Wins, Losses, and Empty Seats: How Baseball Outlasted the Great Depression

Introduction

Introduction You own a baseball team during the 1930s. Your customers are facing declining incomes. In addition, the consumer price index is falling. In the words of the old American Express ads, “What will you do?” Before you decide, consider that you also possess both price-setting (monopoly ) power for your product and single-employer (monopsony) bargaining power over your primary labor input. How will these powers affect your decisions? You have these powers because Major League Baseball is a cartel. A cartel is a group of firms that band together to make some decisions jointly for the group’s mutual benefit. Members may see greater profits as the cartel tries to establish monopoly prices, although individual firms may find it advantageous to cheat on the cartel agreement. The American League and National League gained an explicit exemption from antitrust laws in a Supreme Court case dating from the struggle with the Federal League in 1914–15. Because the cartel gives you territorial protection against other teams moving into your city, you have price-setting power. You have single-employer power thanks to the reserve clause that binds players to just one team. Economists and the general public are keenly interested in cartels. Since antiquity, people have suspected conspiracies that injured the public interest by fixing prices and other shenanigans. Since the enactment of the Sherman Antitrust Act (1890) and the Clayton Antitrust xiv Introduction Act (1914), American businesses that wish to indulge in cartel behavior must do so furtively. Because of baseball’s antitrust exemption, the owners’ actions, while still often cloaked with secrecy, are more open than most. Baseball therefore offers economists greater opportunities to study cartel behavior than do other industries. The Great Depression created stress for the cartel. Buffeted by declining consumer expenditures and a decline of one-fourth in prices, owners scrambled to keep their teams and leagues afloat. The focus of this book is how a cartel functions under adverse economic conditions. How did the owners adjust to their fans’ dwindling ability or desire to pay for baseball? Did a lifeboat mentality develop, in which the strong teams wanted to toss the weak teams overboard? Did the owners reduce ticket prices? Since the owners had single-buyer power over the players, did they squeeze player salaries? Did the hard times inspire innovation ? Potentially helpful technologies such as electric lighting for night baseball and radio broadcasts certainly piqued the owners’ interest . Did owners investigate instituting interleague play or divisions and playoffs? These are the issues this book will address.1 Not Your Robber Barons’ Cartel Baseball’s cartel in the 1930s differed from cartels in other industries because it had the advantages of an explicit antitrust exemption and control over its key input. The joint-production nature of baseball’s product also distinguished baseball’s cartel from other cartels. The alternative to a cartel was unappealing to owners of professional sports teams. The early history of professional baseball was dismal. Owners may have boasted of being rugged individualists who personified the virtues of free-market capitalism, but they really meant that free-market capitalism was good for the other guy. A free market in players and games always seemed to result in chaos. As early as 1875, William Hulbert, owner of a Chicago team, decided the sport needed to be rationalized like other industries, in which concentration and limited competition ruled. xv Introduction When individual business owners get together to create a cartel, they confront some basic problems. First, the cartel members have to decide how to divide the potential revenues or profits. Since each owner desires to get the most advantageous agreement possible, a cartel may die stillborn. Second, if the owners succeed in creating an agreement, they must monitor each other’s actions to insure compliance. Self-interest does not end with the formation of a collusive agreement. Owners may be willing to break the rules, especially when they are trying to get players. If malfeasance is discovered, the owners also need a mechanism to punish cheaters. Third, if the owners are successful in creating and maintaining a cartel, they can earn handsome profits above the norm, assuming the demand for their product remains healthy. Since handsome profits are not commonplace, other business owners become envious and desire to enter the market. The cartel members must devise ways of deterring upstarts from entering the market . Much of the baseball owners’ activity...