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Welcome to The Economics of Sports!

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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

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 P1
Qd 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: and

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.

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