A Brief review of Peeters and Szymanski - Vertical restraints in soccer: Financial Fair Play and the English Premier League

Academic interest in professional sport is significant due to its unique mechanisms often requiring legislation that would seem ridiculous and untenable in any other industry. Football is at the forefront of modern sports literature, and slowly but surely the academic field is producing models and predictions about the possible effects of Financial Fair Play on European football, and this article seeks to evaluate one such contribution.

Download the article here: http://ideas.repec.org/p/ant/wpaper/2012028.html

Thomas Peeters and Stefan Szymanski sought to design a model that would demonstrate the effects of the break-even aspect of FFP on the English Premier League using data collected between 1993/4 and 2009/10, from the financial accounts of teams in the top three tiers of English football. In short their model predicts that FFP will result in lower average payrolls (for the Premier League this could be between £10 million and £16 million, or 14% to 23% of its initial level), whilst average revenues will hardly be affected (the model shows a fall of about £1.5 million which is within their standard error calculation); hence wage to turnover ratios could reduce by anywhere between 8% and 15%. They also argue that competition will be restricted by the vertical restraint of break-even.

They share the view of the majority of others that there is a strong relationship between the amount of money a team spends on wages, and the amount of games that they win. Indeed the average wage bill for the period was £16 million per season, and this number is truly eclipsed by teams in the Premier League, some of which demonstrated figures ten times larger than the average. It is this disparity that Peeters and Szymanski argue is the principle difference between FFP in European football and the salary caps that we see in North American sports. The salary cap in the NFL for example acts as one of the important mechanisms for maintaining competitive balance (alongside equal revenue distributions and an annual redistribution of talent) by fixing spending to league revenues. This is intended to limit the variance between team performances and thus promotes competition. Peeters and Szymanski point out that since FFP only limits spending of an individual club in proportion to its own resources, and these resources vary hugely in European football, no such benefit can be claimed. In effect, FFP will fix sporting performance to financial performance.

This is the conclusion from their paper:

“In this paper we have studied the impact a specific form of financial regulation on the intensity of competition in an industry. The effect of the regulation is to harden the budget constraint for a subset of firms in the industry. We show that the impact of this regulation is substantial even for those firms which are not directly affected by the regulation. Given that firms in this industry are engaged in a form of rent-seeking contest, the regulation is expected to impact almost entirely on costs, which primarily take the form of wages.

In particular, we find that had the Financial Fair Play regulations applied fully in the English Premier League in the 2009/10 season, wage to turnover ratios would have fallen by as much as 15%, which is in line with the theoretical predictions of Dietl et al (2009). As such, the FFP break-even rule will in many ways resemble a North American salary cap, although the latter applies the same spending cap to all teams. In other words, our paper shows that in this context a vertical restraint may restrict competition in exactly the same way as a horizontal agreement between competing firms. Salary caps have been justified in US courts under the theory that they promote competitive balance among the teams. On top of this, they are agreed upon in a system of collective bargaining with unions representing the players, and such agreements are exempt from antitrust. The break-even rule under FFP has not been negotiated as part of a collective bargaining agreement with unions, and furthermore such agreements are not exempt from competition law in the EU. Therefore, analysing the impact of FFP on competition in national leagues is important to assess whether it complies with EU competition law.

The rationale advanced by UEFA for its regulation is not the promotion of competitive balance, but “discipline and rationality” in club finances. Considered as a vertical restraint, this might be deemed to have pro-competitive properties if the rules help to preserve the integrity of the competition and the financial stability of the clubs. On the other hand, our results demonstrate that the break-even rule could be construed as a means to raising profitability and therefore an anti-competitive vertical restraint under EU competition law” (Pages 27 and 28).

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FFP regulations are dependant on being pro-competitive to be acceptable under EU law. If they are found to be anti-competitive it is likely that they will be severely tested in the European courts. Peeters and Szymanski state that “the 1995 Bosman judgment of the European Court of Justice had demonstrated that regulation which restricted competition in the market for players that was not backed by pro-competitive reasoning was doomed to failure under EU law. The relevant European law in the Bosman case concerned the freedom of movement of labour, but UEFA also became embroiled with the European Commission over the collective sale of broadcast rights, a competition law issue” (Page 6). I agree with Peeters and Szymanski’s assessment that FFP is vertically restrictive, and is therefore anti-competitive. However, I do not agree that revenues will remain unaffected. If competition is restricted we should see, in the long run, a reduction in supporter interest, and therefore a fall in media revenues resulting in smaller television distribution deals, and ultimately falling revenues for clubs. The overriding suggestion is, however, that FFP is doomed to failure in the long run due to its anti-competitive constraints.