Opinion

The economics of superstardom

Sudipta Sarangi Chandan K Jha | Updated on August 28, 2014 Published on August 28, 2014

Why a Lionel Messi is valued obscenely higher than a Thomas Muller



It isn’t surprising that Lionel Messi, the Golden Ball winner for the 2014 World Cup and probably one of the greatest footballers of all time, is the world’s most-valued player. But what is notable is the sheer margin.

According to the Swiss-based CIES Football Observatory, Messi’s estimated market value as of June 2014 was in the €200.2-232.6 million range. This was almost twice that of the second most-valued player Cristiano Ronaldo (€105.7-122.9 million). But even more strikingly, the World Cup’s Silver Ball recipient Thomas Muller and the top goal scorer James Rodriguez were valued way below at €36.7-42.7 million and €34.2-39.8 million respectively — less than a fifth of Messi’s.

The same type of differential exists even in salaries: Messi’s, at over $40 million annually, is ten times more than that of Muller. Ronaldo is the highest paid, with more than $50 million in annual earnings. While Ronaldo and Messi occupy the second and fourth positions respectively in the Forbes’ list of the world’s highest paid athletes, Muller doesn’t even make it to top 100. And we know Muller is no less of a star in terms of actual field performance.

Second isn’t best

The big differential in earnings of this sort can be partly explained by the American labour economist Sherwin Rosen’s paper ‘The Economics of Superstars’ published in 1981.

Rosen explains why people are willing to pay a disproportionate premium for the services of a person who is only marginally better than the second best.

But before that, let’s note that while superstars may exist in many industries, we find them more in creative fields such as movies, sports, arts, music and literature. One can perhaps add even textbook-writing: While there could be dime-a-dozen good textbooks on any subject, one inevitably finds only one or two eventually capturing much of the market.

The crux of Rosen’s explanation relies on two factors — imperfect substitution and facilitating technology. Both these play key roles in the industries mentioned above.

By imperfect substitution, what we are trying to say is that there are no substitutes for Lionel Messi. At best, we have only imperfect substitutes. Put differently, consider a wealthy person seeking the services of a surgeon. The chances are he would be willing to pay substantially more than a 10 per cent premium for a surgeon, despite the latter’s success rate being only 10 per cent higher than the next best surgeon.

Reaching-out technology

Modern technology, too, plays a crucial role in widening the earnings gaps in the creative professions. Technology makes it possible to cater to very large audiences at very low cost without sacrificing quality (think CD or DVD). Hence, a superstar is able to reach out a large number of consumers easily, making life difficult for others even if they may be only slightly less talented.

For a buyer, a superstar product will be the first choice if it is reasonably priced relative to something ranked just a notch below. It, therefore allows the superstar to capture the market, as in the most popular textbook example. He can now play the ‘volumes trade’ game to earn substantially more than the nearest competitor.

Imagine what it was like when there were no CDs or DVDs. A singer could, then, only cater to a small audience. Even with high ticket prices, earnings would be limited. But it also meant that other (less talented) singers could survive in the market.

Modern technology, in contrast, makes it possible to reach large audiences cheaply and for the big guys to play the volumes trade game. Not surprisingly, under its onslaught, street plays and small performances have been vanishing over the time.

Media and money

The emergence of superstars today can also be attributed to a third factor – media, which in a sense is an extension of technology.

We don’t need to know what the salaries of yesteryears’ superstars such as Sunil Gavaskar and Kapil Dev were like to infer that they earned nowhere near what the Mahendra Singh Dhonis and Virat Kohlis today do.

Media and technology have both helped make cricket a mass religion in India. Never before have so many people in India followed cricket with such passion. The opportunity to peddle products using this mass reach has not been overlooked by the market.

Hence, today’s superstar cricketers earn unprecedented sums from myriad off-the-field sources, especially celebrity endorsements that rely on the notion that what a talented person endorses must be as worth following or emulating.

Another media driven spectacle that has contributed to all this is the Indian Premier League (IPL.Given its wide viewership, the earnings potential for individual IPL teams has allowed them to place a market value on players through that most wonderful of economic mechanisms — auctions. And these can clearly distinguish a Superstar from a Star: A Yuvraj Singh has fetched almost three times as much as a Robin Uthappa in recent auctions.

Another fact that underscores the earnings wedge that the IPL has created between superstar and superstar is that 17 per cent of the players (26 out of 154) sold in the IPL 2014 fetched merely ₹10 lakh each. That was 140 times less than that of the highest paid player (Yuvraj Singh) and 50 times below Robin Uthappa.

Marshall’s prediction

It is interesting that even before Sherwin Rosen, the ever prescient founder of modern economics Alfred Marshall has foreseen the Superstar phenomenon.

As he wrote in 1947: “The relative fall in the incomes to be earned by moderate ability... is accentuated by the rise in those that are obtained by many men of extraordinary ability. There never was a time at which moderately good oil paintings sold more cheaply than now, and ... at which first-rate paintings sold so dearly”.

Further, “The causes of this change are two; firstly, the general growth of wealth, and secondly, the development of new facilities for communication by which men, who have once attained a commanding position, are enabled to apply their constructive or speculative genius to undertakings vaster, and extending over a wider area, than ever before.”

Thankfully, the superstar phenomenon is not prevalent across all industries. To the extent there are no superstars, income differentials are not as marked. The reward structure in this case, though not linear, is not as skewed as it is in the sports or entertainment industry.

Sarangi teaches microeconomics and game theory at Louisiana State University, while Jha is a doctoral student in economics at the same university

Published on August 28, 2014
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