Transcript Section 1 - Marietta College

Welcome to
The Economics of Sports!
Why study sports economics?
Comparing spectator sports: other industries
Gross Output by Industry (millions of current dollars)
2005
2006
2007
2008
2009
2010
29,867
32,797
36,882
38,452
37,808
39,850
Car washes 8,462
Fluid milk and butter
manufacturing 29,244
8,955
9,119
9,038
8,441
8,710
28,816
33,423
34,347
31,371
36,342
Spectator sports
Source: http://www.bea.gov/industry/xls/GDPbyInd_GO_NAICS_1998-2010.xls
Comparing spectator sports: other retail sectors
Estimated Revenue for Employer Firms (millions of current dollars)
Funeral homes/services
2004
2005
2006
2007
2008
2009
11,485
11,793
11,909
11,943
12,384
12,214
26,302
28,180
29,222
30,299
28,540
9,022
9,193
9,262
8,475
7,352
Passenger car
rental/leasing 25,033
Video tape and disc
rental 10,284
Source: http://www2.census.gov/services/sas/data/Historical/sas-09.pdf
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.
Conventional Wisdom?
o
o
o
o
o
o
o
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
Overview of Course

Review of Basic Economics


Industrial Organization



Why/how do cities finance facilities?
Labor



Do Teams/Leagues Maximize Profits?
Do/Should Antitrust Laws Apply?
Public Finance


Will largely assume you know this
Why Do Athletes Make So Much?
Unions & Discrimination
The NCAA, the Olympics, and Amateur Sports
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.
Market Model

Demand shifters






Income
Price of related goods
Consumer tastes
Market size
Price expectations
$
S1
P1
Supply shifters





Input prices
Technology
Taxes
Price expectations
Number of firms
D1
Q1
quantity
Price Elasticity

Measure of price sensitivity
%Q
E
%P
d


Elastic demand: |E| > 1
Inelastic demand: |E| < 1
• More substitutes
• Big budget items
• Longer time horizons
Elasticity…
TR = $50,000
%Q d
E
%P
$
E=?
50
TR = $48,000
40
200
0.18
E  1100 
 0.82
 10 0.22
45
D1
1000
1200
tickets
Price Controls

S1
Price Ceilings


create shortages
create black markets
P1
Pceiling
D1
Q1
Qd
shortage
tickets
Price Controls

surplus
Price Floors

Create surpluses
S1
Pfloor
P1
D1
Qd
Q1
tickets
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?
Perfect Competition

Assumptions




Many small sellers/buyers
Homogeneous product
Free entry/exit
Perfect information
 firms are price takers
Perfect Competition
$
MC
$
S
ATC
MR = P
P1
MR = MC
D
Q1
Market
Quantity
q1
Firm
quantity
Monopoly

