheap players. And baseball’s rules give smaller market teams access to this talent. Furthermore, as St. Louis and Seattle have demonstrated recently, it is possible to field a fairly expensive team in a relatively small market. On the flip side, a team like the Chicago Cubs has demonstrated for much of the last century that being in a large market with an enthusiastic fan base is not enough. Mismanagement and/or bad luck can certainly overcome the market size advantage.

Beyond all this is the problem converting money into wins. As noted previously in this forum (see HERE and HERE and HERE), and again in The Wages of Wins, the relationship between payroll and wins in baseball is surprisingly weak. We argue that this is primarily related to the difficulty people have forecasting player performance. Although much progress has been made understanding the connection between player performance and team wins, it is still not the case that we can forecast exactly how productive players will be in the future.

A case in point is the Detroit Tigers in 2006. I did not expect the Tigers – the team I have followed since my childhood in Detroit– to be one of the better teams in baseball this year. In fact, Jim Leyland – the team’s manager – is on record saying he did not expect the Tigers to contend this year. Yet here the Tigers are in the World Series.

Of course fans of Kansas City, Milwaukee, and Pittsburgh don’t like to hear this story. It is so much easier to believe that these teams cannot contend because these teams are cursed with less than adequate markets. Unfortunately the data seems to reject this story. Teams in smaller markets can contend in baseball, basketball, and football. When we do see a small market team fail consistently, we have to conclude that these teams suffer either from mismanagement or bad luck. And transferring money from large markets to small markets is not going to change either problem.

– DJ

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