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Welcome to The Economics of Sports!
Why study sports economics?
Comparing spectator sports: other industries
Gross Output by Industry (millions of current dollars)
2005 2006 2007 2008 2009 2010
Spectator sports 29,867 32,797 36,882 38,452 37,808 39,850Car washes 8,462 8,955 9,119 9,038 8,441 8,710
Fluid milk and butter manufacturing 29,244 28,816 33,423 34,347 31,371 36,342
Source: http://www.bea.gov/industry/xls/GDPbyInd_GO_NAICS_1998-2010.xls
Comparing spectator sports: other retail sectors
Estimated Revenue for Employer Firms (millions of current dollars)
2004 2005 2006 2007 2008 2009
Funeral homes/services 11,485 11,793 11,909 11,943 12,384 12,214Passenger car rental/leasing 25,033 26,302 28,180 29,222 30,299 28,540
Video tape and disc rental 10,284 9,022 9,193 9,262 8,475 7,352
Source: http://www2.census.gov/services/sas/data/Historical/sas-09.pdf
Why study sports economics?
Sports and recreation industry is a big business.
Unique industry/firm specific issues Popular and invokes emotion/fervor. Full of myths and mistaken intuition. Useful vehicle for indirect inference in
other industries.
Conventional Wisdom?
o The NBA conspires to ensure The Finals goes seven games
o Anti-scalping laws lower prices at the ticket window
o The DH rule increases offensive output in the ALo Hosting an Olympics is guaranteed to increase
local economic activityo After signing a big-salary contract, players play
worseo The low number of black NFL coaches is evidence
of racismo Higher ticket prices are caused by player salaries
Overview of Course Review of Basic Economics
Will largely assume you know this Industrial Organization
Do Teams/Leagues Maximize Profits? Do/Should Antitrust Laws Apply?
Public Finance Why/how do cities finance facilities?
Labor Why Do Athletes Make So Much? Unions & Discrimination
The NCAA, the Olympics, and Amateur Sports
Economics Review
Study of choices under constraints Who makes choices?
Households Firms Governments
We try to model decisions in simplified frameworks to isolate the issues that influence decision making.
Market Model
D1
S1
Q1
P1
Demand shifters Income Price of related goods Consumer tastes Market size Price expectations
Supply shifters Input prices Technology Taxes Price expectations Number of firms
quantity
$
Price Elasticity Measure of price sensitivity
Elastic demand: |E| > 1 Inelastic demand: |E| < 1
P
QE
d
%
%• More substitutes• Big budget items• Longer time horizons
Elasticity…
82.022.0
18.0
4510
1100200
E D1
tickets
$
50
1000
40
1200
TR = $50,000
TR = $48,000
E = ?P
QE
d
%
%
Price Controls
Price Ceilings create shortages create black
markets
D1
S1
ticketsQ1
P1
Pceiling
Qd
shortage
Price Controls
Price Floors Create
surpluses
D1
S1
ticketsQ1
P1
Pfloor
Qd
surplus
Profit Maximization
p = TR – TC p = Pq – [FC + VC]
Profit maximizing output rule: MR=MC
What output do the Yankees produce? [tickets? games? wins?]
What kind of cost is Alex Rodriguez’s salary?
Perfect Competition Assumptions
Many small sellers/buyers Homogeneous product Free entry/exit Perfect information
firms are price takers
Perfect Competition
S
D
MR = P
MC
ATC
Market Firm
Q1q1
P1
$
Quantity quantity
$
MR = MC
Monopoly Relevant Market
Any close substitutes? Entry Barriers
Economies of scale Control over key input Government restrictions
Monopoly
D
MR
MC
ATC
Q1
P1
ATC1
Profits are maximizedwhere MR = MC
Price is set off of demandcurve
Quantity
$
MR = MC
Pricing Strategy: Phillies vs Flyers
Assume each is a monopoly
MC a backward “L” Does it pay to sell out?
