From the economic theory, it should be noted that star players are in high demand when compared to the ordinary players due to their ability to enhance superior team performance which attracts high levels of attendance, hence higher revenue streams. To compensate them for their excellent performance, star players are often accorded a salary premium. The wage premium given to star players in the NBA league can be best explained with the aid of marginal revenue product (MRP) the demand-supply model and the production function (Hansen & Gauthier 1989).
When using the model, it assumed that the teams operating in the NBA league are in a competitive market. This implies that; it has a large number of buyers and sellers, every market participant has perfect knowledge about the market and there are free entry and exit. From this fact it can be deduced that every firm which in this case are the teams in the NBA league are price takers since they have little or no control over the price of prayers since the price is determined by the supply and demand of players. At equilibrium point, the various teams which operate in the NBA league are assumed to pay an equal amount to their players, since at this stage the supply of players is equal to the demand of players (Metcalfe, 2013). In this situation, the hiring teams in the NBA league will aim at maximizing profit, whereby new acquisitions will not be made until the point where the marginal product of every player acquired, is equal to the marginal cost, which is in turn equal to the price of the player. This can be illustrated well with the aid of the supply and demand of players as shown below.
players
NBA Players Market
From the intersection of the supply and demand curves, it is noted that players are ready to offer their services at higher wages whereas teams are willing to request the services of players at low wages hence the pay rate is determined by the intersection of the two curves showing agreement. Therefore, the demand of players in the NBA league will be equal to the Marginal revenue product of players (DP = MRPP). Whereby, marginal revenue product (MRP) is the extra income a given team will realize as a result of acquiring a new player. This is based on the fact that any profit-maximizing team in any sporting activity is always a winning team. So, in this case, the output will be in the form of wins but not products (Deshpande & Jensen, 2016).
To determine the value of a player, the MRP can be amended so as to ensure the product is quantified in the form of wins. So, the new function will be;
MRPP = MR win* Δ wins.
Where; supply
MRPP – is the marginal revenue product of a given player p
MR win – is the additional success to a team
Δwins – is the additional number of wins attributable to a given player.
However, be noted that star players, unlike the ordinary players, make a much greater contribution in ensuring any given team participating in the NBA league wins the league. Equally, some people attend basketball games because a legendary player like LeBron James, Stephen Curry will be in action. These increases the demand for tickets hence increased revenue from the sale of tickets (Zillgitt, 2016). All of this makes the market for star players high when compared to their supply, this makes it difficult to obtain the services star players at the same rate as that given to the ordinary players. As a result of the forces of demand and supply, the price (wage rate) of star players shifts so much higher than those of ordinary players. As illustrated below.
In Figure 2, the supply and demand for star basketball players in the NBA league has been plotted on the same axis with the supply and demand of ordinary basketball players people attend games of this players. From the graph, it can be deduced that the supply of star basketball players in the NBA league is small when compared with the demand. This led to a small supply hired as Q2 and the wage rate to be as high as W2. This helps show the scarcity of the professional star basketball players and what the teams are ready to forego to acquire their services. Contrary to star players, the supply of ordinary players is very high when compared to the demand, hence from the graph it can be noted that the equilibrium wage rate is very low whereas the equilibrium quantity is very large as shown by Q1 and W1 in the chart
Star teams scrambling for star players in the NBA has also influenced demand and movement of players from one team to the other. All this is in line with the production function which emphasizes the performance. According to this function, the output is a function of inputs. For example, in the case of the NBA, the output regarding the game victory or loss will greatly depend on the team’s input in the form of performance, obtained through investing in star players who attract bigger crowds hence higher attendance at the games. As noted, the number of star players in NBA is limited, therefore all the teams that participate in the NBA league cannot be adequately supplied with enough star players due to the current scarcity. Consequently, for one team in the NBA league to benefit from the services of a star player currently held by another group, it must offer better terms of service to the player than what is being offered to his current team in order to induce the movement of the players from one team to the other (Zillgitt 2016).
The production function can be represented in the form of a production curve, whereby the output obtained a function of inputs. From the curve, it can be deduced that output, the victory of loss of a game and ultimately the gain or lack of attendance, is determined by the input, or the performance of the individual NBA teams such as Miami Heat or the Los Angeles Lakers and the acquisition of star players.
- Hansen, H. &. (1989). Factors affecting attendance at professional sports events. 3(1), 15-32.
- McInerney, B. (2016, Apr 16). NBA teams can still pack in the fans, even if they don’t win.
Retrieved Jan 30, 2017, from CNBC.com: http://www.cnbc.com/2016/04/15/nba-teams-can-still-pack-in-the-fans-even-if-they-dont-win.html - NBA.com. (2016, 9 23). Retrieved from NBA.com: http://www.nba.com/news/faq
- Zillgitt, J. (2016, Apr 14). NBA sets attendance records for the 2015-16 season. Retrieved Jan
30, 2017, from USA TODAY: http://www.usatoday.com/story/sports/nba/2016/04/14/nba-sets-attendance-records-2015-16-season/83024324/ - N. (2017, February 19). NBA Stats. Retrieved from http://stats.nba.com/
