1. Chapter 6 The Public Finance of Sports: The Market for Teams 1

2. I think you will enjoy reading about the history of sports in this chapter. There is not much I can add to the history. I will say that the authors do a really nice job showing when the “tide turned” and cities began to pay a greater amount to have a “pro” team in their city. The Golden Age of Baseball – 1903 to 1953 In the Golden Age of MLB there was no exit, entry or movement of teams. This was a period of stability. In 1953 and 1954 the second team in Boston, Philadelphia and St. Louis all left town for other venues. But, it was not that big a deal because the cities still had, respectively, the Red Sox, Phillies and Cardinals. The movement of the Brooklyn Dodgers in 1957 for LA may have been the beginning of when cities began to pay more for teams. The authors indicate Brooklyn lost a big part of its identity when the Dodgers left. Maybe the city (people who live in the city) would be willing to pay for identity. 2

3. An economic point here is notable as well. Team owner Walter O’Malley was making an accounting profit in Brooklyn, but had an economic loss because of what was being given up by not being in LA. Even greater accounting profit would be made with the move to LA. Over the last several decades pro teams have used the threat of a move to a new city as a way to get the existing host city to either build a new facility, or pay a good deal of the cost of the new facility. Tables 6.1 and 6.2 show proportion of costs paid with public money for Actual stadium or facility Infrastructure such as roads and utilities Support services like police and sanitation And while the city may get some revenue from parking, concessions or luxury boxes, the city has often donated the land the facility will be on and thus the city gives up rental or sales value on the land. 3

4. Why do cities do this? It is probably a more politically workable than paying a team a fixed yearly retainer and they can also require local labor be used in construction. Plus there are the tangible jobs and tax revenues. The city has the pride of being a “big league city.” The authors ask a neat question – If cities pay for the stadiums why not just buy the team? If they did then they wouldn’t have to fear the team moving. They then point out the leagues don’t like city ownership. Joan Kroc (wife of McDonald’s Ray Kroc) tried to give the San Diego Padres to the city but the move was blocked by other baseball owners. Plus, in the NFL there is a bylaw that a team has to be owned by an individual. Green Bay, by the way, is a publicly traded company and so is owned by people. 4

5. During the 1990’s and 2000’s it seems that a new stadium for a baseball team will give a team a temporary jolt of increased attendance and revenue, but when the newness wears-off the teams are back to where they were before. The authors want to make two additional points in the chapter about pro sports and the limiting of the number of teams in the league. As we saw before the leagues limit the number of teams to keep the member teams’ profit at a high level. The authors use the term FRANCHISE MONOPOLY. The league is a monopoly that will grant a franchise to a select few. Part of the thinking is that with few teams, each team can capture some benefits from the host cities. One way this may happen is with an “all or nothing demand” and the other is through the “winner’s curse.” Let’s look at each of these. 5

6. 6 All or nothing demand The authors use a good analogy to get started. Say you go to the movies and you didn’t bring any snacks (do the theaters even allow you to bring snacks in???) All they have are the large boxes of candy, like the big Milk Duds box. You would really prefer a smaller box, but you either take their big box or you get nothing. Many buy the big box. Here is what is going on (see the next slide). If the price is P1 for Milk Duds you normally want Q1 units. But they make you buy Q2 units. At P1, Q1 you have surplus of area A. The amount you pay for the extra Q2 – Q1 is made up of the areas B and C. You value the additional units by C, but you must pay B + C so consumer surplus in the amount B is lost. You would be willing to do this as long as A > B.

7. 7 P P1 A B CD Q1 Q2 Q

8. 8 What consumers would like is a box with Q1 in it and pay P1 times Q1 and have consumer surplus A. But the seller would like some of the consumer surplus so they make you take Q2 and pay P1 times Q2. If you could just stop at Q1 you would, but that option is not offered. If you take Q2 units it must be that A > B, otherwise you would be losing out on value and would be better off taking nothing. Outside the theater when you have more options in a more competitive environment you don’t buy the big box (well, some folks do, but that is because they really want to!). Cities probably don’t want to pay for any of the stadium and associated costs. But when the offer is buy some of the facilities to get the team, or have the team stay, or get nothing, some cities are willing to give up some of the consumer surplus they have.

9. 9 The Winner’s Curse Some have said be careful what you wish for, you may get it!!!! In a world where the future is unknown, folks try to make an educated guess about what might happen. They then plan their lives accordingly. As an example, let’s first consider oil in the ground. Let’s say for every $1 of actual oil in the ground, that firms A, B, C, and D estimate there is $0.50, $1, $1.20, and $1.30, respectively. If there is a bid process for drilling rights, then company D will win the bid. In this example you will note that going into the uncertain world each firm had its own view of what amount of oil would be found. Some estimates are low and some are high – the average bid is exactly correct, compared with what is actually in the ground. The winning bidder will actually be disappointed when the oil is actually found and brought out.

10. 10 The authors suggest that when a league is seeking a new team, or when cities bid on things like the Olympics, that the winning city may overestimate the true value of the team or event and actually end up getting less than they anticipated. An added part to this is that some get caught in the process of bidding and get out of control because they want to win so badly. Does the winner’s curse always hold? No, but it is something to be aware of. SO, in the chapter we get some history of sports and see that somewhere along the way that cities become a financier of sporting events. We have an economic theory as to why cities might be inclined to do this. We also see why cities may be disappointed.