$
MR
D
MC1
P1
Q1
Citizens Bank Park43,500
Wells Fargo Center19,537 NHL20,444 NBA
MC2
P2
tickets43,50019,500
Phillies Flyers
Game Season Game Season
Field Level $70
$53$38
$65$48$34
Cadillac Grille $215 $102
Club Level $38
$30$20
$33$26$16
Lower Level$160 $89
Terrace$38$30$20
$34$25$16
Mezzanine$120$105$93$81
$65$57$47$37
2012 Ticket Prices
Source: philadelphia.phillies.mlb.com and philadelphiaflyers.com
Sixers
Game Season
Cadillac Grille $49 $45
Lower Level$169$109 $59
$149 $95 $55
Mezzanine$45$15
$35$15
2012 Ticket Prices
Source: www.nba.com/sixers/tickets/
Regression Analysis
Regression is a form of statistical analysis of economic behavior and theory. Regression analysis attempts to
explain the variance of a particular variable of interest.
Economic Model of Attendance
A = f(W)
A = α + βW
A = 20 +50W Winning Percentage
Attendance
intercept slope
(5.63) (9.63)
R2 measures “quality of fit” for entire model
“t statistic”
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 Winning Percentage
2009
% o
f C
apac
ity
MLB
2009 A vs 2008 W
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
2008 Winning Percentage
2009
% o
f C
apac
ity
NFL
R2 = 0.234 R2 = 0.430
A = 0.278 + 0.81 W A = 0.882 + 0.15 W(3.14) (4.94)
Regression Example Consider a model of baseball attendance. We
think that the following items might influence overall team attendance in the following ways
Variable Sign of Relationship
Price Negative
Population Positive
Day of Week Ambiguous
Team Quality Positive
Opponent’s Quality
Positive
Competing Events
Negative
Here are some actual regression results from Depken (2000, Journal of Sports Economics)
Variable Description Coefficient Std. Error t-StatisticIntercept -1.469 2.98 0.49PAVE Ticket Price -0.451* 0.11 4.10CONAVE Concession Price -0.098* 0.02 4.90FRAGE Franchise Age 0.006 0.03 0.20CITYTEN City Tenure -0.063** 0.03 2.10STAGE Stadium Age -0.087* 0.02 4.35WIN Winning % 0.739* 0.12 6.15LAGWIN Last Season Win% 0.389* 0.13 2.99POP City Population 0.163* 0.03 5.43INCOME City Income 0.957* 0.21 4.55PLAYERC Team Payroll 0.286* 0.06 4.76LEAGUE League 0.055** 0.03 1.83CAPACITY Stadium Capacity -0.266* 0.08 2.32YR90 1990 0.212* 0.07 3.02YR91 1991 0.193* 0.06 3.21YR92 1992 0.073 0.06 1.21YR93 1993 0.203* 0.06 3.38YR95 1995 -0.129* 0.06 2.15YR96 1996 0.055 0.06 0.91R2 = 0.696N =174Dependent Variable is log-Attendance* (**) indicates significance at the 0.05 (0.10) level
Franchise Economics and Owner Objectives
Franchise Objectives Maximize profits?
Championships? Ottawa Senators
Best record in NHL: 2002-2003 Declared bankruptcy: 2003
Ego premium?
Civic-mindedness?
Franchise Revenues
TR = RG + RB + RL + RS
Gate Revenue Broadcast Revenue Licensing Revenue Stadium Revenue
Gate Revenues: RG
RG = RH + (1- )RP = home team’s share RH = home team gate RP = pooled gate from all other teams
Impact of Revenue Sharing Financial stability? Competitive balance? Player Salaries?
NFL: = 60%MLB: = 66%NBA, NHL: = 100%
National revenue is shared equally Local revenue is not shared equally
KC: A small market for MLB but not NFL Green Bay would have disappeared
Tradeoff: RB vs RG? blackouts
What determines broadcast rights payments? Demand by Advertisers Super Bowl XLVI: NBC received $3.5m for 30
seconds
Broadcast Revenue: RB
Sports Teams and Leagues
Advertisers (Consumer Products Producers)
Media Providers (Networks, Cable, Satellite)
Programming
Ad Slots
Rights Fees $
Slot Fees $
Broadcast Money Trail
Sport Years Rights Total Fees Annual Average
NFL 2006-2013
NBC, Fox, CBS, ESPN, DirecTV
$23.9 billion
$3.7 billion
NBA 2009-2016
ABC/ESPN, TNT $7.44 billion
$930 million
MLB 2006-2013
ESPN, Fox, TBS $4.9 billion $713 million
NASCAR 2007-2014
Fox, ABC/ESPN, TNT
$4.4 billion $550 million
PGA 2007-2012
CBS, NBC, Golf Ch.
