Does Economic’s Louis-Schmeling Paradox Apply to Bayern Munich?

After two matchdays into the 2018-19 Bundesliga season, it already looks hopeless for the rest of us: Bayern Munich appears locked to win its 7th consecutive league title. While the Bavarians have looked this dominant in two matches already, more significantly it’s Bayern’s supposedly closest rivals—Borussia Dortmund, Schalke 04, Bayer Leverkusen, and RB Leipzig—look nowhere close to touching Bayern. Perhaps only in the Bundesliga is such an early prediction not only possible, but likely.

If you don’t like Bayern, or are simply a neutral, the prospect of die Roten winning its 7th consecutive title is depressing. It’s so depressing that if, you’re like me, you’ll hunt for any justification to point a condemning finger at Bayern, as if our collective accusations could goad the giants into action or the Bundesliga into some kind of Quixotic reform. Nevertheless, it’s hard not to hunt around for damage Bayern’s dominance causes the Bundesliga. This summer, I thought I found one such justification for condemning Bayern when I stumbled upon “the Louis-Schmeling paradox” in Richard Robertson and Roland Giulianotti’s book Globalization and Football (2009); the paradox seemed applicable to the case of Bayern Munich’s Bundesliga tyranny.

The Louis-Schmeling paradox was first described by the economist Walter C. Neale in his seminal 1964 paper from The Quarterly Journal of Economics entitled “The Peculiar Economics of Professional Sports: A Contribution to the Theory of the Firm in Sporting Competition and in Market Competition.” (I know. Don’t get distracted by the sexy title. Stay focused.) The paradox itself is named after the two famous Joe Louis vs. Max Schmeling boxing fights, the first of which the German Schmeling won, only famously to lose the rematch to the African-American Louis.

Trust me, Neale’s paper and concept is relevant the Bundesliga and Bayern Munich. I promise.

Neale hypothesizes that, while a monopoly is the ideal market position for firms in the business world, monopolies harm sporting entities (both teams or individual athletes, like boxers). Neale’s reasoning is two-fold: first, healthy competition (i.e. not a monopoly!) makes the best even better. In the case of boxing, Louis was driven to greater skill by sharpening himself against the great Schmeling. As crucial as this point seems to be, Neale actually spends most of his paper on a second supporting point: increased competition (i.e. competitive balance) is economically healthier for sports. The steps of this point are as follows: increased competition makes fans more excited because there’s uncertainly around the match’s outcome, which in turn leads to more ticket sales, and an increase in gate revenue. Neale briefly cited the example of the 1950s New York Yankees, who, during a World Series-less spell, paradoxically attracted larger crowds and more media coverage, because of the supposed’y increased uncertainty around the outcomes of Yankees’ games. Neale coined the phrase “League Standing Effect” to describe this phenomenon. Put simply, the League Standing Effect states that the tighter are a sporting league’s standings (from top to bottom of the table) and more frequently teams move around in the standings and change positions, the more gate revenue sporting entities should expect. In other words, competition is good business. Of course, the key point here is that tight league standings and teams frequently moving around the table must also involve the top table position. After all, the Bundesliga has plenty of table movement from spots #2-#18!

Neale expands his analysis by arguing that the League Standing Effect reveals an increase in the public good itself. Here, he cites a “Fourth Estate Benefit,” in which increased competition is good for media covering sports, which should attract more readers and larger advertising revenues as a result, etc. These knock-on effects illustrate the special power sporting entities, as business firms, have in generating revenue that exceeds what the single firm can achieve alone. In this sense, Neale argues that sporting leagues are like single-entity business firms contributing robust Fourth Estate Benefits to the wider society. A sort of trickle-down economics for sports.

Thus, Neale makes the case for the importance of increased competition between sporting entities and within sporting leagues. Basically, more competition = more excitement = more money. Half-humorously, Neale sums up a successful sports business strategy as “Oh Lord, make us good, but not that good.”

