The replacement of the reserve clause by the reentry draft in 1977 significantly
modified the labor market arrangements governing major league baseball. The
reserve clause left players' mobility entirely to the discretion of the team
signing them as rookies. The reentry draft created a competitive auction market
for the services of veteran players. To the public eye this movement away from
monopsony should have two implications. The first, rapidly escalating player
salaries, obviously has occurred. The occurrence of the second, declining
competitive balance, is less obvious. To the average fan, the large baseball
markets will simply buy up the better free agents. In contrast, economic theory
predicts that implementation of the reserve clause will merely shift monopsony
rents from the owners to the players, leaving competitive balance largely
unaffected. Less technically, when George Steinbrenner wanted Dave Winfield to
play for the Yankees, it was immaterial from a competitive standpoint whether
millions of dollars had to be paid to the Padres for his rights or directly to
Dave Winfield.
This paper assesses the competitive effects of the reentry draft by
comparing a period during which the reserve clause was in force (1969-76) with
the first seven years following the introduction of the reentry draft (1977-83).
We test changes in six revenue concentration indices using classical methods. We
find that there was no statistically significant change for any of the indices
for the major leagues as a whole. However, competition was statistically
reduced in the more active American League. This initial perspective intimates,
but does not test, a direct relationship between free agent activity and
shifting market shares. We employ non-parametric techniques to test the
relationships between free-agent activity by team ("A", "B", and
"C" player acquisitions, losses, and net gains) against team-revenue
ranks, competitive balance, and winning-percentage ranks. We find that
free-agent activity (especially, for "A" players) is significantly
related to revenue and winning percentage, but not to overall balance.
Our results tend to refute the economic model in this instance. We
speculate that under the reserve clause, owners engaged more in player trades
than in cash transactions. By trading comparable worth, the competitive market
result was not achieved. Indeed, other authors have maintained that cash
transactions were rare due to an implicit anti-raid contract among owners. We
further speculate that the reentry draft reduced the benefits of cooperation
while raising its costs. The resulting strain on the implicit cartel agreement
was sufficient to encourage defection.
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