How to Solve Competitive Balance
In most ordinary markets, competitors have an interest to improve as much as they can to overpower other competitors but in the soccer industry, to maximize welfare benefits, competitors need each other to provide an attention-grabbing economic product. Therefore, there are many ways that policy makers can solve competitive imbalance that exists within a league. We will go over some of the most common methods to solve for competitive imbalance in a league and also go over the drawbacks that some of these policies have.
Revenue Sharing: The name makes this policy quite self-explanatory. Basically, revenue sharing helps ensure that money is allocated from richer to relatively poorer teams. One way this outcome can be achieved is when a portion of ticket sales are also given to the away teams. If FC Barcelona was playing at home compared to Sevilla FC, ticket sales for the Barcelona game would be a lot higher compared to Sevilla and when a portion of ticket sales are allocated towards Sevilla, it will help close the revenue gap between the two clubs. The only issue with revenue sharing is that the money from ticket sales goes to the owners of the club who are very unlikely to invest that money into the talent of the team, which results in this policy having a minimal effect on combating competitive balance within a league.
Salary Cap: Salary caps are meant to make sure that rich teams are not able to buy the best players and talent could be distributed across many teams. This policy is not effective at all because it reduces the wages that players receive and puts more money into the hands of owners which is not allocated to improving the quality of the team.
Luxury Tax: This is by far one of the best policies that can help ensure a greater level of competitive balance within a league. If a team is overspending compared to other teams in the league, then the league policy makers can impose a luxury tax on all the extra money being spent to acquire talent which would increase the costs for acquiring these new players and at the same time increase revenue for the league that is achieved through luxury taxes. Then, the luxury tax revenue can be allocated to smaller teams to improve the quality of the team to help attain higher competitive balance.
Competitive balance is important in a league to help maximize welfare benefits but a league should work to satisfy perceived competitive balance compared to objective competitive balance because that is what affects consumer behavior and spending the most. There are also many ways to fix the issues of competitive balance that also have their inefficiencies such as the luxury tax, salary cap, or revenue sharing. Ultimately, it is important to have star players on a team and have some imbalance otherwise the league would be boring with perfect competitive balance. Therefore, it is important to have competition within a league but excessive competition can lead to unintended consequences.