4Comparing spectator sports: other industries Gross Output by Industry (millions of current dollars)200520062007200820092010Spectator sports29,86732,79736,88238,45237,80839,850Car washes8,4628,9559,1199,0388,4418,710Fluid milk and butter manufacturing29,24428,81633,42334,34731,37136,342Source:
5Comparing spectator sports: other retail sectors Estimated Revenue for Employer Firms (millions of current dollars)200420052006200720082009Funeral homes/services11,48511,79311,90911,94312,38412,214Passenger car rental/leasing25,03326,30228,18029,22230,29928,540Video tape and disc rental10,2849,0229,1939,2628,4757,352Source:
6Why study sports economics? Sports and recreation industry is a big business.Unique industry/firm specific issuesPopular and invokes emotion/fervor.Full of myths and mistaken intuition.Useful vehicle for indirect inference in other industries.
7Conventional Wisdom?The NBA conspires to ensure The Finals goes seven gamesAnti-scalping laws lower prices at the ticket windowThe DH rule increases offensive output in the ALHosting an Olympics is guaranteed to increase local economic activityAfter signing a big-salary contract, players play worseThe low number of black NFL coaches is evidence of racismHigher ticket prices are caused by player salaries
8Overview of Course Review of Basic Economics Industrial Organization Will largely assume you know thisIndustrial OrganizationDo Teams/Leagues Maximize Profits?Do/Should Antitrust Laws Apply?Public FinanceWhy/how do cities finance facilities?LaborWhy Do Athletes Make So Much?Unions & DiscriminationThe NCAA, the Olympics, and Amateur Sports
9Economics Review Study of choices under constraints Who makes choices? HouseholdsFirmsGovernmentsWe try to model decisions in simplified frameworks to isolate the issues that influence decision making.
10Market Model Demand shifters $ S1 Supply shifters P1 D1 Q1 Income Price of related goodsConsumer tastesMarket sizePrice expectationsSupply shiftersInput pricesTechnologyTaxesNumber of firms$S1P1D1Q1quantity
11Price Elasticity Measure of price sensitivity Elastic demand: |E| > 1Inelastic demand: |E| < 1More substitutesBig budget itemsLonger time horizons
15Profit Maximization p = TR – TC p = Pq – [FC + VC] Profit maximizing output rule: MR=MCWhat output do the Yankees produce? [tickets? games? wins?]What kind of cost is Alex Rodriguez’s salary?
16Perfect Competition Assumptions Many small sellers/buyers Homogeneous productFree entry/exitPerfect information firms are price takers
17Perfect Competition $ $ S D Market Firm MC ATC MR = P P1 q1 Q1 MR = MC QuantityquantityMarketFirm
18Monopoly Relevant Market Entry Barriers Any close substitutes? Economies of scaleControl over key inputGovernment restrictions
19Monopoly $ Profits are maximized where MR = MC Price is set off of demandcurve$MCATCP1ATC1MR = MCDQ1QuantityMR
20Pricing Strategy: Phillies vs Flyers Assume each is a monopolyMC a backward “L”Does it pay to sell out?$MC2MC1P2P1D19,500Q143,500ticketsCitizens Bank Park43,500Wells Fargo Center19,537 NHL20,444 NBAMR
212012 Ticket Prices Phillies Flyers Game Season Field Level $70 $53 $38 $65$48$34Cadillac Grille$215$102Club Level$30$20$33$26$16Lower Level$160$89Terrace$25Mezzanine$120$105$93$81$57$47$37Source: philadelphia.phillies.mlb.com and philadelphiaflyers.com
222012 Ticket Prices Sixers Game Season Cadillac Grille $49 $45 Lower Level$169$109$59$149$95$55Mezzanine$15$35Source:
23Regression AnalysisRegression is a form of statistical analysis of economic behavior and theory.Regression analysis attempts to explain the variance of a particular variable of interest.
