Recently, I read an article about the NHL and relocation.  It intrigued me to find out that in reality, relocation hurts the NHL more than it helps the league.  How, you ask?

Well, I recently wrote a paper for an economics class about this topic, based on an article written by Dennis Carlton.  Below is his introduction to the paper, along with my summary giving an explanation that would shock most anyone that knows the NHL.

"The Control of Externalities in Sports Leagues: An Analysis of Restrictions in the National Hockey League." Dennis W. Carlton et al. Journal of Political Economy, University of Chicago. 

­­­­­­­­­­­­“This paper provides one of the few successful demonstrations of the efficiency of certain types of restrictions in the context of a joint venture. The joint venture we examine is the National Hockey League (NHL) in the 1980s, which was then composed of 21 separately owned teams. (It now has 30 teams.) The restriction we analyze is the NHL rule on franchise relocation. Before one can fully understand the effect of the restriction, one must understand the theory of how sports leagues operate and whether sports leagues have any market power that can be enhanced by such a restriction. After providing such a theory, we empirically test the effect of the NHL restriction on franchise relocation. Aside from data availability, the advantage of our time period is that television was then an unimportant source of revenue for the NHL. Thus we are able to isolate a particular externality arising from how the NHL finances teams.”

In this paper, the writers discuss the theory of a sports league and whether or not it has market power.  The league they use for this specific paper is the National Hockey League.  They define a sports league as “a joint venture of independent firms whose cooperation is essential if the league is to produce a desirable product,” in most cases, a championship season for a team.  It is discussed that the value of one franchise in a sports league can greatly influence the value of the entire league.  For example, Alexander Ovechkin, the top player in the NHL, not only draws fans for his team, but he also draws attendance anywhere he plays.  Altogether, this helps increase revenues for the entire league, and not just the Washington Capitals.

A study of the NHL was done when there were only 21 teams in the league (early 80s).  At this time, there was only one area in which there was more than one NHL team (New York area, two New York teams, one North Jersey team).  They were attempting to figure out whether or not a sports team has market power based on the area it is located.  They determined that a team indeed does have market power, because if they are the only team in the area, the demand for an NHL game is extremely high, so they are able to raise the prices in order to equal the supply needed, and so they are able to maximize revenue.  This only works to an extent, however, as if the market is set too high, the demand for a hockey game will drop greatly, and people will find other forms of entertainment.

Expansion was also discussed at great lengths, and although every expansion team pays a large fee to the existing teams in the league, it may not be incentive enough for other teams to agree.  For instance, if there is a team in Tampa Bay, that team’s owners will not want another team expanding in Orlando, as the demand for tickets will decrease, ultimately lowering Tampa Bay’s revenue from ticket sales.  One of the two teams would also be hurt, because whichever team performs better will in a way have comparative advantage over the other, as they would be able to produce wins more efficiently than the other team; more fans would attend the game of the team who wins more games, ultimately increasing ticket sales.

They then go on to explain that when a team moves, it lowers the league’s attendance and revenue because of the effects relocation has on other teams.  These writers use a statistic that when the Kansas City Scouts and the Atlanta Flames relocated to Colorado and Calgary, respectively in the 80s, the attendance for the two teams’ away games decreased.  Although this seems like moving would not have an effect on other teams’ attendance, it indeed does.  When two teams have a rivalry, many people go to a match between those two in order to see a good hockey game.  If one of those teams move, though, it kills many rivalries, and therefore not as many people want to go to the game.

Although the trend of lower away attendance only lasted an average of three years after the move, it was enough to reduce revenue by tens of millions of dollars for the league.  With inflation moving the way it was in the 80s (and still is), one would expect the revenue to at least remain the same.  However, if the revenue is lowering while the economy is inflating, then in reality, revenues are dropping even more than the statistics can show.

They conclude by summarizing their entire study on away attendance, saying, “a team that has moved draws fewer fans to its away games and thereby imposes a cost on all the other league members.”  Although the effect disappears after the first two or three years and affects only teams in the United States, it is evidence enough for a sports league to restrict teams from relocating.