Of course, the case of Bayern Munich—and the club’s six consecutive Bundesliga titles—is the example I thought of when I first read about the Louis-Schmelling paradox.

It should be easy now to see the connection between Neale’s paradox—with its “League Standing Effect”—and Bayern Munich. Applying the Louis-Schmeling paradox to the case of Bayern and the Bundesliga, Bayern’s six consecutive titles—not to mention the gap between the club’s 1st place finishes and everyone else in spots #2, #3, and below—screams MONOPOLY. All of which, according to Neale, means that Bayern’s run of dominance, i.e. its monopoly, can’t be good business either for Bayern or the Bundesliga in the long-term.

In terms of Bayern itself, you could use the Louis-Schmeling paradox to explain why Bayern hasn’t won the Champions League since 2012-13. Since iron sharpens iron, and Bayern ain’t gettin’ any iron sharpened in the Bundesliga; it’s no wonder the Bavarian Giants eventually flame out of the Champions League tournament every year in seemingly disappointing style. (The argument is also made about PSG in Ligue 1 and, to a less extent, Juventus in Serie A.) Of course, many commentators have already made this point. In case you’re feeling really smug about all this, extend this logic and scream out in ironic glee every time Bayern robs another Bundesliga competitor of said competitor’s best player(s) on the transfer market. See, Bayern? SEE?? This is what happens to you when you weaken everyone in the Germany: you weaken yourself in the Champions League!!!! MUHAHAHAHAHA.

As for the Bundesliga itself, the Louis-Schmeling paradox, especially Neale’s League Standing Effect, tells us that Bayern’s “monopoly” on all the competition (i.e. decreasing the league’s competitive balance from the top-down) is bad for league business, not only threatening attendance and gate receipts, but also jeopardizing the Fourth Estate Benefit by decreasing interest in the Bundesliga from a media, marketing, and general commerce perspective.

On the surface, applying the Louis-Schmeling paradox to the case of Bayern Munich and the Bundesliga seems like a slam dunk.

Right?

Not so fast. It turns out that Neale’s paradox itself isn’t exactly a slam dunk.

In 2014, the economists Brad R. Humphreys and Li Zhou noted curiously that no one had put Neale’s paradox to the empirical test. So they did it in their paper “The Louis-Schmeling Paradox and the League Standing Effect Reconsidered.” (Hat tip: I myself only discovered the Humphreys and Zhou paper thanks to a 2015 Jonah Lehrer blog post on the same topic. Thanks, Jonah.) Basically, Humphreys and Zhou developed a “consumer choice model” to examine attendance and revenue in Major League Baseball here in the U.S. from 2006-10 looking for signs of the League Standing Effect at work. Their results? They found no sign of the League Standing Effect, and concluded: “Day-to-day changes in rank order standings are not associated with increases in attendance at MLB games, and variation in the daily standard deviation in winning percentages in divisions [MLB has 6 divisions] is also not associated with changes in attendance.” RIP Louis-Schmeling paradox, at least for now.

However, Humphreys and Zhou discovered two “alternative factors” at work during the day-to-day flow of the sporting season for fans attending home matches: home win preference and loss aversion. These two factors trump any possible League Standing Effect or Neale’s Louis-Schmeling paradox. Simply put, home fans are more willing to attend when the home team is more likely to win. As Lehrer explains, “[i]f we’re going to invest time and money in a live performance, then we want the investment to pay off.” Homers just want the home team to win, damnit. which would certainly explain why the Allianz arena is consistently full, even if its atmosphere doesn’t rival, say Dortmund, Schalke, Frankfurt, etc. Because Bayern wins every damn time, there’s lots of win preference there for the Bavarian faithful in the Allianz.

