Marginal Revenue Product
Applying the neo-classical paradigm of “Marginal Revenue Product” (MRP) to sports industries can often be problematic. To begin with, in team sports, the perfect paradigm of MRP is tested against the overall winning percentage of the team, or its revenues or a combination of factors which are not as easy to quantify as in the case of worker-efficiency and worker-wage ceilings in other industries and services. The basic purpose of calculating MRP is to determine wage levels in close connection with profitability.
This calculation is performed with “revenue studies of sports teams which include winning percentage or wins as right-hand side variables should take greater care in the conclusions drawn from marginal revenue estimates”; however it is important to remember that “The winning percentage coefficient in the revenue function is really a measure of the marginal revenue of quality, not quantity,” (Brook, 2005)
Due to the severe disparity between the rate of “superstars” and “younger indentured” players, the determination of an individual’s MRP must be made in conjunction with the overall team-salaries and profits.
MRP can occasion the proliferation of high-salaries which bring dismay to casual observers: “People often wonder how professional athletes could be worth the mega-dollar salaries they receive[…] Economic explanations have focused primarily on the amount of revenue generated by the player” (Krautmann, 1999, p. 369).
One established “equation” for determining MRP is the “Scully Estimate” which seeks to “estimate a player’s value by imputing his MRP from the following three equations: team’s total revenues, the team’s winning percent, the rostered-player’s performance on the team — as well as taking into consideration other variables “which may affect the team’s revenues.” The Scully method is far from perfect, it has, however, been “one of the primary methods of estimating a player’s MRP. It has even been used in arbitration hearings,” and therefore marks one of the most oft-cited matrixes for examining MRP in team sports. (Krautmann, 1999, p. 369)
For individual athletes, who do not play on a team, the calculation of MRP, indeed, partakes of many more variables than those allowed in the Scully method. To begin with, the variables mentioned in the Scully method, such as training costs, managerial appraisals, and modification for minor league experience and associated costs, are not applicable to individual sports, per se: “”players of individual sports such as golf and tennis seem by and large to finance their own training. ” (Downward & Dawson, 2000, p. 230)
This fact connects to the fact that individual athletes are labor contributors in regard to tournament organizers or sports associations or leagues. In analogous comparison to industry-production, individual athletes “supply the labor; production requires cooperation with tournament organizers and owners of facilities. The ‘firm’ in these other sports must include these other bodies” and so it is possible for a player to carry a considerable amount of personal MRP despite a direct correlation to winning percentages or tournament victories.(Downward & Dawson, 2000, p. 21)
This latter observation is possible due mainly to the vagaries and illogical functions of human psychology. Amitai Etzioni noted in the works of cognitive psychologists that “the limits of the human mind have also been noted in the work of cognitive psychologists who introduced prospect theory[…] prospect theory states that people utilize various heuristic devices to simplify incoming information in an effort to overcome the limited ability of the human mind to process complex information,” which, in effect, means that an individual players MRP is somewhat determined by the psychological inadequacies or vagaries of the consumers who drive revenue. (Berri & Eschker, 2005)
Prospect theory leads to what is clinically known as: confirmation bias, and under confirmation bias, “people tend to more often notice evidence that supports their claims while ignoring evidence that refutes their a priori positions” ; this means that an average spectator of a team or individual sport will “be more likely to recall playoff games in which the player performs well and will be more likely to forget games in which the player performs poorly” (Berri & Eschker, 2005).
So, it is possible for a player to perform poorly in one season or set of tournaments and still command a substantial amount of MRP. In individual sports, the appearance of opponents also helps to drive MRP: “the individual sports player) cannot by itself produce saleable output. Every engagement requires the presence of an opponent. ” Obviously, any matrix designed to calculate the MRP of individual, rather than team, players will have to be radically different than the Scully model. (Downward & Dawson, 2000, p. 20)
Factors beyond talent or performance influence the MRP of individual players:
The realization of talent is an individual’s average performance. Some factors beyond talent will influence performance (e.g., conditions of health, the environment, time of day, even how much sleep one got the night before). Thus, at any time the observation of individual i’s performance, [P.sub.i], is a random variable with expectation, [t.sub.i], and a random component, [e.sub.i].(1)
[P.sub.i] = [t.sub.i] + [e.sub.i]. (1)
(Porter & Scully, 1996)
Although it is typical for commentators and observers to make a direct tie between individual performance and MRP, the fact remains that for “individuals competing in professional sports the distribution of earnings is determined by the distribution of awards for performance, the distribution of talent (expected performance), and by work effort (the number of competitions undertaken)” and that “Even at the same wage, work effort is not equal among all, because people differ in their willingness to trade leisure for income,” therefore the calculation of an individual sport-players MRP is much more difficult than calculating that of a player of team sports. (Porter & Scully, 1996)
Berri, D. J., & Eschker, E. (2005). Performance When It Counts? the Myth of the Prime Time Performer in Professional Basketball. Journal of Economic Issues, 39(3), 798+.
Downward, P., & Dawson, A. (2000). The Economics of Professional Team Sports. London: Routledge.
Krautmann, A. C. (1999). What’s Wrong with Scully-Estimates of a Player’s Marginal Revenue Product. Economic Inquiry, 37(2), 369-381.
Brook, S. (2005). What Do Sports Teams Produce?. Journal of Economic Issues, 39(3), 792+.
Porter, P. K., & Scully, G. W. (1996). The Distribution of Earnings and the Rules of the Game. Southern Economic Journal, 63(1), 149+.
Cite this Marginal Revenue Product
Marginal Revenue Product. (2017, Mar 30). Retrieved from https://graduateway.com/marginal-revenue-product/