Competitive Balance vs. Incentives to Win: A Theoretical Analysis of Revenue Sharing

Abstract

We analyze a dynamic model of strategic interaction between the league organizing a professional sport, the teams playing the tournament organized by this league, and broadcasters competing for the rights to televise their matches. Teams and broadcasters maximize expected profits, while the league's objective may be either to maximize the demand for the sport or to maximize the teams' joint profits. Demand depends positively on competitive balance among teams and how intensively they compete to win the tournament. Revenue sharing increases competitive balance but decreases incentives to win. Under demand maximization, a performance-based reward scheme (as used by European top soccer leagues for national TV deals) may be optimal. Under joint profit maximization, full revenue sharing (as used by US team sport leagues for national TV deals) is always optimal.