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Transcript of Monopoly and Antitrust. Inefficiency of Monopoly Competitive Outcome P = P C = MC Q = Q C Monopoly...
![Page 1: Monopoly and Antitrust. Inefficiency of Monopoly Competitive Outcome P = P C = MC Q = Q C Monopoly Outcome P M > P C = MC Q = Q M < Q C MR D MC QMQM PMPM.](https://reader033.fdocuments.in/reader033/viewer/2022051412/5517e9e6550346cb568b48b1/html5/thumbnails/1.jpg)
Monopoly and Antitrust
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Inefficiency of Monopoly Competitive Outcome
P = PC = MC Q = QC
Monopoly Outcome PM > PC = MC Q = QM < QC
MRD
MC
QM
PM
QC
Comp Monop
CS
PS
Welfare
DWL
A
BC
A
B
C
A+B
A+B+C
--
A+B+C
-- Rent-seeking may add to DWL
quantity
$
PC
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Price Discrimination Pricing strategy that attempts to capture
more consumer surplus Types
1st Degree: 2nd Degree: 3rd Degree:
Necessary Conditions Market power Segment the market Prevent resale
Charge each consumer the highest price they’re WTP
Quantity discounts
Charge prices based on price elasticities
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First Degree Price Discrimination
Monopolist is able to capture CS …and eliminate DWL by selling until P = MC
MRD
MC
QM
PM
QC
CS
PSDWL
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Second Degree Price Discrimination
Offering discounts based on the number of games attended
Offering discounts based on the number of people in your group
MRD
MC
QM
PM
QC
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Third Degree Price Discrimination Segment market into groups with differing
elasticities Adults Senior citizens
Profit max rule: MRA = MRS = MC MRA = PA[1 – 1/EA]
Example: EA = 3
ES = 5
MC = 8 Charge higher price to group with less elastic demand
PA = $12PS = $10
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Personal Seat Licenses People pay for the right to buy season tickets Two-part tariff: entrance fee + per unit charge
Per unit price = MC Entrance fee = resulting CS
MRD
MC
QM
PM
QC
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Monopsony Monopoly on the buyer side
Labor Market and the Reserve Clause BBC and English Soccer
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Barriers to Entry Broadcast contracts
NFL spreads contracts out over CBS, Fox, NBC, ESPN USFL
Pre-emptive franchise location AFL vs NFL in Dallas and Minneapolis
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Antitrust Law Sherman Act (1890)
Section 1: prohibits cartels (or “trusts”) Every contract, combination in the form of a trust or
otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations is hereby declared to be illegal.
Section 2: attacks monopoly itself Every person who shall monopolize or attempt to
monopolize any part of the trade or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations, shall be deemed guilty of a misdemeanor…
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Federal Baseball v NL (1922) Federal League
(1914-1915) Brooklyn Chicago Pittsburgh St. Louis Baltimore Buffalo Indianapolis Kansas City
National League (1876 – present) Boston Brooklyn Chicago Cincinnati New York Philadelphia Pittsburgh St. Louis
American League (1901 – present) Boston Chicago Cleveland Detroit New York Philadelphia St. Louis Washington
US Supreme Court ruled: “baseball was not interstate commerce” Implication: Baseball is exempt from antitrust laws
Toolson (1953) Flood (1972)
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Contrast with NFL Radovich v NFL (1957)
Blacklisted for playing in AAFC NFL lost at Supreme Court
no legal monopoly power or monopsony power Tried to retain monopsony
“Gentleman’s Agreement” until early 1960s “Rozelle Rule” imposed when that broke down
Successful antitrust suit in 1970s by John Mackey Players’ Association negotiated deal that allowed Rule to
continue
Tried to establish monopoly Got limited exemptions for TV and merger with AFL No games on Friday (HS) and Saturday (NCAA)
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MLB has had few challengers Federal League was last major rival Other leagues have had regular challenges
Baseball has been stable Montreal Expos moved to Washington – 2005 Washington Senators to Texas – 1972 Blocked attempts by Giants, White Sox, Pirates
Impact of Baseball’s Exemption
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NFL Has Been Far Less Stable 1980: Oakland Raiders sue NFL
Challenged NFL’s right to block move to LA Brought antitrust suit Jury – drawn from LA! – agrees
NFL cannot force other teams to stay put Moves from Baltimore, Cleveland, LA (2X),
Houston, St. Louis Did dissuade
New England from moving to Hartford, CT Seattle from moving to LA
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Cartel Theory Game Theory
“Prisoner’s Dilemma” NY Yankees
High Price Low Price
NY Mets
High Price
$500k$500k
$700k$200k
Low Price
$200k$700k
$300k$300k
Dominant Strategy?
