Download Econ 3306 Sports economics

Econ 3306 – SPORTS ECONOMICS
Supply & Demand
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Terminology: Both
o Change Price (Variable)
o Curve does NOT shift
o Change in Quantity Demand/supply
 Change a Non-Price Determinant (Parameter)
 Shift the Curve
 Change in Demand/Supply
Law of Demand:
o As price increases, quantity demand decreases.
o As price decreases, quantity demand increases.
 The relationship between Price and Qty D?
 – Inverse, Negative, Indirect
Law of Supply:
o As price increases, quantity demand increases.
o As price decreases, quantity demand decreases.
 The relationship between Price and Qty S?
 – Positive, Direct
Law of Product equilibrium
o In a free market, natural forces will move price and quantity of supply & demand to the equilibrium point… i.e., supply = demand
o The point of equilibrium implies that the market is “at rest,” and quantity demanded is equal to quantity supplied.
Demand Non-Price Determinates
o Taste / Preferences
o Income
o Price of Related Goods
 –Complementary
 –Competing (Substitute)
o Expectations
o Number of Buyers
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Supply Non-Price Determinates
o Price of Inputs
o Technology
o Price of Other Goods
o Expectations
o Number of Sellers / Suppliers
o Regulations
o Taxes
SUPPLY & DEMAND MODEL
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Changes in S&D: Explains the relationship between price and quantity
Market Demand: Shows the quantity that all consumers combined purchase at each price summing the demand curve.
Factors that change the demand curve:
o Change in income
 Normal goods: Demand increases when income increases
 Inferior goods: Demand decreases when income increases
o Price of substitutions/complements:
 Increase in price of substitute causes demand to increase
 Increase in price of complement cases demand to decrease
Factors that change the supply curve:
o Change in input price
o Technology
o Taxes
o Natural events
Elasticity of Demand: The percentage change in quantity that results from a given change in price.
Output & The Production Function In Sports:
o Three ways of measuring output
 What firms sells to make revenue: Game attendance or T.V viewership.
 Number of games played
 Team winning percentage
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Production Function: Shows the relationship between quantity of inputs used and the quantity of outputs produced
 Relies on labor and capital: In sports both are fixed variables
 Short run: Time period in which at least one input is fixed and the other inputs are variables
 Long run: All inputs are variables
Marginal Product: The increase in output that results from one unit increase in that input
o Law of Diminishing Returns: As a firm continually increases one input while holding the other fixed, the marginal product of that
input must eventually fall.
Marginal Cost: The additional cost associated with an increase in the output, basically the inverse to the MP
Price Ceilings and Scalping
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Anti-scalping: laws require that tickets cannot be sold above face value.
Creating a price ceiling: A cap on prices
 Creates excess demand for tickets
 Those who value them the most might not get them
Perfect Competition Market
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Many producers & consumers, homogeneous (same) products, good pricing information.
Firms have no market power (ability to set price)
Every firm has a horizontal demand curve (L-shape), even though market demand is downward slopping
Firms can sell all it wants at market price, but cannot sell anything at any higher price
Marginal Revenue: The additional revenue from selling one more unit, is equal to the market price.
Firms maximize profit by choosing an output where MR =MC
Competitive markets are economically efficient, meaning they maximize society’s gains from exchange
Monopoly Market
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Monopoly exists when a firm is the sole producer in the market
o They have the ability to control price
o All sports teams have some degree of market power
o The demand curve faced by a monopoly is the market demand curve
o Marginal revenue for most monopolist is less than price
Rise of Pro Sports
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Baseball & soccer were the first to become widely popular
The industrial revolution in the mid-19th century gave more leisure time to people and the development of sports
Growing popularity of soccer & and baseball among the working class, led to pro sports
o Working class athletes could not play regularly without being paid for the opportunity cost of their time.