Relevant Market


Any close substitutes?
Entry Barriers



Economies of scale
Control over key input
Government restrictions
Monopoly
Profits are maximized
where MR = MC
$
MC
Price is set off of demand
curve
ATC
P1
ATC1
MR = MC
Q1
MR
D
Quantity
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
Citizens Bank Park
43,500
Wells Fargo Center
19,537 NHL
20,444 NBA
19,500 Q
1
43,500
MR
tickets
2012 Ticket Prices
Phillies
Field
Level
Club
Level
Flyers
Game
Season
$70
$53
$38
$65
$48
$34
Cadillac Grille
Game
Season
$215
$102
$160
$89
$120
$105
$93
$81
$65
$57
$47
$37
Lower Level
$38
$30
$20
$33
$26
$16
Terrace
Mezzanine
$38
$30
$20
$34
$25
$16
Source: philadelphia.phillies.mlb.com and philadelphiaflyers.com
2012 Ticket Prices
Sixers
Cadillac Grille
Game
Season
$49
$45
$169
$109
$59
$149
$95
$55
$45
$15
$35
$15
Lower Level
Mezzanine
Source: www.nba.com/sixers/tickets/
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.
Economic Model of Attendance
A = f(W)
Attendance
A = α + βW
intercept
slope
R2 measures “quality of fit”
for entire model
A = 20 +50W
(5.63)
(9.63)
Winning Percentage
“t statistic”
2009 A
vs
2008 W
NFL
100%
110%
90%
100%
2009 % of Capacity
2009 % of Capacity
MLB
80%
70%
60%
50%
40%
30%
90%
80%
70%
60%
50%
40%
30%
20%
20%
10%
10%
0%
0%
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2008 Winning Percentage
A = 0.278 + 0.81 W
(3.14)
R2 = 0.234
0.9
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2008 Winning Percentage
A = 0.882 + 0.15 W
(4.94)
R2 = 0.430
0.8
0.9
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
Positive
Opponent’s Quality
Positive
Competing Events
Negative
Here are some actual regression results from Depken (2000, Journal of Sports Economics)
Variable
Description
Coefficient
Intercept
-1.469
PAVE
Ticket Price
-0.451*
CONAVE
Concession Price
-0.098*
FRAGE
Franchise Age
0.006
CITYTEN
City Tenure
-0.063**
STAGE
Stadium Age
-0.087*
WIN
Winning %
0.739*
LAGWIN
Last Season Win%
0.389*
POP
City Population
0.163*
INCOME
City Income
0.957*
PLAYERC
Team Payroll
0.286*
LEAGUE
League
0.055**
CAPACITY
Stadium Capacity
-0.266*
YR90
1990
0.212*
YR91
1991
0.193*
YR92
1992
0.073
YR93
1993
0.203*
YR95
1995
-0.129*
YR96
1996
0.055
R2 = 0.696
N =174
Dependent Variable is log-Attendance
* (**) indicates significance at the 0.05 (0.10) level
Std. Error
2.98
0.11
0.02
0.03
0.03
0.02
0.12
0.13
0.03
0.21
0.06
0.03
0.08
0.07
0.06
0.06
0.06
0.06
0.06
t-Statistic
0.49
4.10
4.90
0.20
2.10
4.35
6.15
2.99
5.43
4.55
4.76
1.83
2.32
3.02
3.21
1.21
3.38
2.15
0.91
Franchise Economics and
Owner Objectives
Franchise Objectives

Maximize profits?

Championships?

Ottawa Senators


Best record in NHL: 2002-2003
Declared bankruptcy: 2003

Ego premium?

Civic-mindedness?
Franchise Revenues
TR = RG + RB + RL + RS




Gate Revenue
Broadcast Revenue
Licensing Revenue
Stadium Revenue
Gate Revenues: RG
RG =  RH + (1- )RP




 = home team’s share
RH = home team gate
RP = pooled gate from all other teams
Impact of Revenue Sharing



NFL:  = 60%
MLB:  = 66%
NBA, NHL:  = 100%
Financial stability?
Competitive balance?
Player Salaries?
Broadcast Revenue: RB


National revenue is shared equally
Local revenue is not shared equally



Tradeoff: RB vs RG?
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
KC: A small market for MLB but not NFL
Green Bay would have disappeared
 blackouts
What determines broadcast rights payments?


Demand by Advertisers
Super Bowl XLVI: NBC received $3.5m for 30 seconds
Broadcast Money Trail
Sports Teams and Leagues
Programming
Rights Fees $
Media Providers (Networks, Cable, Satellite)
Ad Slots
Slot Fees $
Advertisers (Consumer Products Producers)
Revenue from Broadcast Rights Agreements
Sport
Years
Rights
Total Fees
Annual
Average
NFL
2006-2013
NBC, Fox, CBS,
ESPN, DirecTV
$23.9 billion
$3.7 billion
NBA
2009-2016
ABC/ESPN, TNT
$7.44 billion
$930 million
MLB
2006-2013
ESPN, Fox, TBS
$4.9 billion
$713 million
NASCAR
2007-2014
Fox, ABC/ESPN,
TNT
$4.4 billion
$550 million
PGA
2007-2012
CBS, NBC, Golf Ch. $3 billion
$500 million
NHL
2012-2021
Versus; NBC
$200 million
Source: Street & Smith’s Sports Business Journal
$2 billion
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
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!
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
Franchise Costs
TC = CP + CA + CT + CS + OC

