Aggregative Contests and Ex-post Heterogeneity: the Case of the UEFA Champions League

The UEFA Champions League is an annual Pan-European football competition that takes place parallel to the domestic league competitions. The participation in the Champions League secures the teams large payments, which have steadily increased over the last decade. This paper develops a general contest model of a professional team sports league in which the winner of the domestic league competition participates in the Champions League and has the possibility to win an additional prize. Our model considers two leagues where each league is composed out of several profit-maximizing clubs. We analyze the impact of the Champions League on investment incentives, competitive balance and club profits. Our model shows that the Champions League prize and domestic league prize have differential effects on competitive balance: an increase in the Champions League prize decreases competitive balance, while an increase in the domestic league prize increases competitive balance.