1. Welcome to The Economics of Sports!

3. Why study sports economics?

4. 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
39,850
Car 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:

5. 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
12,214
Passenger 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:

6. 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.

7. Conventional Wisdom?
The NBA conspires to ensure The Finals goes seven games
Anti-scalping laws lower prices at the ticket window
The DH rule increases offensive output in the AL
Hosting an Olympics is guaranteed to increase local economic activity
After signing a big-salary contract, players play worse
The low number of black NFL coaches is evidence of racism
Higher ticket prices are caused by player salaries

8. Overview of Course Review of Basic Economics Industrial Organization
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

9. 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.

10. Market Model Demand shifters $ S1 Supply shifters P1 D1 Q1 Income
Price of related goods
Consumer tastes
Market size
Price expectations
Supply shifters
Input prices
Technology
Taxes
Number of firms $ S1 P1 D1 Q1
quantity

11. Price Elasticity Measure of price sensitivity
Elastic demand: |E| > 1
Inelastic demand: |E| < 1
More substitutes
Big budget items
Longer time horizons

12. Elasticity… D1 TR = $50,000 $ E = ? 50 TR = $48,000 40 1000 1200
tickets

13. Price Controls Price Ceilings S1 create shortages create black markets
Pceiling D1 Q1 Qd
tickets
shortage

14. Price Controls Price Floors S1 Create surpluses D1 surplus Pfloor P1Qd Q1
tickets

15. 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?

16. Perfect Competition Assumptions Many small sellers/buyers
Homogeneous product
Free entry/exit
Perfect information
 firms are price takers

17. Perfect Competition $ $ S D Market Firm MC ATC MR = P P1 q1 Q1 MR = MC
Quantity
quantity
Market
Firm

18. Monopoly Relevant Market Entry Barriers Any close substitutes?
Economies of scale
Control over key input
Government restrictions

19. Monopoly $ Profits are maximized where MR = MC
Price is set off of demand
curve $ MC
ATC P1
ATC1
MR = MC D Q1
Quantity MR

20. Pricing Strategy: Phillies vs Flyers
Assume each is a monopoly
MC a backward “L”
Does it pay to sell out? $
MC2
MC1 P2 P1 D
19,500 Q1
43,500
tickets
Citizens Bank Park
43,500
Wells Fargo Center
19,537 NHL
20,444 NBA MR

21. 2012 Ticket Prices Phillies Flyers Game Season Field Level $70 $53 $38
$65
$48
$34
Cadillac Grille
$215
$102
Club Level
$30
$20
$33
$26
$16
Lower Level
$160
$89
Terrace
$25
Mezzanine
$120
$105
$93
$81
$57
$47
$37
Source: philadelphia.phillies.mlb.com and philadelphiaflyers.com

22. 2012 Ticket Prices Sixers Game Season Cadillac Grille $49 $45
Lower Level
$169
$109
$59
$149
$95
$55
Mezzanine
$15
$35
Source:

23. 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.

24. Economic Model of Attendance
A = f(W)
A = α + βW
A = W
Attendance
intercept
slope
R2 measures “quality of fit”
for entire model
Winning Percentage
(5.63)
(9.63)
“t statistic”

25. 2009 A vs 2008 W
MLB
NFL
A = W
A = W
(3.14)
(4.94)
R2 = 0.234
R2 = 0.430

26. 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
Opponent’s Quality
Competing Events

27. Here are some actual regression results from Depken (2000, Journal of Sports Economics)
Variable
Description
Coefficient
Std. Error
t-Statistic
Intercept
-1.469
2.98
0.49
PAVE
Ticket Price
-0.451*
0.11
4.10
CONAVE
Concession Price
-0.098*
0.02
4.90
FRAGE
Franchise Age
0.006
0.03
0.20
CITYTEN
City Tenure
-0.063**
2.10
STAGE
Stadium Age
-0.087*
4.35
WIN
Winning %
0.739*
0.12
6.15
LAGWIN
Last Season Win%
0.389*
0.13
2.99
POP
City Population
0.163*
5.43
INCOME
City Income
0.957*
0.21
4.55
PLAYERC
Team Payroll
0.286*
0.06
4.76
LEAGUE
League
0.055**
1.83
CAPACITY
Stadium Capacity
-0.266*
0.08
2.32
YR90
1990
0.212*
0.07
3.02
YR91
1991
0.193*
3.21
YR92
1992
0.073
1.21
YR93
1993
0.203*
3.38
YR95
1995
-0.129*
2.15
YR96
1996
0.055
0.91
R2 = 0.696
N =174
Dependent Variable is log-Attendance
* (**) indicates significance at the 0.05 (0.10) level

28. Franchise Economics and Owner Objectives

29. Franchise Objectives Maximize profits? Championships? Ego premium?
Ottawa Senators
Best record in NHL:
Declared bankruptcy: 2003
Ego premium?
Civic-mindedness?

