Dominance in football: An application of Sutton’s theory of endogenous sunk costs

Stefan Szymanski 24 June 2015

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In 2014 Real Madrid, a major football team, achieved the unprecedented feat of winning ‘La Décima’. It was their tenth Champions League title, and it marked the team winning three more than their its nearest rival, AC Milan, and twice as many as the next nearest teams – Bayern Munich, Liverpool and Barcelona. For the last ten years the club has also topped Deloitte’s Money League. In 2015 their reported revenues were €550 million. Forbes valued the club at $3.3 billion, making it the most valuable team in any sport in the world.

The basis of Real Madrid’s strength is their dominance of La Liga. They have played continuously in the Spanish league since its foundation in 1929. They have won the league thirty-two times altogether and twenty-one times in the last fifty years alone, well ahead of arch-rivals FC Barcelona (fifteen times) and way ahead of anyone else (in fact, only five other teams have won the league in the last half-century).

Dominance

Real Madrid has a lot in common with a team called Havnar Bóltfelag (also known simply as HB), the largest team in Tóorshavn, a town of 18,000 people and the capital and largest town of the Faroes Islands. Founded in 1904 (two years after Real Madrid), Havnar Bóltfelag were a founder member of the national league in 1942 and have won the league twenty-two times, well ahead of nearest rivals Kí Klaksvík (eight times). Only nine other clubs have won the league in the last fifty years.

To take another example of dominance, Jeunesse Esch of Luxembourg (founded in 1907) have won twenty titles in the last fifty years, nine more than their its closest rivals F91 Dudelange. Compared to Havnar Bóltfelag, Jeunesse is a giant. According to the popular website transfermarkt.de, the total squad value of Havnar Bóltfelag in 2015 was half a million euros, compared to over one and a half million for Jeunesse. The revenue of the Luxembourg league is 50% larger than that of the Faroese clubs according to the Union of European Football Associations (UEFA). Yet in both countries we see the same pattern. Real Madrid is larger still, with a squad currently valued in 2014 at over more than €850 million. But large or small, the relationship of these clubs to the other teams in their domestic leagues is the same – they are dominant.

Dominance is a feature of almost every football league in the world. Table 1 shows a selection of leagues from across Europe ranging from the plutocratic (England, Germany, Spain, Italy) to the impoverished (Faroe Islands and Luxembourg). Regardless of size, most leagues tell a very similar story: a small number of big clubs dominate. The most dominated league over the last half-century was Scotland, where Celtic won 24 twenty-four titles – almost half. Not far behind were Germany (dominated by Bayern Munich), the Netherlands (AFC Ajax), Spain (Real Madrid), Portugal (FC Porto) and Norway (Rosenborg Ballklub). Only in the Republic of Ireland, France, and Poland did the dominant club not get into double figures. On average, the dominant team in the leagues of each of these countries won one third of all the titles.

Table 1. Dominance in 20 European leagues over the last 50 years

Source: UEFA and Wikipedia.

Looking at Table 1, there seems to be no relationship between the size of the league and the extent of domination. Small leagues are as likely to be dominated by a small number of teams as big leagues. Germany, the country with the largest population and the greatest wealth in our sample, looks rather like tiny Luxembourg or the Faroe Islands.

Absence of competition?

Dominance is often associated with the absence of competition, but that is not the case when it comes to football. There are, for example, twenty-seven professional football teams within a fifty-mile radius of Manchester United.1 If fans didn’t like United, there are plenty of alternatives. Often, rivals play in the same stadium (Bayern and TSV 1860, Inter Milan and AC Milan are the two most notable examples). And if Spanish fans are looking for variety, there are four other professional football clubs in Madrid to choose from.

Dominance through monopoly, the absence of competition, usually occurs because the scale of the investment required is so great that competition just isn’t feasible. Take the water supply and sewerage systems for example. Competition would require individual households and businesses having access to not one, but two or more networks of pipes, a proposition that amounts to economic madness. Laying pipes is very costly, and water supply and sewerage fees have to be set in such a way as to recover these costs. Any benefit that might arise from competition would be dwarfed by the cost of duplication.

But dominance also occurs in markets where competition is perfectly feasible. The beverage market is a good example. Any child can (and often does) set up a lemonade stand on the street and sell to passersby – this is not a business in which entry is difficult or particularly expensive. It remains to this day relatively easy in business terms to set up a production plant to bottle soft drinks, and yet Coca-Cola dominates this world, with a market share of around 42% in 2012, followed by Pepsi with 28%. Despite all that potential competition, these two firms dominate the market. Their hegemony is not explained by set-up costs but—according to the work of John Sutton (1991) — by something different: advertising. Consumers tend to buy soft drinks that they recognise and advertising is the way by which they usually recognise the product. So when sellers compete against each other they compete not just on price but on recognition. Recognition is costly, and takes years to establish. Moreover, once you have it, and if you want to maintain it, you have to keep on investing. Is there anyone on the planet who does not recognise the name of Coca-Cola? And yet the company still spends around $3 billion a year on advertising. That is what it takes to fend off the constant threat of competition.

Advertising

Sutton argues that soft drinks are a good example of an ‘advertising-intensive’ industry in which a pattern of dominance can emerge. In the early days of such industries there are many competitors jostling for recognition, which leads to an arms race in advertising. Advertising expenditures precede sales, and so represent something of a gamble. For some companies they pay off and the business grows, while for others the sales don’t follow and the business goes to the wall. In this way, a small number of successful firms grow into giants. A competitive fringe also survives, mostly consisting of small firms with small market share. In very large markets (such as the United States), the power of advertising conferred a huge advantage on companies like Coca-Cola. In Europe’s smaller markets (which tend to be drawn along national lines), more small firms tend so survive, making the biggest firms less dominant.

Glory hunters

This is essentially the story of football too. Instead of advertising, think of league championships. Teams that win are the ones that attract the fans – the biggest clubs have the largest number of fans and the largest revenues. The big difference between football and soft drinks is that the pattern of dominance looks the same in small markets (Faroe Islands) as in the big markets (Spain). The reason for this is that in the soft drinks industry, and most other big markets, small firms trying to keep up with the dominant firms go out of business. In football, small clubs almost never disappear. Of the eighty-eight clubs in the English Football League in 1923, eighty-five still exist, and most of them still play in the four English divisions. Of the seventy-four clubs playing in the top divisions of England, France, Italy and Spain in 1950, seventy-two still exist. Unlike most businesses in which loss-making firms are shut down or merged into other businesses, football clubs almost always survive. This does not prevent dominance, but unlike most industries, it does mean that the pattern of dominance tends to look the same everywhere.

References

Sutton, J (1991), Sunk costs and market structure: Price competition, advertising, and the evolution of concentration, Boston, Massachusetts: MIT Press.

Szymanski, S (2015), Money and Football: A Soccernomics Guide, Nation Books.

Footnote

1 Ten within a twenty-five mile radius: Accrington, Blackburn, Bolton, Burnley, Bury, Manchester City, Oldham, Rochdale, Stockport, Wigan and a further seventeen between twenty-five and fifty miles: Barnsley, Blackpool, Bradford, Chesterfield, Crewe, Doncaster, Everton, Huddersfield, Leeds, Liverpool, Mansfield, Preston, Rotherham, Sheffield United, Sheffield Wednesday, Stoke, and Tranmere. Derby County is just outside the 50 mile radius.

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Topics:  Frontiers of economic research

Tags:  Football

Stephen J. Galetti Collegiate Professor of Sport Management, University of Michigan

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