How Rational and Behavioral Economics Affect Competitive Balance in a League
The competitive balance that exists in a league is not necessarily equal to the way fans perceive competition. There are two types of competitive balance: objective competitive balance (OCB) and perceived competitive balance (PCB). Objective competitive balance provides statistics which show the actual competitive balance that exists within the league. On the other hand, perceived competitive balance is the way the consumers (fans) perceive the balance within the league which is determined by many behavioral economic factors. Three important behavioral factors that affect PCB are framing effects, threshold effects, and attention level effects.
Framing Effects: The lens through which fans access competition within a league from can create a significant deviation of PCB from OCB. For instance, let us say that the OCB of league X is 0.2 while the OCB of league Y is 0.7. Therefore, it is likely that the initial PCB of league X is less than that of league Y. However, if the OCB of league X were to increase to 0.4 while the OCB of league Y fell to 0.5, fans will address this change as an increase in the competitive balance of league X and a decrease in the competitive balance of league Y. Thus, the PCB of league X could become greater than the PCB of league Y as PCB depends on the context of the previous competitive balance statistics. If fans have been experiencing low competitive balance in a league, then an increase in the competitive balance could be perceived as a great increase because fans have been exposed to low levels of competitive balance previously.
OCB League A > OCB League B
Change in OCB values by a little
PCB League B > PCB League A (Framing Effects)
Threshold Effects: According to this idea, perfective competitive balance is not ideal. There is a certain level of competitive balance that fans aspire to have within the league and going beyond that provides little to no benefit. Therefore, resources should not be allocated to achieve more balance within a league once PCB reaches the satisfying levels for fans. However, if the PCB threshold changes such that it becomes below the satisfying level, it could result in a very strong demand reaction for the consumers which could hurt profits for the league. In short, the demand curve for consumer behavior is quite elastic below the satisfying level of competitive balance but it is quite inelastic when there are changes above the satisfying level. However, there could be a counter effect when PCB is undercut as the willingness to pay for fans could increase to help improve the competitive balance within the league.
Attention Level Effects: The PCB in a league is also determined by sub-competitions that exist between a few teams in a league. For instance, if there are only a few teams in a soccer league competing for the title and they have great competition against each other, the PCB could be a lot higher compared to the OCB (since the OCB is based on the overall competition between all teams in a league). Let us say league X has a lower OCB than league Y. There are 3 teams in league X competing for the championship with good competition while league Y has 3 teams competing for 10th place with good competition. It is quite reasonable to believe that consumer attention is a lot higher in a league where teams are competing for the championship compared to 10th place. Therefore, even though the OCB of league X is lower than league Y, the PCB of league X is higher than league Y because of the difference in the attention that different sub-competitions in a league are receiving. Furthermore, this conclusion can be made as PCB is influenced more by the relationship that teams have in sub-competitions compared to the competitive balance that exists within the entire league. For instance, one may think that the English Premier League has a lot of healthy competition but this is not true since people are deriving this from the fact that teams like Manchester City and Liverpool have great competition who are competing for the title which generates a lot of interest. More important sub-competitions in leagues increase the PCB even if the OCB is not as high.
Ultimately, welfare maximization in the real world is not driven by OCB but rather by PCB as it is not what the numbers show but rather what the fans think of competition within a league. Therefore, for leagues to maximize welfare, they should not be thinking from a perspective to balance the overall competition within a league but rather important sub-competitions between a small group of contenders that grab the attention of fans. Furthermore, changes in competitive balance within a league have a greater impact on welfare maximization than the absolute competitive balance which exists in a league.