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BerriSchmidtOnTheRoad - Berri Schmidt NBAS SUPERST EXTERN...

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10.1177/1527002505275094 JOURNAL OF SPORTS ECONOMICS / November 2006 Berri, Schmidt / NBA’S SUPERSTAR EXTERNALITY On the Road With the National Basketball Association's Superstar Externality DAVID J. BERRI California State University, Bakersfield MARTIN B. SCHMIDT College of William and Mary Hausman and Leonard offered evidence that Michael Jordan generated US$53 million in broadcast revenue for teams other than his employer, the Chicago Bulls. In essence, these authors argued for the existence of a superstar externality. The purpose of this article is to extend the work of Hausman and Leonard via an examination of road attendance in this sport. The evidence we report suggests that a superstar externality also exists on the road in the National Basketball Association. Policy suggestions to remedy this issue are offered in the text. Keywords: superstar externality S ports have increasingly been a topic of choice for many economists. Although much of this interest is motivated by the entertaining nature of the industry, the aca- demic value liesprimarily in the data the industry collectsto measure the productiv- ity of firms and workers. Such data have been employed in numerous studies designed to better our understanding of labor economics and industrial organization. A weakness with respect to these studies, though, lies in the difficulty one has arguing that what is true in the world of sports is also true in less entertaining indus- tries. Production in the world of sports, as noted by Neale (1964), is decidedly differ- ent from production in most other markets. In most industries, for example, a firm’s welfare is improved when competition is eliminated. In sports, though, the elimina- tion of competition effectively eliminates the industry. Furthermore, other firms must not only continue to exist but also actually do better when their competitors are of rel- atively equal strength. 1 In other words, the relationship between the quality of com- petition and firm revenue is nonlinear in professional team sports. As the opponent 347 JOURNAL OF SPORTS ECONOMICS, Vol. 7 No. 4, November 2006 347–358 DOI: 10.1177/1527002505275094 © 2006 Sage Publications
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increases in strength, attendance and revenue should increase. Of course, if the oppo- nent becomes too strong, attendance and revenue may again decline. Despite the joint nature of sports production, the compensation of talent in the industry is organized as if the individual firms were largely independent. Although the National Basketball Association (NBA) has implemented payroll and salary caps, as well as luxury taxes and revenue sharing, such rules merely provide a framework within which salaries are determined. At the end of the day, teams nego- tiatewith players, and these negotiations result in a salary that is paid by the individ- ual team. Hence, if a player generates revenue for his opponent, such revenue gen- eration is largely uncompensated. Therefore, to the extent that individual team-revenue streams are increased by the quality of players on other teams’ rosters, an externality exists in the NBA.
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  • Spring '09
  • Michael Jordan, Kobe Bryant, National Basketball Association, Journal Of Sports Economics, David J. Berri, road attendance

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