The NBA’s Oklahoma City Thunder has
enjoyed an immense amount of success the last couple of years. Making the NBA Western Conference Finals two
years in a row, they have cemented themselves as the youngest and most
promising team of the future for the Western Conference. While the Thunder is a remarkable team, it is
unusual that a pro sports team in such a small market (Oklahoma City, Oklahoma)
would have so much success. The common
notion is that only large market teams have continued success while small
market teams struggle to acquire the stars needed for consistent winning
seasons. I will attempt to show that the
Oklahoma City Thunder is not actually in conflict with this notion.
This notion has been consistent in
the NBA since its’ founding in 1946 when the large market team Boston Celtics
dominated the league in the 50s and 60s.
In fact, the two most successful teams in the history of the NBA have
been the Boston Celtics and the LA Lakers.
Both of these teams are considered to be two of the biggest markets for
professional basketball in the NBA. It
begins to make one wonder what has led to these dominant franchises in the last
60 years of NBA history. One explanation
is the invariance principle from the economics of sports research. It states that certain types of players will always
end up in the same places or on the same teams.
Generally speaking, star players will go to where their marginal revenue
product (MRP) is greatest. That is,
players will end up where they can gain the most by playing a professional
sport. Thus, these large market teams of
Boston and LA have been able to provide the largest benefit for a player’s
MRP. This leads to a payroll imbalance
between large market and small market teams.
Essentially, because the large market teams earn more revenue they can
afford players with a larger MRP than smaller markets. A player’s marginal revenue product is what
determines the cost for that player in terms of player salary. The idea is that a better player will produce
more on the field, or court in this case, and generate higher revenue for the
franchise owner. Given that most, if not
all, owners’ bottom line to maximize profits there will be a definite revenue
imbalance throughout the league because of the differential in market
sizes. Therefore, a payroll imbalance
throughout the league ensues and thus there is competitive imbalance. The payroll imbalance ensues from the
inability for smaller markets to pay for better talent and vice-versa with the
larger market teams. An illustration of
this concept is shown in the graph below.
This graph shows us the interaction
between franchises in a two team league, one small market team and one
large. The red-shaded area shows the
payroll for the smaller market team and the green for the larger. Given the marginal revenue curves we can see
that the small market team generates much less revenue for players than the
large market team. The intersection of
the two lines is the point where the marginal revenues are equal and hence the
higher winning percentage goes to the large market team. P* denotes marginal revenue price for each
team.
The Oklahoma City Thunder has a much
higher winning percentage than the small market team depicted in the graph. This raises an interesting question. What is Oklahoma City doing that other small
markets aren’t in order to gain the MRP of its players? Well, let us take a look at a comparison of
NBA payrolls for the Thunder as compared to other teams. According to sportscity.com the Thunder
payroll is in the middle of the pack at about $58 million. A larger market team like LA, for example, has
a payroll of almost $94 million and Boston’s payroll is almost $81
million. With these payroll imbalances,
one would expect a large competitive imbalance associated; with Boston and LA
outperforming Oklahoma City by a very large margin. However, this is not the case. While Boston and LA are still dominant teams
in the NBA, the Thunder have outperformed them by a slight edge the last two
years.
Star players in the NBA are often
paid close to $20 million a year. Dallas
Mavericks’ Dirk Nowitzki made a little over $19 million in the 2011-12
season. LeBron James, Dwayne Wade and
Chris Bosh of the Miami Heat will make about $16 million this season. The salaries for LeBron and D-wade are large
pay cuts. Kobe Bryant of the LA Lakers
will make $25 million this season. The
Oklahoma City Thunder’s Kevin Durant will make just over $16 million this
season. Given that Durant was second in
the NBA MVP race, behind LeBron James, it could be argued that Durant is
underpaid. Russell Westbrook is also a
key player for the Thunder in their recent success. Westbrook is considered one of the elite
point guards in the league along with Derrick Rose, Chris Paul, and Deron
Williams. Deron Williams and Chris Paul
will both make $16 million this season with Derrick Rose reaching the end of
his contract making only $5 million.
With Derrick Rose’s resume he will undoubtedly receive a raise when he
signs a new contract. Westbrook will
make just over $5 million this NBA season.
With the MRP for Westbrook and Durant it would be reasonable to assume
that they are underpaid. Other players
are probably underpaid as well, but for our purposes we will focus on the two
best players on the team. The assumption
that these players aren’t receiving their marginal revenue product may be true
if they were in a larger market.
However, given the small market they play in, their MRP will be much
smaller. By this understanding, the MRP
that is generated by Durant and Westbrook is just what the market demands. In essence, the Thunder’s success is not
contradictory to the idea of a winning percent equilibrium depicted in the
previous graph. To help illustrate this
point the same graph is drawn for the OKC market below. 
This graph shows the same concept as
noted earlier with a two team league.
However, MR(small market) curve has been pivoted to show a slight
increase in marginal revenues for wins.
This in turn raises the price for the marginal revenue equilibrium and
winning percentage with the edge now going to the smaller market team. This small market team has a payroll well
above average for a normal small market team and in this two team league it is
above the larger market payroll.
In the case of the Oklahoma City
Thunder, their payroll is still below larger market teams, but it is above the
average payroll for a small market team.
This can also be explained by the idea of diminishing marginal returns
since the Thunder are still new to the city and the marginal utility is still
much higher than other cities. Thus,
demand is higher in Oklahoma City. To
understand this further, Durant is certainly underpaid as compared to other
players of his caliber around the league.
However, his MRP for the market of OKC is met. Russell Westbrook is also underpaid but his
MRP for the market in OKC is also met.
This is explained in the graph by the lower starting point for MR(small
market) along the right vertical axis than the higher starting point on the
left axis for MR(large market). The
change in slope for MRP denotes the change in demand for the smaller market and
we see a large increase in payroll for the Oklahoma City Thunder. Thus, the Thunder are not in conflict with
the idea of a winning percent equilibrium.
The lower starting point for MR(small market) denotes the fan’s willingness
to pay for better talent. However, with
the shift in the small market curve, the owner is willing to pay more for
better players, but still under their MRP as considered league-wide. All of these things denote an advantage for
the smaller market Oklahoma City Thunder.
Now, the question is, how long will this last?
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