Next, loss aversion explains a bit of the psychology at affecting home fans. Home losses are more painful for fans than away losses. And surprising home losses are the most painful. Lehrer explains the effect like this: “[T]he impact of an upset is asymmetric, with surprising losses packing a far greater emotional punch than surprising wins.” This sentence makes me even happier when I consider the suffering Bayern fans undergo when the likes of Martin Schmidt’s old Mainz 05 or Tayfun Korkut’s VfB Stuttgart occasionally pick up at the Allianz. Asymmetric pain for the Bayern fans? Yes, please! Again, this effect also explains why Bayern fans, at least, keep showing up in droves: Bayern fans can safely assume their loss aversion state-of-mind won’t be upset at home in the Bundesliga. Conversely, this effect also explains why Bayern draws the largest crowds on average (44,000+) for away matches: many fans simply expect their club to lose to Bayern. This expectation strips away any effects of the “asymmetric pain” Humphreys and Zhou describe.

An implication from Humphreys and Zhou’s paper for the Bundesliga is that fans mostly care about their home team and its home matches. Sure, we all kvetch about Bayern’s stranglehold on the title, but we’re mostly emotionally invested in what our home team does, and especially that our team avoid home upsets. Remember: Neale’s original paper concerns match attendance and its knock-on effects, and from a match attendance perspective, the Bundesliga confirms Humphreys and Zhou’s findings: that league-wide attendance isn’t necessarily effected by a single club monopolizing the top of the table.

For example, league-wide match attendance has been remarkably consistent from 2012-13 to 2017-18, the six seasons during which Bayern has won its consecutive championships. During these six seasons, average matchday attendance when measured against total stadium capacity has fluctuated within the range of 91% to 93%, according to numbers I calculated from transfermarkt.de:

  • 2012-13: stadium capacity = 92% full on average.
  • 2013-14: stadium capacity = 91% full on average.
  • 2014-15: stadium capacity = 92% full on average.
  • 2015-16: stadium capacity = 92% full on average.
  • 2016-17: stadium capacity = 93% full on average.
  • 2017-18: stadium capacity = 91% full on average.

In case you’re wondering what the average capacity rate was during the two seasons (2010-11 and 2011-12) when Borussia Dortmund won the Bundesliga, here’s the answer: 92% in 2011-12 and 89% in 2010-11 (both VfB Stuttgart and Borussia Mönchengladbach had many empty seats during the 2010-11 season). So as we’d expect from Humphreys and Zhou, Bayern’s monopoly on Bundesliga titles doesn’t have a strong correlation with league-wide attendance figures. This finding makes sense on many levels, given the cultural specifics of Bundesliga matchdays (e.g. cheaper tickets and concessions on average) and given Humphreys and Zhou’s home win preference concept. Moreover, as an aside, I find this league-wide 91%-93% stadium capacity rate to be remarkably high given the ugly optics of empty seats in places like Wolfsburg or Hoffenheim in past seasons. I think my perception was that the Bundesliga capacity rate would be lower. Finally, if anything other variables likes ultras boycotting matches over RB Leipzig’s appearances, Monday night matches, or clashes with the DFL are probably stronger factors on league-wide attendance than Bayern Munich’s monopoly of the silver salad plate.

While the Bundesliga as a whole confirms to Humphreys and Zhou’s findings in terms of explaining matchday attendance, Bayern’s “monopoly” of the Bundesliga still can be critiqued in light of the Louis-Schmeling paradox, like the effects sporting monopoly could have on monopolist’s performance, as Neale briefly touched on in his 1964 paper. Surely, this argument—that Bayern doesn’t get sufficiently “sharpened” in Bundesliga play, hence jeopardizing its Champions League-winning chances—won’t go away until a club like Bayern, PSG, or Juventus win a Champions League title soon. However, my hunch is that there isn’t much real explaining power in this argument; after all, luck and a bit of randomness surely explains more about the Champions League outcomes than anything else.