24Economic Model of Attendance A = f(W)A = α + βWA = WAttendanceinterceptslopeR2 measures “quality of fit”for entire modelWinning Percentage(5.63)(9.63)“t statistic”
252009 A vs 2008 WMLBNFLA = WA = W(3.14)(4.94)R2 = 0.234R2 = 0.430
26Regression ExampleConsider a model of baseball attendance. We think that the following items might influence overall team attendance in the following waysVariableSign of RelationshipPriceNegativePopulationPositiveDay of WeekAmbiguousTeam QualityOpponent’s QualityCompeting Events
27Here are some actual regression results from Depken (2000, Journal of Sports Economics) VariableDescriptionCoefficientStd. Errort-StatisticIntercept-1.4692.980.49PAVETicket Price-0.451*0.114.10CONAVEConcession Price-0.098*0.024.90FRAGEFranchise Age0.0060.030.20CITYTENCity Tenure-0.063**2.10STAGEStadium Age-0.087*4.35WINWinning %0.739*0.126.15LAGWINLast Season Win%0.389*0.132.99POPCity Population0.163*5.43INCOMECity Income0.957*0.214.55PLAYERCTeam Payroll0.286*0.064.76LEAGUELeague0.055**1.83CAPACITYStadium Capacity-0.266*0.082.32YR9019900.212*0.073.02YR9119910.193*3.21YR9219920.0731.21YR9319930.203*3.38YR951995-0.129*2.15YR9619960.0550.91R2 = 0.696N =174Dependent Variable is log-Attendance* (**) indicates significance at the 0.05 (0.10) level
31Gate Revenues: RG RG = RH + (1- )RP Impact of Revenue Sharing = home team’s shareRH = home team gateRP = pooled gate from all other teamsImpact of Revenue SharingFinancial stability?Competitive balance?Player Salaries?NFL: = 60%MLB: = 66%NBA, NHL: = 100%
32Broadcast Revenue: RB National revenue is shared equally Local revenue is not shared equallyKC: A small market for MLB but not NFLGreen Bay would have disappearedTradeoff: RB vs RG? blackoutsWhat determines broadcast rights payments?Demand by AdvertisersSuper Bowl XLVI: NBC received $3.5m for 30 seconds
34Revenue from Broadcast Rights Agreements SportYearsRightsTotal FeesAnnual AverageNFLNBC, Fox, CBS, ESPN, DirecTV$23.9 billion$3.7 billionNBAABC/ESPN, TNT$7.44 billion$930 millionMLBESPN, Fox, TBS$4.9 billion$713 millionNASCARFox, ABC/ESPN, TNT$4.4 billion$550 millionPGACBS, NBC, Golf Ch.$3 billion$500 millionNHLVersus; NBC$2 billion$200 millionSource: Street & Smith’s Sports Business Journal
35Stadium Revenue: RS Concessions Parking Naming rights: pros; colleges; individualsLuxury seatsdon't count as gate, therefore, don't have to shareNFL Example:luxury suite rents for $500,000 per year20 seatsclaim each seat is worth $50 Team only shares = 0.4 * 20 * $50 * 8 games = $3200
36Oilers: Houston Nashville Browns: Cleveland Baltimore Question: Why have we seen a move to small markets by NFL teams?Rams: LA St. LouisRaiders: LA OaklandOilers: Houston NashvilleBrowns: Cleveland BaltimoreRevenue Sharing is the key!
37Licensing Revenue: RL Generally shared with all teams Cowboys broke ranks with NFL in 1995 by signing Pepsi for stadium sponsorshipNFL & Pepsi: $2.3b over 10 years
38Franchise Costs + OC TC = CP + CA + CT + CS Player Salaries Over 50% of team revenuesDeferred compensationBonusesWorkers’ compPension contributionsPlayer DevelopmentMLB and NHLAdministrativeCoaches and managementMarketingTravelStadiumOpportunity Costs: Profit that could be earned in another city
39Some revenue and cost averages from professional sports in 2006
40League Decisions Cincinnati Red Stockings (1869) National League (1876)$0.50 ticketsNo Sunday gamesNo beerAmerican Association (1882)$0.25 tickets on Sunday with beer!
41League Decisions Setting the Rules Limiting Entry # games, game format, equipmentLimiting EntryTeamsBenefits:entry fee: NFLmore revenue sourcesCosts:sharing of league revenuesReduced geographical monopolyReduces threat of movingNew leagues: ABA, WHA, AFL, USFLLeague-wide MarketingFree-rider problemCompetitive Balance and Revenue SharingHoustonCharlotteArizonaTampa BayMinnesotaColumbusSource: Major League Sports Teams, ODU Forecasting Project, 2001
42Accounting Games Book Profit and Depreciation Profit = TR – TC Corporate taxes depend on book profitPaying high administrative costs reduces book profitInterest is tax deductible (dividends are not)Player contracts are treated as depreciable assetsBill VeeckSan Antonio Spurs exampleCosts include interest expensesand depreciation of capital
43San Antonio Spurs Depreciation and Tax Savings (All figures in $ millions)Categoryw/o Roster DEPw/Roster DEP(1) NOR4.90.3(2) DEP3.5( )(3) NAD1.4-9.3-3.2-13.9(4) Taxes.5(5) NADT.9Tax Savings3.21.1Assume:$75m purchase price for franchise50% of player cost is depreciable3.5 year depreciation schedule ($10.7m/yr)Tax rate = 35%
44Vertical Integration Beer company buys team Media outlet buys sports teamAOL Time Warner Atlanta Braves ( )Tribune Company Chicago Cubs ( )Disney Anaheim Angels ( ) /Anaheim Ducks ( )Fox LA Dodgers ( )Double monopoly?
45Vertical Integration Downstream Firm (Media) Upstream Firm (Team) Broadcast rights feePdownMCPupMCDDMRMRQupQdownVertically integrated firm sets transfer price to allocate profit acrosscombined entity Set low broadcast rights fee to reduce team profits in order to pleadpoverty during lobbying for public subsidy
47If a team always sells out its home games, economists would say it is very likely that: A surplus existsThere is excess supplyThere is excess demandPrices are too high
48If an industry is a monopoly, output is _____ and prices are _____ than if it were perfectly competitive.Lower, lowerHigher, lowerLower, higherHigher, higher
49If 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.
50If 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.
51A 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.
52If 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 payrollessentially zero.about half the cost of a ticket.
53To 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.
54The league with the most equal split of gate receipts between the home and visiting teams is The NFLThe NBABaseball’s National LeagueThe NHL
55Over the course of a single season, the largest proportion of team cost is zero.fixed.variable.shared by all teams in the league.
56The ownership of professional teams by media outlets prevents cross subsidization.is known as horizontal integration.is known as vertical integration.is becoming less common.
57The 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.
58Marketing 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.