$3 billion $500 million
NHL 2012-2021
Versus; NBC $2 billion $200 millionSource: Street & Smith’s Sports Business Journal
Revenue from Broadcast Rights Agreements
Stadium Revenue: RS
Concessions Parking Naming rights: pros; colleges;
individuals Luxury seats
don't count as gate, therefore, don't have to share
NFL Example:• luxury suite rents for $500,000 per year• 20 seats• claim each seat is worth $50
Team only shares = 0.4 * 20 * $50 * 8 games = $3200
Rams: LA St. Louis Raiders: LA Oakland Oilers: Houston Nashville Browns: Cleveland
Baltimore
Revenue Sharing is the key!
Question: Why have we seen a move to small markets by NFL teams?
Licensing Revenue: RL
Generally shared with all teams Cowboys broke ranks with NFL in 1995
by signing Pepsi for stadium sponsorship
NFL & Pepsi: $2.3b over 10 years
Franchise Costs
TC = CP + CA + CT + CS
Player Salaries Over 50% of team revenues Deferred compensation Bonuses Workers’ comp Pension contributions Player Development
MLB and NHL Administrative
Coaches and management Marketing
Travel Stadium
Opportunity Costs: Profit that could be earned in another city
+ OC
Some revenue and cost averages from professional sports in 2006
League Decisions
Cincinnati Red Stockings (1869) National League (1876)
$0.50 tickets No Sunday games No beer
American Association (1882)$0.25 tickets on Sunday with beer!
League Decisions Setting the Rules
# games, game format, equipment Limiting Entry
Teams Benefits:
entry fee: NFL more revenue sources
Costs: sharing of league revenues Reduced geographical monopoly Reduces threat of moving
New leagues: ABA, WHA, AFL, USFL League-wide Marketing
Free-rider problem Competitive Balance and Revenue Sharing
Source: Major League Sports Teams, ODU Forecasting Project, 2001
1993 NHL 2000 NHL 1993 MLB 1999 MLB 1995 NBA 2004 NBA 1995 NFL 1999 NFL 2001 NFL$0
$100
$200
$300
$400
$500
$600
$700
$800
$50$80
$95
$130 $125
$300
$140
$530
$700
Recent Franchise Fees
MinnesotaColumbus
ArizonaTampa Bay
Charlotte
Houston
Accounting Games
Book Profit and Depreciation
Profit = TR – TC
Corporate taxes depend on book profit Paying high administrative costs reduces book profit Interest is tax deductible (dividends are not) Player contracts are treated as depreciable assets
Bill Veeck San Antonio Spurs example
Costs include interest expensesand depreciation of capital
San Antonio Spurs Depreciation and Tax Savings (All figures in $ millions)
1993-94 1994-95
Category w/o Roster DEP
w/Roster DEP
w/o Roster DEP
w/Roster DEP
(1) NOR 4.9 4.9 0.3 0.3
(2) DEP 3.5 (3.5+10.7) 3.5 (3.5+10.7)
(3) NAD 1.4 -9.3 -3.2 -13.9
(4) Taxes .5 0 0 0
(5) NADT .9 -9.3 -3.2 -13.9
Tax Savings 0 3.2 1.1 4.9
Assume:• $75m purchase price for franchise• 50% of player cost is depreciable• 3.5 year depreciation schedule ($10.7m/yr)• Tax rate = 35%
Vertical Integration
Beer company buys team Media outlet buys sports team
AOL Time Warner Atlanta Braves (1976-2007)
Tribune Company Chicago Cubs (1977-2007)
Disney Anaheim Angels (1999-2003) /Anaheim Ducks (1993-2005)
Fox LA Dodgers (1998-2004)
Double monopoly?
