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Econ 3306 – SPORTS ECONOMICS Supply & Demand 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 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 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 o 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 o 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 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 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 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 Profit = TR – TC Wi = Winning % Max profit is the maximum distance between TR & the TC curve. (TR slope = TC slope) REVENUE & COST 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 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 o o o 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 TV & ATTENDENCE o o LICENSING REVENUE o o o Centralized No competition Apparel Items to licenses Player name Likeness Uniform # Signature Photos Original Art Voices Venue Revenue o o o 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 o 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 Importance of a League o o o o o o o 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 o o o 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 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.