"Assessing the Competitive Effects of the Reentry Draft in Major League Baseball "

Robert C. Dolan
Robert M. Schmidt

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.