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Welcome to The Economics of Sports!. Why study sports economics?

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Presentation on theme: "Welcome to The Economics of Sports!. Why study sports economics?"— Presentation transcript:

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) 200520062007200820092010 Spectator sports 29,86732,79736,88238,45237,80839,850 Car washes 8,4628,9559,1199,0388,4418,710 Fluid milk and butter manufacturing29,24428,81633,42334,34731,37136,342 Source:

5 Comparing spectator sports: other retail sectors Estimated Revenue for Employer Firms (millions of current dollars) 200420052006200720082009 Funeral homes/services 11,48511,79311,90911,94312,38412,214 Passenger car rental/leasing 25,03326,30228,18029,22230,29928,540 Video tape and disc rental10,2849,0229,1939,2628,4757,352 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? 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 AL o Hosting an Olympics is guaranteed to increase local economic activity o After signing a big-salary contract, players play worse o The low number of black NFL coaches is evidence of racism o Higher ticket prices are caused by player salaries

8 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

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 D1D1 S1S1 Q1Q1 P1P1 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 $

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… D1D1 tickets $ 50 1000 40 1200 TR = $50,000 TR = $48,000 E = ?

13 Price Controls Price Ceilings create shortages create black markets D1D1 S1S1 tickets Q1Q1 P1P1 P ceiling QdQd shortage

14 Price Controls Price Floors Create surpluses D1D1 S1S1 tickets Q1Q1 P1P1 P floor QdQd surplus

15 Profit Maximization = TR – TC = Pq – [FC + VC] Profit maximizing output rule: MR=MC What output do the Yankees produce? [tickets? games? wins?] What kind of cost is Alex Rodriguezs 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 MR = P MC ATC MarketFirm Q1Q1 q1q1 P1P1 $ Quantity quantity $ MR = MC

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

19 Monopoly D MR MC ATC Q1Q1 P1P1 ATC 1 Profits are maximized where MR = MC Price is set off of demand curve Quantity $ MR = MC

20 Pricing Strategy: Phillies vs Flyers Assume each is a monopoly MC a backward L Does it pay to sell out? $ MR D MC 1 P1P1 Q1Q1 Citizens Bank Park 43,500 Wells Fargo Center 19,537 NHL 20,444 NBA MC 2 P2P2 tickets 43,50019,500

21 PhilliesFlyers GameSeasonGameSeason 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: and

22 Sixers GameSeason Cadillac Grille$49$45 Lower Level $169 $109 $59 $149 $95 $55 Mezzanine $45 $15 $35 $15 2012 Ticket Prices 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 = 20 +50W Winning Percentage Attendance interceptslope (5.63)(9.63) R 2 measures quality of fit for entire model t statistic

25 MLB 2009 A vs 2008 W NFL R 2 = 0.234R 2 = 0.430 A = 0.278 + 0.81 WA = 0.882 + 0.15 W (3.14)(4.94)

26 Regression Example Consider a model of baseball attendance. We think that the following items might influence overall team attendance in the following ways VariableSign of Relationship PriceNegative PopulationPositive Day of WeekAmbiguous Team QualityPositive Opponents QualityPositive Competing EventsNegative

27 Here are some actual regression results from Depken (2000, Journal of Sports Economics) VariableDescriptionCoefficientStd. Errort-Statistic Intercept-1.4692.980.49 PAVETicket Price -0.451*0.114.10 CONAVEConcession Price -0.098*0.024.90 FRAGEFranchise Age0.0060.030.20 CITYTENCity Tenure -0.063**0.032.10 STAGEStadium Age -0.087*0.024.35 WINWinning % 0.739*0.126.15 LAGWINLast Season Win% 0.389*0.132.99 POPCity Population 0.163*0.035.43 INCOMECity Income 0.957*0.214.55 PLAYERCTeam Payroll 0.286*0.064.76 LEAGUELeague 0.055**0.031.83 CAPACITYStadium Capacity -0.266*0.082.32 YR901990 0.212*0.073.02 YR911991 0.193*0.063.21 YR9219920.0730.061.21 YR931993 0.203*0.063.38 YR951995 -0.129*0.062.15 YR9619960.0550.060.91 R 2 = 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? Ottawa Senators Best record in NHL: 2002-2003 Declared bankruptcy: 2003 Ego premium? Civic-mindedness?

30 Franchise Revenues TR = R G + R B + R L + R S Gate Revenue Broadcast Revenue Licensing Revenue Stadium Revenue

31 Gate Revenues: R G R G = R H + (1- )R P = home teams share R H = home team gate R P = pooled gate from all other teams Impact of Revenue Sharing Financial stability? Competitive balance? Player Salaries? NFL: = 60% MLB: = 66% NBA, NHL: = 100%

32 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: R B vs R G ? blackouts What determines broadcast rights payments? Demand by Advertisers Super Bowl XLVI: NBC received $3.5m for 30 seconds Broadcast Revenue: R B

33 Broadcast Money Trail

34 SportYearsRightsTotal FeesAnnual Average NFL2006-2013NBC, Fox, CBS, ESPN, DirecTV $23.9 billion$3.7 billion NBA2009-2016ABC/ESPN, TNT$7.44 billion$930 million MLB2006-2013ESPN, Fox, TBS$4.9 billion$713 million NASCAR2007-2014Fox, ABC/ESPN, TNT $4.4 billion$550 million PGA2007-2012CBS, NBC, Golf Ch.$3 billion$500 million NHL2012-2021Versus; NBC$2 billion$200 million Source: Street & Smiths Sports Business Journal Revenue from Broadcast Rights Agreements

35 Stadium Revenue: R S 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 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?

37 Licensing Revenue: R L 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 TC = C P + C A + C T + C S 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

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 # games, game format, equipment Limiting Entry Teams Benefits: entry fee: NFLNFL 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 Minnesota Columbus Arizona Tampa Bay Charlotte Houston

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) 1993-941994-95 Categoryw/o Roster DEP w/Roster DEP w/o Roster DEP w/Roster DEP (1) NOR4.9 0.3 (2) DEP3.5(3.5+10.7)3.5(3.5+10.7) (3) NAD1.4-9.3-3.2-13.9 (4) Taxes.5000 (5) NADT.9-9.3-3.2-13.9 Tax Savings03.21.14.9 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 (1976-2007) Tribune Company Chicago Cubs (1977-2007) Disney Anaheim Angels (1999-2003) /Anaheim Ducks (1993-2005) Fox LA Dodgers (1998-2004) Double monopoly?

45 D MR D MC Q up P up MC P down Q down Upstream Firm (Team) Downstream Firm (Media) 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 Vertical Integration Broadcast rights fee

46 Clicker Review

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

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

49 If demand for tickets to see the LA Lakers is inelastic, 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.

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

51 A negative aspect of anti-scalping laws is 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.

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

53 To determine the market demand for tickets to see the Boston Bruins play hockey we 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.

54 a) The NFL b) The NBA c) Baseballs National League d) The NHL The league with the most equal split of gate receipts between the home and visiting teams is

55 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

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

57 The Dallas Cowboys are such a valuable franchise because they 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.

58 Marketing for a league is a public good if 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.

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