However, Humphreys and Zhou raise an important point about sporting monopolies, home win preference, and loss aversion: there is a tension between between home fans/clubs and the wider league. Humphreys and Zhou state the tension like this: “[T]he results here further underscore the importance of understanding why leagues would want to ensure balanced competition while individual teams might prefer less balance in order to take advantage of fan’s loss aversion and home win preference.” In other words, there are clearly two sets of incentives explaining competitive balance. Sure, the folks sitting in the DFL offices and many of us might wish that the Bundesliga was a more competitively balanced league, but this isn’t necessarily the goal of each individual club—not Bayern, not Dortmund, not Hertha, and probably not even, paradoxically enough, a recent cellar dweller like Mainz 05. Instead of competitive balance, home win preference and loss aversion are stronger factors in explaining a specific club’s goals vis-a-vis competition.

As Humphreys and Zhou imply, the tension between leagues and individual clubs around the issue of competitive balance is irresolvable, given the competing sets of incentives between clubs and the league. From this perspective, Bayern’s Bundesliga dominance doesn’t hurt the league’s bottomline, at least in the domestic German context. However, given the globalized stage big-time sport plays out in our world, neither Neale nor Humphreys and Zhou explored how/if something like the League Standing Effect affects international fans aboard watching a given domestic league. Presumably, these fans don’t have a strong sense of loss aversion nor the home win preference. In others words, try as I might to give myself “the feels” whenever BVB wins or loses at match at the Westfaldenstadion (especially an upset loss!), my emotions will never be as strong the home fans actually in the stadium watching the match live. Or perhaps even the Dortmunders living in the region watching the match on television.

Conversely, I wonder, if a league’s competitive balance matters more to international fans like myself, especially for a league like the Bundesliga, which is clawing for a larger market share in the saturated U.S. football market where Liga MX, the Premier League, MLS, and the Champions League already dominate the landscape—and TV ratings. Anecdotally, I meet people who tell me they love the Bundesliga, but wish Bayern didn’t win all the time. I wonder how long these international fans will hang in there watching a Bayern-dominated Bundesliga. In the U.S. context at least, Bayern’s monopoly rankles your average sporting neutral who’s used to America’s “socialistic” sporting leagues with their strict salary caps, egalitarian TV revenues deals, and other parity-ensuring measures. So possibly something like the revenge of Neale’s Louis-Schmeling paradox is at work for these globalized fans.

However, we can be grateful that the Louis-Schmeling paradox rests on shaky ground in terms of explaining the behavior of the local on-the-ground fans—the kind of fans who give the Bundesliga the atmosphere we all crave like dickens every international break. Thankfully, these fans operate on logic directed toward channeling everything for the home club. For this reason, and others, it’s no wonder the Bundesliga is Europe’s gold standard for attendance rates and matchday atmospherics.

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Travis serves as an editor and regular columnist here. He writes for Howler magazine's website, as well as The Short Pass where he covers the USL and other topics. Born and groomed in Santa Fe, New Mexico, Travis is a college English instructor in Pittsburgh. Coffee, books, and sports are his passions. His writing has also appeared in Bloomberg Sports, the Good Man Project, and his former blog, Sportisourstory.tumblr.com, and elsewhere. He tweets at @tptimmons. Heja BVB!

5 Comments

  1. Great read! As a fan of both American baseball and the Bundesliga, I find H&Zhou’s choice to use baseball in their study a bit weird, given some of the game’s uniqueness (the salary cap, amount of games, randomness of wins, undervalue of division winners). While folks suggest that the Bundesliga is holding Bayern back in the Champions league, I place more of the blame on teams from Madrid. I mean I don’t know that the reason Bayern can’t be Rea Madrid is lack of competition from Mainz. i mean Real Madrid are kinda good at soccer, as were Atletico.

  2. it’s not bayern’s fault. the league is the problem. other teams didn’t step up to challenge bayern.
    bayern just buy bargain by getting lewy/rudy/goretzka for free, triggering gotze clause, hummels wants to go back to bayern. all these players can easily choose to go elsewhere but they choose bayern.
    as a matter of fact bayern are the reason bundesliga still consider as top league(consistently challenging for UCL). had all these bundesliga talents go elsewhere bundesliga might be irrelevant like eredivisie

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