## Increasing the competition reduces competition

I know the rule is: write what you know. So, I also know I’m going out on a limb here writing something about sport. Specifically, writing about AFL. But, this idea has got into my head, and I think writing it down is the only way to let it out.

Due to utter chance, the weekend newspaper fell open on an article about the AFL competition format, and after glancing at it, I found it to be really interesting. The gist of it was that the AFL has consciously shaped its teams to create a level playing field, through salary caps and priority draft picks for bottom teams, with the result that there is a good rotation of teams winning the grand final, and the sport has achieved enduring popularity. And it doesn’t hurt that they’ve been able to translate that popularity into a pretty decent TV rights deal.

However, it appears that while there is a good rotation of top teams, in recent years, those top teams are typically (and curiously) much better than the rest of the competition. According to the article, since 2000, Essendon, then the Lions, Port Adelaide, Geelong, St Kilda and now Collingwood have had long runs of wins, trouncing all the other teams for a reasonable period of time.

It strikes me that another way that the AFL has shaped their competition may be leading to this very outcome: growing the number of teams. Despite their efforts to limit and reset the strength of the teams each season, there is always going to be a distribution of ability across the set of teams. A spread of ability will exist, even if concentrated, so there can still be outliers. To put it another way, even if the standard distribution is smaller, the probability of a team falling outside a s.d. of the mean is still the same.

According to Wikipedia’s page on the AFL, back in 1982 there were just 12 teams, and this has increased little-by-little over the years to the current 17 teams, with 18 teams are proposed for next year. If we look at the probability of there being an outperformer in the mix (for discussion’s sake, let’s define that as a team with an ability two standard deviations above the mean), it increases from about 1-in-4 for a 12 team competition to about 1-in-3 for an 18 team competition.

# Teams Year P(one or more outperformers)
12 1982 0.241
14 1987 0.275
15 1991 0.292
16 1995 0.308
17 2011 0.324
18 2012 0.339

On one hand, the AFL’s actions are intended to make teams as similar in ability as possible to promote healthy competition. Ironically though, it seems their actions in increasing the size of the competition might be working against this to improve the chance than a season will have a dominant team.

Although from the AFL’s point of view, if the driver of their policies is not competition but popularity, then as long as the new teams are introduced in new areas, the loss of popularity from impacting competition is likely more than made up by the increase due to the additional of new supporters.

## And the non-profits shall inherit the earth

The difference between a for-profit organisation and a not-for-profit organisation is simple, obvious and profound. For-profits have owners for which they generate profits, while not-for-profits have stakeholders for which they accomplish their aims. However, both can have customers that they service, both can have products they sell, and both are able to raise money. They can also compete with each other.

For example, the Guardian Media Group is owned by the Scott Trust (no relation), and runs a number of media businesses in the UK, including The Guardian newspaper. It competes against mainstream newspapers in the UK, and does reasonably well, despite not being controlled by owners or shareholders.

There is also the John Lewis Partnership, which runs a number of retail businesses in the UK, including the Waitrose chain of 187 supermarkets. And also the engineering and manufacturing company Scott Bader that operates all around the world, but is effectively owned by the employees rather than shareholders. (US based employee-owned companies are tracked here, while UK based companies are tracked here.)

Many for-profit companies, competing against such non-profits, are at a competitive disadvantage: they have to pay a proportion of their earnings to people outside of the company, rather than reinvesting it in the business or the employees. Owners are effectively an overhead that returns nothing to the business. Of course, not all businesses have owners that are leeches – many famous and successful companies never paid dividends to their shareholders.

Berkshire Hathaway, run by Warren Buffett, doesn’t pay dividends. Luckily the growth in the value of BRK shares more than makes up for that. Also, Microsoft didn’t pay dividends until 2003, after many years of stellar growth in MSFT stock.

However, most companies are not like those. Many companies pay out between a third and half their annual profits in dividends. Not-for-profits do not face this burden, giving up the potential funding source of raising money from sharemarkets, but in return enabling them to set lower prices, given the same cost base, product quality and service levels as their competitors.

This suggests that not-for-profits, while potentially more constrained in terms of the money they can raise, can outcompete the for-profits in their own markets. In Australia, not-for-profits have tended to operate charitable businesses rather than commercial ones, but I wonder if we’ll see more and more of them appear in the future, given their advantageous competitive position.