1. Demand and Revenue Concepts 1

2. I want to start this section by pointing out some of the characteristics about sports that attracts people. The author points out that some of these ideas are athletic prowess, quality of teams and competition, commonality and winning. Let’s consider each of these ideas. Athletic prowess – who had more athletic prowess, Michael Jordan or Kirk Hinrich (Sioux City kid in the NBA)? Sure, MJ had more prowess (ability) than Hinrich (MJ had more than most, if not all – but they say Oscar Robertson was one heck of a player – he averaged a triple double one year.) Quality of teams and competition Here we consider the absolute level of quality and the relative level of quality. 2

3. Think about your favorite sport. What happens to the absolute level of quality as you view children, then high school, then college and then professional players? The absolute quality rises. (I also wonder about the increment to quality as the age of the player progresses.) Maybe you have been to a high school game were the teams are fairly evenly matched. The game can be fairly exciting, right? This idea would be about the relative quality of play. In terms of quality of play, the author points out the uncertainty of outcome hypothesis. This is the idea that fans really like it when a league has a degree of parity so that any team has a decent chance to win the next game over a challenging opponent. 3

4. Commonality is the personal relationships we form around our enjoyment of sports. Winning is a major reason we like our sports teams! Economics People have wants (all we really need is some basic food, clothing and shelter). We can only harness so many resources today. Many economics books start with the idea that the wants of people are some much larger than the resources available. Scarcity is the summary word used to indicate the simultaneous nature of seemingly unlimited wants and limited resources. By the way, the 4 basic resources in an economy are land, labor, capital, and entrepreneurial ability. 4

5. The author points out that a scarce commodity is one that there is not enough of freely available to satisfy all desires. The author says athletic prowess, quality, commonality and winning are all scare commodities. In sports we may pay to see these things. I want to have you consider an idea the author raises on page 15 of the text. Here he writes, “The level of competition that particular fans will eventually enjoy will depend on their willingness to pay for team quality. Those willing to pay more get to enjoy a higher level of quality than those willing to pay less.” I am not sure what to do with this idea, I just want to make a note of it. I think the author is implying minor league towns are such because they are not willing to pay to be a big league town. This may be true, although I have a hunch some would like to join the big leagues but are denied entry. 5

6. Rationing Since commodities are scarce (limited resources, unlimited desire to have them), a mechanism must be devised to decide who will get the made items (the mechanism is the rationing device – how are cookies rationed at your house – first come first served?). The rationing device often used is the price system. In a price system, those willing and able to pay the price often get the good. Again, the author has a sentence in the book that I am drawn to, but not totally sure about. On page 19 he writes, “The more fans in a given location who are willing to pay for quality, the higher the quality of the team they will get to enjoy.” 6

7. 7 Ticket scalping as a rationing device What if ticket prices to an event are “low?” Some other rationing device must also be devised. A popular device in sports is to make people wait in line to get a ticket. So, to see the game you have to wait in line just for the privilege to buy a ticket. Scalping is way for folks who don’t want to wait in line to still get a ticket. People are willing to pay to avoid waiting in line. Next we switch to the thinking about how the characteristics we look for in sports have an influence on the revenues of the team. We do this by focusing on demand.

8. 8 Demand Demand for a good or service is an indication of what consumers are willing and able to pay for the good or service. In the book we see A means attendance at a game and is the usual Q or quantity we have in the demand relationship. You could say demand has the form A = c – gP, Where A = quantity of attendance, c = all the things that influence attendance other than the price, P = the price of attendance, and g = a term that makes an adjustment to how the price affects the attendance.

9. 9 So, we had the demand as A = c – gP. Since we normally have the price P on the “y axis” in a graph we can rewrite the demand in what some call the inverse form as P = (c/g) – (1/g)A, or if we use a = c/g and b = 1/g and have P = a – bA, Where a is called the y intercept and b is the slope. I like the form A = c – gP because we see A (quantity attending) is influenced by the price and c represents all the other things that influence attendance. But in the inverse form P = a – bA the term a = c/g includes the c part. On the next slide let’s see the demand curve in a graph.

10. 10 P A (0, a) In the graph we have the line P = a – bA. Each point on the line has an ordered pair (the A value first and the P value second). At the y-intercept A = 0 and then P = a. At the x-intercept A = a/b and P = 0. The slope of the line is –b. (a/b, 0)

11. 11 Market Power The author mentions that in sports, even in youth sports, teams occupy or get assigned exclusive geographic territory. This means they are the only “home” team in that territory. From an economic point of view this means the team is a price maker and the demand for attendance has a downward slope to it. While it may have to be concerned with what substitutes there are in the geographic home area, the substitutes are not perfect (there is no other seller of the exact same product in the area) and thus the team has some power to control the price. Consumers have a demand for the good and the demand is what I had on the previous screen. Let’s note that as the price moves in one direction the quantity demanded for attendance moves in the opposite direction. This is the law of demand!

12. 12 P A (0, a) Here I show that if the price set by the team is lowered, the quantity demanded would rise. Also note that if there is a price change there is movement along the demand curve. So, if price changes we have a movement along the demand curve and talk about the A change as a change in the quantity demanded. (a/b, 0)

13. 13 P A (0, a) So, we have indicated a price change can lead to a change in the quantity demanded and we move along the curve. Now we want to talk about the whole curve shifting. If the whole curve shifts we talk about a change in demand. If demand shifts up or right we have an increase in demand and if it shifts left or down we have a decrease in demand. (a/b, 0)

14. 14 What can shift the demand or lead to a change in demand? 1) The characteristics mentioned earlier, like athletic prowess and quality of play have an influence on a consumer’s preference or taste for sports. For example, for many when the quality of play rises the demand rises and thus we see the demand curve shift to the right. 2) As the income of fans change the demand can change. We really have to types of goods in this context to think about: normal and inferior goods. Example: Chicago has an NHL team and a minor league hockey team. As income rises in Chicago some fans may demand less of the minor league team and more of the NHL teams tickets. With higher income a higher demand such as for the NHL team indicates the NHL attendance is a normal good (with more income folks want more of the good), while a lower demand as income rises indicates the demand for the minor league team is inferior.

15. 15 3) The price of other goods can make the demand for attendance change. Think about paying for parking. If the price to pay for parking, a good that compliments attending games, goes up, some people will stop going to the game and thus demand falls. (So, the change in the price of a compliment shifts demand in the opposite direction.) But, think about movie tickets in town going up in price. For some a higher movie ticket price may cause some to stop going to the movies and just pick up on the attending sporting events. The movie is a substitute (maybe a weak one) for sports and the price of the movie changing can change the demand for the sports events. 4) The population in the area has an impact on demand. As the population rises the home team usually picks up some of that in fan base and thus the demand rises.

16. 16 P A (0, a) (a/b, 0) Here I show two demand curves. Both have the property that if the price should change there will be movement along the curve and will say there is a change in the quantity demanded. The curve on the right shows a higher demand because maybe the population grew or fans have become more interested in the absolute level of play of the home team. Note that as the demand grows the price could also be changed. A higher price could be associated with a higher attendance. This would not be a contradiction of the downward slope of any one demand curve.