Upper-class (wealthy) sportsmen changed from amateur participants to financial backers and owners of the professional teams
o They could market superior professional teams to a public that now had the money and leisure time attend sporting events
MAXIMIZING PROFIT
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Profit = TR – TC
Wi = Winning %
Max profit is the maximum distance between TR & the TC curve. (TR slope = TC slope)
REVENUE & COST
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Firm revenue: Function for the demand of its products
Demand for attendance is driven by 6 factors
o The price of the good (tickets)
o Price/availability of the substitution: such as other teams or entertainment
o Price/availability of complements: such as parking & concessions
o Consumer income: If pro sports are a normal good, tickets sell will increase w/ income
o # Of consumers (fans)
o Taste & preferences
Closed League: All North American pro leagues
o Teams don’t change (w/o approval)
o Teams cannot relocate (w/o approval)
o May have affiliate minor league
Open League: Outside the U.S… European soccer leagues
o Leagues ranked… promotion/relegation
o Lower league (minor) best teams may replace poor higher league teams
o Multiple teams in one city
Taste & Preferences
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Day of the week
Quality of home team
Quality of visiting team
Importance of game
Anticipated close game
Weather
Presence of star player
o Pro team generate revenue from 6 sources
 Ticket or gate receipt: (RG)
 Local & national broadcasting rights: (RB)
 Advanced media, such as live streaming: (RM)
 Licensing income, such as jerseys: (RL)
 Venue-related items, such as luxury boxes, venue name, concession: (RV)
 Transfers from other teams in the league: (RT)
 TR = RG + RB + RM + RL + RV + RT
Gate Revenue: Varies
o NFL: small variation
o MLB: Large variation… 81 games
Broadcast Revenue
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Local & national
Created major shift in sports trajectory
HUGE amounts of revenue
 Impact on network revenues
 Weaker games: Poor anticipation
 Bad football: Poor matchups... top players out… CTE
 Two LA teams: local getting local game & not national games
 Protest
 Size/variation differs substantially among sports
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TV & ATTENDENCE
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LICENSING REVENUE
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Centralized
No competition
Apparel
 Items to licenses
 Player name
 Likeness
 Uniform #
 Signature
 Photos
 Original Art
 Voices
Venue Revenue
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1st NFL TV broadcast – Oct 22nd, 1939
1st MLB TV broadcast – Aug 26th, 1939
 Both in Ebbets field, Brooklyn, NY
 1st MLB game – Columbia vs. Princeton 5/17/39
Concessions (value not readily available)
Parking – if team owns it
Luxury box
Tragedy of Commos
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A situation where there is an overconsumption of a particular product or service because rational decisions lead to an outcome
that is overall damaging to social welfare. E.g., overfishing
 It is a term used in social science to describe a situation in a shared resource system where individual users acting
independently according to their own self-interest behave contrary to the common good of all users, by depleting or
spoiling that resource through their collective action
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Importance of a League
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Establish/enforce rules of the game
Set/enforce team schedule
Govern off-field behavior
Limit entry
Advertisement
Promote competitive balance
Enforce some territorial rights
NFL & CTE
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American football study – Boston university
 202 deceased players (who showed signs)
 Brain donation
 Ages 23 – 89
 177 players diagnosed w/ CTE – 87%
 Median age of death 66yrs – years of football, 15
 Pre-high school- 0/2
 High school- 3/14 (21%)
 College - 48/53 (91%)
 Semi pro - 9/14 (64%)
 Canadian football - 7/8 (88%)
 NFL 110/111 - (99%)
Symptoms
 Mild
 Behavioral, mood swing- 96%
 Cognitive symptoms – 85%
 Signs of dementia – 33%
 Severe
 Behavioral, mood swings – 89%
 Cognitive symptoms – 95%
 Signs of dementia 85%
Concussion Protocol – NFL collective bargaining agreement
OWNERSHIP
 Active bs passive team owner
o Importance of limited partnership- $$
o Perks
o Tax implications (3% investment income)
o Material Participation
 Finance w/ stock or debt
o Debt – Advantage: interest expense deductible. Don’t share ownership
o Stock – Rare: Dividends from stock; not deductible … Give up some ownership
 Tax loophole in Sports: Roster Depreciation Allowance (RDA)
o Depreciate players on purchase of team
o Allocated player component of assets
o What do you want with an asset – Depreciation
o What do you want with a player - Authorization
 Franchise Rights
o Revenue Sharing
o Trademarks, names, licenses
o Regional Exclusivity (important)
 Franchises depreciate an appreciating asset
o Player contract vs player contact rights
 Contract = Salary -Years, & what they have to do to earn the money
 Contract Rights = the ownership of the right to enforce the contract and the duty to abide by it.
 BILL VEECK – 1949 CLEVELAND INDIANS
 MILWAUKEE BRAVES – 1964: MOVED TO ATLANTA
 SEILG V. IRS – 1976: BOUGHT SEATTLE PILOTS, MOVED TO MILEWAUKEE
 PAID 10.6 MIL FOR PILOTS
 ALLOCATED 94% AS PLAYER CONTRACTS TO BE AMORTIZED
 DEPRECIATED
Monopoly & Antitrust
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Monopoly: Teams control their own territory
o Charge more (Pm > Pc)
o Produce less (Qm < Qc)
o Higher prices: Hurts consumers. Helps producers
Monopsony: Players are bound to their teams as long as they’re wanted
Economic Bad:
o Pollution; Water, land, air (travel). Noise
o Unhealthy products: Steroids, concussions, musculoskeletal (joint damage)
 Risk: financial product
 Value destruction
 Quality of life
Monopoly profit maximizing output set MR=MC
Open leagues have less monopoly power
o They can’t limit the number of teams in a city
o Any team can form in a low tier and work their way up
Variable ticket pricing
 Different games can change the price
Dynamic ticket pricing
 Ability to change prices in seconds in response to actual realized demand.