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Debate in Sports: Can the NHL Settle on Terms for Revenue Split?

Similar to how the National Basketball Association (NBA) struggled this past season to establish an agreement on how much of a team’s revenue players should receive, the National Hockey League (NHL) is faced with the same dilemma. As of right now, because an agreement has not been reached, it is highly unlikely that either the launch of training camps (scheduled for September 21) or the start of the regular season (scheduled for October 11) will happen.

The essential problem is that 18 out of 30 of the teams in the NHL lost money last year and are looking to players to cover those losses in order to become profitable again. However, the players are very much unwilling to give up their large share of the revenue. This has resulted in an intense series of debates, which has left the league in a standstill. After taking 57% of the league’s revenues last year, the players are suggesting to take a 3% cut, while the owners will not settle for less than a 9% cut. This is a common phenomenon in today’s sports world and can be analyzed using game theory—it turns out that much of the strategic planning that happens in the sports world can be analyzed using game theory (betting, trades, etc…)

In this situation, we can clearly see why the NHL is going nowhere using the concepts that we have learned in class. Consider the game with two players: the NHL players and the NHL owners whose payoffs are represented in the payoff matrix below:

 

The Owners

 

The Players

  Yield Persist
Yield 20, 20 -50, 50
Persist 50, -50 0, 0

Both the players and the owners have two choices in this game: to yield to the other side’s proposition as to how to split the revenue or to persist and thereby continue negotiations. If the players and the owners both yield and meet in the middle, they can both receive a positive payoff. However, if one of them persists, and the other yields, then the side that yields will suffer a negative payoff. An example in this situation would be if the players persisted on taking 54% of revenues and the owners yielded—the owners would then be managing an unprofitable team because they gave in to the players’ demands. Lastly, if both sides persist, then they both receive a payoff of zero because the season cannot start, and no revenues can be earned at all.

If we take a closer look at this game, we notice that this is exactly like the prisoner’s dilemma setup that we learned about in class. Despite the fact that there is an outcome that can benefit both sides (Yield, Yield), the game has a Nash Equilibrium of (Persist, Persist) where both sides are worse off because of their dominant strategies to play Persist.

An even more interesting complication to this is that this can be interpreted as a continuing game where if the players and the owners both persist and drag negotiations on, then the payoffs for the game get progressively worse. For example, in another 2 weeks, the payoffs for the outcome (Yield, Yield) will be lower than it is now because the season is cut shorter and even upon cooperating, both sides will be earning less revenue due to a shorter season. This proposes an interesting question: will the players and owners realize this and cooperate or will they continue to persist and eventually both end up with nothing?

-blogger23

Source: http://www.economist.com/blogs/gametheory/2012/09/labour-relations-hockey

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