X-inefficiency in Sports Pt. 1
A few days ago our resident Man U president, Ashish Kulkarni, wrote this wonderful blog post about X-inefficiency. I’ve come to a stage in my life where my logic is entirely questionable. I click on things that don’t have terms that I’ve already ‘studied’ in class. Why? Because I know I won’t understand what’s written in it as I don’t attend most classes. The ones I do attend, I don’t pay attention to what’s being taught. So, naturally, I read up about it because there’s at least one efficiency in economics I need to know about.
X-inefficiency as a concept arose in this paper by Harvey Leibenstein. When there is no major incentive to control costs (as in the real world, profit maximisation does not always imply cost minimization), the firm ends up producing at a cost that is more than what it can actually achieve. When one looks at it this way, the firm is not technically efficient, and is thus, x-inefficient. How does sports tie into this? Well, sports teams can take the place of firms in this case! A professional sports league is a monopoly – due to the very high costs of entry – and the teams are the firms in the monopoly. Monopolies are perfect examples of x-inefficiencies, as due to lack of competitive pressure, there is no real incentive for firms to cut down on costs and produce exactly on the average cost curve.
There’s a variety of literature that examines x-inefficiency in sport and we’re going to cover as much as we can in this series.
The first one is a wonderful paper by Manuel Espitia-Escuer and Lucía Isabel García Cebrián that talks about the efficiency of football teams in the Champions League. The paper is slightly old (surprise!) and it analyses the Champions League between the years 2003 and 2007. To refresh your memory, I’m listing the details of the four competitions below:
- Held at Old Trafford (Manchester United’s home stadium)
- Winner: A.C. Milan
- Runners-up: Juventus F.C.
- Fun fact: It was the first all-Italian UCL final, and Milan beat Juve on penalties (3-2)
- Held at Arena AufSchalke (FC Schalke 04’s home ground)
- Winner: FC Porto
- Runners-up: Monaco
- Held at Atatürk Olympic Stadium in Turkey
- Winners: Liverpool F.C.
- Runners-up: A.C. Milan
- Fun fact: The trophy was permanently awarded to Liverpool and a new trophy was made for the next season
- Held at Stade de France (the French national stadium)
- Winners: FC Barcelona
- Runners-up: Arsenal FC
- Fun fact: Liverpool failed to qualify for this season (because of their league position) but were given special dispensation by UEFA which allowed them to make a bid to defend their title. However, they were eliminated by Benfica in the first knockout round.
- Held at the Olympic Stadium at Athens
- Winners: A.C. Milan
- Runners-up: Liverpool F.C.
- Fun fact: Billed a repeat of the 2005 final, except it was played in Greece instead of Turkey this time. Milan players swept the UEFA Club Football Player Awards, with 4 out 5 of the honors going to three Milan players (Kaká won two awards.)
The paper, in very brief terms, says this: statistics show that efficiency is very important and the more efficient you are, the higher are your chances of winning.While the aim of a team is to be as effective as possible – to win the competition they’re a part of – measuring efficiency allows for the team to better interpret and evaluate their results, and thus allows for better improvements. The inefficiencies that were seen could be a result of wasteful use of resources and not because the teams didn’t use different tactics. And while efficiency is relative to other teams in a single season, no team is consistently efficient throughout the period of analysis.
In part 2, we will look at this study in more detail along with a few more.