Question

1. What is the difference between an open and closed league?
2. How does an open league with relegation work? (Association football in Europe is often structured like this.)
3. How does this structure affects competitive balance? Explain.
4. Suppose the NBA moved to an open structure with 24 teams in the top tier. What are some things you would expect to see differently in terms of competitiveness, free agency, additional teams, teams ability to get subsidies from cities, etc.

Answer 1

In a closed league system, the single entity controls all the interactions and transactions within the team it has. Whereas in a open league, there is a system of promotion and relegation and it contains several hierarchical divisions. The main difference between open and closed league is the entry of new teams.In an open league, entry of new teams does not require approval by a franchise fee or existing team owners, in a closed league prior approval of the existing team is required.

In an open league, players compete with others for to be promoted and they try to avoid relegation. A relegated team will have lower potential of revenue generation as they have to play in lower divisions.The relegation threat gives teams in the top division an additional incentive in order to invest
in higher quality players.

Competitive balance states the effect of competitive balance on fans and it also tests the uncertainty of outcome hypothesis of the league. The greater uncertainty can reduce the attendance and competitive balance issue is used as an excuse for the restrictive practices in Open leagues.The open league system affects the competitive balance and inorder to encourage competitive balance, there should be introduction of salary caps and revenue sharing elements required in open leagues.

If the NBA has moved to open structure with 24 teams in the top tier, the things that we expect to see could be promoting competitive balance, providing exclusive practice facilities and avoiding relegation etc.