DMR
DMR
MC
Qup
PupMC
Pdown
Qdown
Upstream Firm (Team) Downstream Firm (Media)
Vertically integrated firm sets transfer price to allocate profit acrosscombined entity
Set low broadcast rights fee to reduce team profits in order to plead poverty during lobbying for public subsidy
Vertical Integration
Broadcast rights fee
Clicker Review
If a team always sells out its home games, economists would say it is very likely that:
A s
urplu
s ex
ists
Ther
e is
exc
ess.
..
Ther
e is
exc
ess.
..
Pric
es a
re to
o hig
h
0% 0%0%0%
a) A surplus existsb) There is excess
supplyc) There is excess
demandd) Prices are too high
If an industry is a monopoly, output is _____ and prices are _____ than if it were perfectly competitive.
Lower
, lower
Hig
her, l
ower
Lower
, hig
her
Hig
her, h
igher
0% 0%0%0%
a) Lower, lowerb) Higher, lowerc) Lower, higherd) Higher, higher
If demand for tickets to see the LA Lakers is inelastic,
Fan
s w
ill re
s...
fans
will
resp
o..
fans
will
resp
o..
fans
will
resp
o..
0% 0%0%0%
a) Fans will respond to a price increase with a proportional decrease in quantity demanded.
b) fans will respond to a price increase with a less than proportional decrease in quantity demanded.
c) fans will respond to a price increase with an infinitely large decrease in quantity demanded.
d) fans will respond to a price increase with a more than proportional decrease in quantity demanded.
If income decreases and tickets to see a Notre Dame football game are a normal good, then the
dem
and fo
r tic
...
supply
of t
ick.
..
dem
and fo
r tic
...
supply
of t
ick.
..
0% 0%0%0%
a) demand for tickets will decrease.
b) supply of tickets will increase. c) demand for tickets will
increase. d) supply of tickets will decrease.
A negative aspect of anti-scalping laws is
they
pre
vent .
..
they
cau
se ..
.
they
pre
vent..
.
they
hurt
tick.
.
0% 0%0%0%
a) they prevent sell-outs. b) they cause people to pay more than
they are willing to in order to get tickets.
c) they prevent the market from matching willing buyers and sellers.
d) they hurt ticket agencies.
If a game is not sold out, then the marginal cost to a team of accommodating one additional fan is
0% 0%0%0%
a) almost infinite.b) about equal to the team's payroll c) essentially zero. d) about half the cost of a ticket.
To determine the market demand for tickets to see the Boston Bruins play hockey we
add th
e m
argi..
.
div
ide
the
re...
add th
e pr
ice.
..
add th
e qu
anti.
.
0% 0%0%0%
a) add the marginal revenue at each price.
b) divide the revenue of the team by the number of fans.
c) add the price consumers are willing to pay at each quantity.
d) add the quantity demanded at each price.
a) The NFLb) The NBAc) Baseball’s National Leagued) The NHL
The league with the most equal split of gate receipts between the home and visiting teams is
The
NFL
The
NBA
Bas
ebal
l’s N
at...
The
NHL
0% 0%0%0%
a) zero. b) fixed.c) variable. d) shared by all teams in the
league.
Over the course of a single season, the largest proportion of team cost is
zero
.
fixe
d.
var
iable
.
shar
ed b
y al
l t...
0% 0%0%0%
The ownership of professional teams by media outlets
pre
vents
cro
ss...
is k
nown as
ho...
is k
nown as
ver..
.
is b
ecom
ing le
..
0% 0%0%0%
a) prevents cross subsidization. b) is known as horizontal
integration. c) is known as vertical integration. d) is becoming less common.
The Dallas Cowboys are such a valuable franchise because they
can
tap
into
b...
hav
e a
traditi
..
hav
e done
an...
hav
e so
man
y...
0% 0%0%0%
a) can tap into both U.S. and Mexican media markets.
b) have a tradition of winning that attracts fans from all over.
c) have done an expert job of managing the salary cap.
d) have so many luxury boxes.
Marketing for a league is a public good if
all
team
s pay
for..
.
all
team
s pay
a...
all
team
s der
ive.
..
all
team
s pay
s...
0% 0%0%0%
a) all teams pay for the cost of advertising for small market teams.
b) all teams pay an equal share of the cost of advertising campaigns.
c) all teams derive benefit from an advertising campaign.
d) all teams pay some share of the cost of advertising campaigns.