Player Salaries






Over 50% of team revenues
Deferred compensation
Bonuses
Workers’ comp
Pension contributions
Player Development


Administrative




MLB and NHL
Coaches and management
Marketing
Travel
Stadium
Opportunity Costs: Profit that
could be earned in another city
Some revenue and cost averages from
professional sports in 2006
League Decisions
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
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!
League Decisions
$800

Setting the Rules
$700

# games, game format, equipment
$600
Teams

$500

$400

$530
Benefits:

Charlotte
entry fee: NFL
more revenue sources
Costs:
$300
Arizona
sharing
of league revenues
Tampa Bay
Minnesota
 Reduced geographical monopoly
Columbus
 Reduces threat of moving
$300

$200

$140
$130WHA,
$125 AFL, USFL
New leagues: ABA,
$95
$50
League-wide
Marketing
$80
$100
$0

$700
Recent
Franchise Fees
Limiting
Entry


Houston
Free-rider problem
Competitive Balance and Revenue Sharing
1993 NHL 2000 NHL 1993 MLB 1999 MLB 1995 NBA 2004 NBA 1995 NFL 1999 NFL 2001 NFL
Source: Major League Sports Teams, ODU Forecasting Project, 2001
Accounting Games

Book Profit and Depreciation
Profit = TR – TC

Costs include interest expenses
and depreciation of capital
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
San Antonio Spurs Depreciation and Tax Savings
(All figures in $ millions)
1993-94
1994-95
w/o Roster
DEP
w/Roster
DEP
w/o Roster
DEP
w/Roster
DEP
(1) NOR
4.9
4.9
0.3
0.3
(2) DEP
3.5
(3.5+10.7)
3.5
(3.5+10.7)
(3) NAD
1.4
-9.3
-3.2
-13.9
(4) Taxes
.5
0
0
0
(5) NADT
.9
-9.3
-3.2
-13.9
Tax Savings
0
3.2
1.1
4.9
Category
Assume:
• $75m purchase price for franchise
• 50% of player cost is depreciable
• 3.5 year depreciation schedule ($10.7m/yr)
• Tax rate = 35%
Vertical Integration


Beer company buys team
Media outlet buys sports team





AOL Time Warner  Atlanta Braves (1976-2007)
Tribune Company  Chicago Cubs (1977-2007)
Disney  Anaheim Angels (1999-2003) /Anaheim Ducks
Fox  LA Dodgers (1998-2004)
Double monopoly?
(1993-2005)
Vertical Integration
Downstream Firm (Media)
Upstream Firm (Team)
Broadcast rights fee
Pdown
MC
Pup
MC
MR
Qup
D
MR
D
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
Clicker Review
If a team always sells out its home games,
economists would say it is very likely that:
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b)
A surplus exists
There is excess supply
There is excess demand
Prices are too high
A
a)
If an industry is a monopoly, output is _____ and prices
are _____ than if it were perfectly competitive.
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Lo
a)
If demand for tickets to see the LA Lakers is
inelastic,
po
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b)
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.
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a)
If income decreases and tickets to see a Notre Dame
football game are a normal good, then the
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demand for tickets will decrease.
supply of tickets will increase.
demand for tickets will increase.
supply of tickets will decrease.
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a)
A negative aspect of anti-scalping laws is
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b)
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.
th
a)
If a game is not sold out, then the marginal cost to a
team of accommodating one additional fan is
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about equal to the team's payroll
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about half the cost of a ticket.
al
a)
To determine the market demand for tickets to
see the Boston Bruins play hockey we
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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.
ad
a)
The league with the most equal split of gate
receipts between the home and visiting teams is
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b)
The NFL
The NBA
Baseball’s National League
The NHL
Th
a)
Over the course of a single season, the largest
proportion of team cost is
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d)
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a)
The ownership of professional teams by media
outlets
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ts
c)
en
b)
prevents cross subsidization.
is known as horizontal integration.
is known as vertical integration.
is becoming less common.
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ev
a)
The Dallas Cowboys are such a valuable
franchise because they
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c)
n
b)
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.
ca
a)
Marketing for a league is a public good if
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d)
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c)
lt
ea
b)
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.
al
a)