Is the NBA Actually a Free Market?
Why the NBA is a free, fair, and competitive market.
The NBA season is upon us. And for those of us who are diehard fans we are about to root passionately for our teams (Knicks and Spurs for me), in a quest for the ever elusive championship. Some will be betting heavily and others the mere casual fan. As a student of economics and basketball, this article will explore whether or not the NBA actually is a free, fair, and competitive market for players and the teams. If the NBA was a free market every team would have a chance to win a title. This does not mean all teams have an equal chance because of factors that I will discuss later. But in a competitive market, there are no monopolies or oligopolies.
The key structure of the NBA market is the salary cap. Teams can’t spend unlimited amounts on players. And if they go over the salary cap they have to pay millions of dollars in taxes, and the repeater tax for multiple seasons over the salary cap is even more prohibitive. While this gives the deeper pocketed owners an advantage, all teams can go over or under the cap as they see fit. So the salary cap seems like a fair way to even the odds between a team like the Los Angeles Lakers and the Charlotte Hornets.
But does that mean every team has an equal opportunity to construct a team that can win a championship? This is the NBA’s 75th anniversary season so no team is starting from square one in terms of their history and other competitive advantages. Location gives the teams in California, New York, and Miami a more unique advantage. But just because some teams have structural advantages doesn’t mean other teams can’t compensate in other areas. San Antonio being the epitome of a small NBA financial market and one of the most winning in NBA history.
In the car market being a historically great company like Ford or General Motors does not guarantee future success. But one key different between the car and NBA markets is a new car company can come in and disrupt the market like Tesla, but the NBA is mostly fixed at 30 teams.
But disruption can still happen from the inside. San Antonio used to be the most innovative franchise in terms of drafting undervalued foreign players like Manu Ginobili and Tony Parker, but other teams have caught on since. Another disruptor was Daryl Morey in the front office in Houston. He used analytics better in terms of player moves and was faster to adapt to the simple but underappreciated mathematical logic that a three-pointer counts as more than a two-pointer. Now shooting a lot of threes is tactically commonplace but it shows that these are the types of strategies that smarter teams can use to their competitive advantage and make up for other areas of deficiencies — such as an owner who is less willing to spend more money on players or improving the facilities, or sports science departments.
To find the best example of keeping salary costs low and still winning at a high level you have to go to Tampa Bay in the MLB. The Rays have to be the most innovative franchise in sports right now. In 2017 they won 49% of their games. Over the next four seasons they finished above 500% in all of them, made it to the postseason in three of them, and lost in the World Series in one of them. In this past season they won 100 games, best in franchise history dating back to only 1998. And they did this with a payroll of a little under 71 million, ranking 26 out of 30 MLB teams. The Yankees (boo!) won 92 games this year but at a cost of a little over 203 million. Talk about economic efficiency! And the MLB doesn’t have a salary cap but they do have a luxury tax. The specific lessons and innovations of the Rays are not obvious but can be applied to all the NBA teams that complain about their cheapskate billionaire owners etc. etc.
The NBA market is a free one because teams can sign players in free agency, trade players, and draft players of their choosing. Every team has a reasonable chance to make smart player moves, work hard as a team, and win a championship. These decisions can be as important as how much you pay players. But recent NBA history has shown that the top stars want to play in certain markets with other stars. Durant, Irving, Harden and Lebron and AD being two of the notable ones. While this can be viewed as unfair, teams like the Bucks of 2021 and the Mavs of 2011 are shining examples of building a championship team with one drafted star (Giannis and Dirk Nowitzki), and great compliments.
And while the number of teams that have a legitimate chance to win the NBA championship this season is roughly ten or 33% of teams, this is not because the NBA market is not competitive. It’s because a lot of franchises have drafted poorly, signed the wrong free agents, and have management, coaching, and culture issues; to name a few of the big ones. Someone who understands statistics like Daryl Morey, (now with the 76ers, and in the midst of a heated stand-off with Ben Simmons), would say the objective that is within your control as an organization is to increase your odds of winning a championship. All teams can do that and the better ones increase it more in both the short and long term.
While there is nothing seemingly egalitarian for the other twenty teams who have less than a 1% chance of winning a championship (to put it mildly). But no one ever said free market capitalism was about everyone being equal. It’s about equality of opportunity and that’s where the much misunderstood concept of fairness comes into play. It was “fair” that the Warriors drafted Draymond Green, one of the best defenders and passing big men in NBA history in the second round at pick 35. It was “fair” when the Bucks traded for Jrue Holiday and P.J. Tucker to help turn them from a great regular season team to a championship one.
And by that same logic it’s fair when the Sixers drafted Markelle Fultz first in the 2017 NBA draft over Jayson Tatum. Or when the cap spiked in 2016 and the Knicks signed Joakim Noah to a 4 year $72 million deal. And that disastrous contract to a player at the tail end of a career plagued by injuries was made by one of the greatest basketball coaches of all time in Phil Jackson.
You can critique the NBA market for some of the salary cap and contract extension rules that seem to give big market teams and players more leverage. But because of advantages in owners with more liquidity and geography the odds will be stacked a decent amount against say the Oklahoma City Thunder. But through draft luck and bold picks, Durant and Westbrook respectively, they were one of the top teams for years. And now they are rebuilding with the best statistical strategy a team that is not a so-called free agent destination can have, with a monsoon of draft picks (36 over the next 7 years) and tradable contracts. Getting out of the NBA standings basement will not be easy, but with a fearless leader in Sam Presti it will be faster than a team with questionable leadership like the Timberwolves and the Kings. (I’m a fan of head coaches Chris Finch and Luke Walton though.)
This argument should leave every fan a little more optimistic that with competent ownership, a savvy front office, stable coaching, and talented high character players you can give yourself a chance to make the playoffs and then win a championship. The reason why the NBA is so fun to watch is because every team at the start of the season believes they have a chance to improve and there are enough teams that believe they can win championship. And it’s that competition that is as the heart of sports and the free market.
