Chapter 9 The Economics of Professional Sports: What Is the Real Score? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

9-2 The Professional Sports Business Organizational Structure  Privately owned teams  Professional sports leagues  League franchises Teams and Players  Productivity is visible and easily measured  Salary issues  Contract issues

9-3 The Product Market Cooperation among teams  Professional sports leagues as cartels Baseball’s antitrust exemption

9-4 Characteristics of Successful Cartels Cartel members responsible for most of output generated by market Cartel members produce fairly homogeneous outputs Cartel must be able to divide market into territories controlled by each member and to establish production quotas Cartel must be able to prevent cheating by members

9-5 Coordinated Behavior Revenue sharing Joint marketing

9-6 Pricing and Output for Broadcast Rights Units of Output Total Cost ($000) Marginal Cost ($000) Price ($000) Total Revenue ($000) Marginal Revenue ($000) Profits ($000)

9-7 Pricing and Output for a Cartel Quantity per unit of time Price ($000) MC D MR D C A B

9-8 The Number and Location of Teams Baseball’s attempt to close “small- market” teams Incentive to relocate teams

9-9 The Stadium Controversy Public financing of stadium construction and renovation Justification for public financing  Satisfy local public’s demand for sports entertainment  Status for community  jobs and tax revenue  Evidence on impact of sports franchises

Teams, Players, and Salaries in Professional Sports, NFLMLBNBANHL Number of Teams3230 Number of Players per Team Average Team Revenue (millions)$221.56$182.96$125.50$91.56 Average Player Salary (millions)$1.74$3.15$5.36$1.91 Source:

9-11 The Employment of Players Annual draft of new players Exclusive rights to player services for a period of time No “tampering” rules

9-12 Monopsony Monopsony – market with only one employer Why are sports leagues monopsonies?  Immobility of new players who have been drafted  Highly specialized skills of players

9-13 Wages and Employment in a Monopsony Number of Players Wage ($000) Total Cost of Labor ($000) Marginal Cost of Labor ($000) Marginal Revenue Product ($000)

9-14 Wage and Employment Determination for a Monopsonist Labor hired per unit of time Wage $ S MRP = D C A B MC L Monopsonistic Profit

9-15 Free Agency Reserve clause Limited reserve clause and free agency

Mean MLB Salaries Since Free Agency 9-16 Source: Major League Baseball

9-17 Labor Disputes Labor unions Strikes and lockouts Salary caps Revenue sharing

9-18 Do Professional Athletes Earn Their Pay? How does player performance contribute to team revenue? Fans and willingness to pay Does anybody deserve such high pay?

9-19 Illicit Drugs and Professional Sports Each sports league has a substance abuse problem  Bans on “recreational” drugs  Bans in performance-enhancing drugs Economic analysis of why players use performance- enhancing drugs  Expected benefits versus expected costs How to reduce the use of performance-enhancing drugs  Forfeiture of salary  Increase probability of detection

9-20 The Case of Major League Soccer MLS a single-entity leagueMLS  All teams owned by a single corporation  Investor-operators  Broadcast rights, licensing, merchandizing centrally controlled  Employment contracts between player and league  League allocates players to teams Is MLS a monopsony? WNBA