30. Franchise Revenues TR = RG + RB + RL + RS Gate Revenue
Broadcast Revenue
Licensing Revenue
Stadium Revenue

31. Gate Revenues: RG RG =  RH + (1- )RP Impact of Revenue Sharing
 = 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%

32. Broadcast Revenue: RB 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

33. Broadcast Money Trail

34. Revenue from Broadcast Rights Agreements
Sport
Years
Rights
Total Fees
Annual Average
NFL
NBC, Fox, CBS, ESPN, DirecTV
$23.9 billion
$3.7 billion
NBA
ABC/ESPN, TNT
$7.44 billion
$930 million
MLB
ESPN, Fox, TBS
$4.9 billion
$713 million
NASCAR
Fox, ABC/ESPN, TNT
$4.4 billion
$550 million
PGA
CBS, NBC, Golf Ch.
$3 billion
$500 million
NHL
Versus; NBC
$2 billion
$200 million
Source: Street & Smith’s Sports Business Journal

35. 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

36. Oilers: Houston  Nashville Browns: Cleveland  Baltimore
Question: Why have we seen a move to small markets by NFL teams?
Rams: LA  St. Louis
Raiders: LA  Oakland
Oilers: Houston  Nashville
Browns: Cleveland  Baltimore
Revenue Sharing is the key!

37. 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

38. Franchise Costs + OC 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

39. Some revenue and cost averages from professional sports in 2006

40. 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!

41. League Decisions Setting the Rules Limiting Entry
# 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
Houston
Charlotte
Arizona
Tampa Bay
Minnesota
Columbus
Source: Major League Sports Teams, ODU Forecasting Project, 2001

42. 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 expenses
and depreciation of capital

43. San Antonio Spurs Depreciation and Tax Savings
(All figures in $ millions)
Category
w/o Roster DEP
w/Roster DEP
(1) NOR
4.9
0.3
(2) DEP
3.5
( )
(3) NAD
1.4
-9.3
-3.2
-13.9
(4) Taxes .5
(5) NADT .9
Tax Savings
3.2
1.1
Assume:
$75m purchase price for franchise
50% of player cost is depreciable
3.5 year depreciation schedule ($10.7m/yr)
Tax rate = 35%

44. Vertical Integration Beer company buys team
Media outlet buys sports team
AOL Time Warner  Atlanta Braves ( )
Tribune Company  Chicago Cubs ( )
Disney  Anaheim Angels ( ) /Anaheim Ducks ( )
Fox  LA Dodgers ( )
Double monopoly?

45. Vertical Integration Downstream Firm (Media) Upstream Firm (Team)
Broadcast rights fee
Pdown MC
Pup MC D D MR MR
Qup
Qdown
Vertically integrated firm sets transfer price to allocate profit across
combined entity
 Set low broadcast rights fee to reduce team profits in order to plead
poverty during lobbying for public subsidy

46. Clicker Review

47. If a team always sells out its home games, economists would say it is very likely that:
A surplus exists
There is excess supply
There is excess demand
Prices are too high

48. If an industry is a monopoly, output is _____ and prices are _____ than if it were perfectly competitive.
Lower, lower
Higher, lower
Lower, higher
Higher, higher

49. If demand for tickets to see the LA Lakers is inelastic,
Fans will respond to a price increase with a proportional decrease in quantity demanded.
fans will respond to a price increase with a less than proportional decrease in quantity demanded.
fans will respond to a price increase with an infinitely large decrease in quantity demanded.
fans will respond to a price increase with a more than proportional decrease in quantity demanded.

50. If income decreases and tickets to see a Notre Dame football game are a normal good, then the
demand for tickets will decrease.
supply of tickets will increase.
demand for tickets will increase.
supply of tickets will decrease.

51. A negative aspect of anti-scalping laws is
they prevent sell-outs.
they cause people to pay more than they are willing to in order to get tickets.
they prevent the market from matching willing buyers and sellers.
they hurt ticket agencies.

52. If a game is not sold out, then the marginal cost to a team of accommodating one additional fan is
almost infinite.
about equal to the team's payroll
essentially zero.
about half the cost of a ticket.

53. To determine the market demand for tickets to see the Boston Bruins play hockey we
add the marginal revenue at each price.
divide the revenue of the team by the number of fans.
add the price consumers are willing to pay at each quantity.
add the quantity demanded at each price.

54. The league with the most equal split of gate receipts between the home and visiting teams is
The NFL
The NBA
Baseball’s National League
The NHL

55. Over the course of a single season, the largest proportion of team cost is
zero.
fixed.
variable.
shared by all teams in the league.

56. The ownership of professional teams by media outlets
prevents cross subsidization.
is known as horizontal integration.
is known as vertical integration.
is becoming less common.

57. The Dallas Cowboys are such a valuable franchise because they
can tap into both U.S. and Mexican media markets.
have a tradition of winning that attracts fans from all over.
have done an expert job of managing the salary cap.
have so many luxury boxes.

58. Marketing for a league is a public good if
all teams pay for the cost of advertising for small market teams.
all teams pay an equal share of the cost of advertising campaigns.
all teams derive benefit from an advertising campaign.
all teams pay some share of the cost of advertising campaigns.