The following post is a trend analysis of the Transfer Price Index data using various indicators used in industrial studies to measure the competitiveness of industries. The charts will be updated to include the final data from the 2010/11 season in due course.
Purely by coincidence, 2 of the measures are the same as used by UEFA in their 2009 “Benchmarking Report” for Financial Fair Play.
Four-Firm Concentration Ratio (CR4)
The CR4 is a common indicator used to show the extent of market control of the 4 largest firms in an industry and to illustrate the degree to which an industry is trending towards monopoly (or at least oligopoly).
Medium concentration starts at 50% and indicates oligopoly. High concentration starts at 80%.
In Premier League terms the CR4 is useful as there are now 4 Champions League spots up for grabs every season. The chart shows the £XI CR4 of the teams who finished in the top 4 positions in each Premier League season. The chart also denotes the amount of Champions League spots open to Premier League clubs.
Herfindahl-Hirschman Index (HHI)
The CR4 is useful in illustrating inequalities between the top 4 and the rest. However to look at the inequalities between all the firms in an industry (or all the clubs in a league), you need to consider the market share of every firm. The HHI allows us to do this. The HHI is widely used as any rise signifies an increase in inequality.
The United States uses the HHI to determine whether mergers are equitable to society; increases of over 0.0100 points generally provoke scrutiny, although this varies from case to case. The Department of Justice considers HHI indices between 0.1000 and 0.1800 to be moderately concentrated and indices above 0.1800 to be concentrated. As the market concentration increases, competition and efficiency decrease and the chances of collusion and monopoly increase.
The HHI has a similar line to the CR4. Both graphs show the Premier League going beyond a key threshold and into the realms of oligopoly for the same 3 seasons 2005-2007. This aligns with the Mourinho era at Chelsea. In the first year of the Abramovich Era under Claudio Ranieri, the HHI showed an above average 10% increase. However in the first year under Mourinho, the HHI saw its biggest year-on-year rise of 29%. In the year Mourinho left Chelsea (also the year the credit crunch started) the year the HHI shows its biggest year-on-year fall of 22%.
As the CR4 and HHI show a similar pattern, we need to look at another measure to get a holistic view of competitive balance in the Premier League era. The Lorenz Curve is a traditional measure used for income distribution and social inequality. For £XI CTPP in the Premier League era, the Lorenz Curve gives us conclusive results.
In the 20 team Premier League era, the 1998/99 season is closest to the line of pure equality
We have already established that the plutocratic peak of the Premier League was 2005-2007. The 2006/07 season is on the chart and you can see 40% of the cumulative £XI in the top two and 61% in the top 5
In 2009/10, 75% of the cumulative £XI is in the top 8 clubs. Ten years earlier the figure was only 45%.
The 2009/10 line outperforms all others from 8th to 12th positions suggesting that another level of inequality may have been built into the league. This compression of £XI into the top 8/top 12 has to come at the expense of somewhere else. There’s a slight narrowing between the top 4 and the rest but unsurprisingly the impact is mainly felt at the bottom of the league
The bottom 7 clubs in 2009/10 represented a mere 10% of the cumulative £XI. In the 1990s this figure was as much as 23%. The bottom 3 clubs had a measly 2% of the cumulative £XI
Both the CR4 and HHI show how inequality in the Premier League has increased steadily since its inception. The rate of increase quickened at the turn of the century but accelerated sharply in the Abramovich era to the extent that the league officially became an oligopoly for 3 seasons. Only the credit crunch halted the upward trend.
The Lorenz curve demonstrates that while the Premier League has become more unequal, there are other noticeable trends. A greater percentage of the clubs at the top are increasing their £XI at the expense of the sides at the bottom. In fact, the clubs at the bottom of the Premier League have never had it so bad. Not only is competing with the top clubs an impossible dream but it’s even becoming more difficult co compete with the middle tier clubs as well.