I don’t know much about the economics of sports, and this transfers to Spain’s La Liga. This is Spain’s top football (soccer) flight, which is considered #1 by UEFA, but which is actually, arguably, worse in quality than the English Premier League. Why are top flight Spanish football teams losing so much quality?
To some extent, I think there’s an illusion. The best Spanish teams are Real Madrid and Barcelona. Atlético de Madrid is, this year, competing head-to-head with both of these rivals, but typically other squads end up 20+ points behind. R. Madrid and Barcelona are top three world wide (along with Bayern Munich), whereas English Premier League and Italian Serie A teams are not comparable. In conjunction with this, we have to consider that Barcelona has dominated domestic football for 4–5 years, and many teams have just accepted this state of the world (but, look how competitive a club can be if they think they have a significant probability of winning a domestic title: Atlético de Madrid). In other words, I think many La Liga squads look poor, only because we’re judging them against the quality of two clubs that could beat any other team in the world (over a 38-game season).
At the same time, I have to admit that oftentimes the La Liga teams in the top 10 spots (as of today) don’t look terribly competitive against the EPL or Serie A teams with the same rankings. I think that Barça, R. Madrid, and A. Madrid could beat any EPL and Serie A team, right now. But, consider that 9th place Valencia cannot dominate 11th place Swansea in the Europa League. Consider how poorly 6th place Real Sociedad has done in this year’s Champions League. I think any Spanish teams between 4th and 10th place would have a hard time with Manchester City, Everton, Tottenham, Manchester United, and Southampton. The Italia Serie A is of lower quality, in general, than both leagues, but certain top ten Spanish teams would still have trouble with certain top ten Italian teams.
The reasons why I think La Liga has lost some of its quality,
- The most cited reason in Spanish sports press is the unequal distribution of TV revenue, where Barcelona and Real Madrid, by far, get the largest shares (they’re also the teams with the most fans, of course). Atlético de Madrid gets the third largest share, in large part because it colludes with the “big two.” I have two problems with this, though: (1) I’m a capitalist pig; (2) if TV revenues were more equitably distributed, Real Madrid and Barça would probably lose their international dominance;
- The Steve Keen factor: a large accumulation of private debt during the bubble years. Spanish teams are heavily indebted, and most of them have relatively low revenue flows. The implication is that, to avoid bankruptcy, Spanish teams have been forced to cut their transfer budgets, focusing instead on selling players and paying down their debts. This has been the case for Valencia, Sevilla, A. Madrid, Málaga, etc. While R. Madrid and Barcelona have the fiscal space to improve their squads, other Spanish teams have been forced to sell their talent;
- Depression: Spain has been suffering from a horrible depression for the past 4–5 years. The only teams with significant international followings are R. Madrid and Barcelona. The other teams have seen a marked decrease in ticket sales, shirt sales, etc. Their income flows have shrunk;
- The tax structure: Admittedly, I don’t know what the tax structure looks like in other countries. But, in Spain, 50%+ of a player’s wage is taxed. Consider Cristiano Ronaldo’s gross annual income of R. Madrid. He makes ~€20 million on net, or ~40 million gross. Most Spanish teams can’t afford an annual salary over €5 million gross, which means that players looking to make a net income higher than 2.5 million are going to go elsewhere. Teams in countries with a more favorable tax structure can actually offer the player more, and still pay less than their Spanish counterparts.
I wonder if la Liga is evidence of “my” theory of sticky prices. My theory, basically, is that in industries where market power is unevenly distributed between firms, those with greater market power are also those most capable of paying higher input prices (their MRP curves lies farther to the right than those of their competitors). Because of their market power, they pull input prices up. Firms with less market power — relatively speaking, they’re closer to price takers — are forced to pay higher input prices. After a demand shock, because prices are pulled up by larger firms, their smaller counterparts are forced to cut output (if they can’t find cheaper substitute inputs).
Consider players as the only input to a football club. Over the past four years, clubs with greater market power have pulled transfer prices up. Consider, for example, the €30+ million R. Madrid paid for Asier Illarramendi, or the similar amount they paid for Isco. These are young players with huge transfer fees. They are essentially unaffordable to teams that aren’t Bayern Munich, Barcelona, R. Madrid, Manchester City/United, et cetera. This year, A. Madrid’s most expensive incoming transfer was Josuha Guilavogui, for €10 million. (A. Madrid did buy Falcao for €40 million two and a half years ago, but they had just sold Agüero to Man. City for €45, and they flipped Falcao to Monaco for €60 million two years later. Big teams, I think, usually don’t make that kind of re-sale profit from their big ticket transfers.)
Wages are probably an even better indicator of prices. A team might pay a smaller transfer fee, but they draw the player away by offering a higher wage. The wage cap for a team like A. Madrid, Spain’s “#3 team,” is €5 million gross. Clubs with market power can afford to pay twice to four times that amount. Spanish squads have had to substitute for lower quality inputs, or they’ve had to turn to their youth teams. But, the consequences are in line with what a sticky price model predicts: a decrease in output.
One day Spain’s economic troubles will end. Barcelona’s dominance will be something of the past. La Liga’s quality will increase again. So, if I were to highlight one thing as the main cause of the league’s diminishing quality, I’d say the depression. Inequitable distribution of TV rights is another thing, but I’m not sure it matters that much.