Each team would set Low Price
Competitive Outcome: (Low, Low)
Cooperative Outcome: (High, High)
Unstable due to incentive to cheat
Nash Equilibrium
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18 football-related deaths in 1905 President Roosevelt threatened to take action NCAA formed to control “on the field” behavior
The Sanity Code (1946) Drew up rules for “off the field” behavior
Limits to financial “aid” to athletes “Seven Sinners” refuse NCAA fails to get 2/3 majority needed to expel
NCAA in tatters – cannot enforce own rules
NCAA: An Incidental Cartel
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New Life for the NCAA “Point shaving” scandal breaks out in 1952
CCNY ruined as national power Kentucky implicated
UK Coach – Adolph Rupp – likely involved as well Also found illegal payments to players by Rupp
NCAA failed to respond Embarrassed SEC suspends UK
NCAA establishes “Death Penalty” Boycott by other members UK is suspended for one season
SMU football 1987-88SW LA basketball 1973-75Morehouse soccer 2003MacMurray tennis 2004-07
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Applying the NCAA’s Cartel Power
Monopsony Power Drive down price of labor Problem: Schools cheat
Monopoly Power Early TV contract
Limited teams to 3 TV games every 2 years CFA lobbied for more TV
NCAA created I-A and I-AA; reworked revenue sharing CFA filed Antitrust lawsuit against NCAA (1984) Now many broadcasts – but less revenue!
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Competitive Balance
The Value of Uncertainty of Outcome
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Turnover in Champions? 1949
Yankees beat Dodgers 1950
Yankees beat Phils 1951
Yankees beat Giants 1952
Yankees beat Dodgers 1953
Yankees beat Dodgers 1954
Giants beat Indians 1955
Dodgers beat Yankees 1956
Yankees beat Dodgers
1957 Braves beat Yankees
1958 Yankees beat Braves
1959 Dodgers* beat White Sox
1960 Pirates beat Yankees
1961 Yankees beat Reds
1962 Yankees beat Giants
1963 Dodgers* beat Yankees
1964 Cardinals beat Yankees
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In 1960s only 2 NBA champions Celtics Champions 1959-66, 1968-69
Since 1980 only 9 NBA championsLakers: 1980; 1982; 1985; 1987-1988; 2000-2002; 2009-2010
Bulls: 1990-1993; 1996-1998
Spurs: 1999; 2003; 2005; 2007
Celtics: 1981; 1984; 1986; 2008
Pistons: 1988-1989; 2004
Rockets: 1994-1995
Heat: 2006
Mavs: 2011
Sixers: 1983
Is Baseball Unique?
Champs since 1980MLB: 20NFL: 15NHL: 15NBA: 9
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Leagues Want Competitive Balance Stimulates interest
Attendance TV Ratings
Team dynasties? Are Yankees bad for baseball? “law of diminishing returns” Market size effects
What is competitive balance? Even competition in each game? Turnover among champions?
MRS
MRL
WS WL
Winningpercentage
$
MC
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Measuring Competitive Balance Between Season Variation
Hirfindahl-Hirschman Index (HHI) HHI quantifies turnover in champions Also used to measure monopoly power
Where: ci=#championships by team i;
T=#Years; N=#Teams
2
N
i
i
THHI c Large HHI means
few teams dominate
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What is the HHI for the NBA since 1987? Championships
Chi: 6 LA: 7 Det: 3 SA: 4 Hou: 2 Miami: 1 Boston: 1 Dallas: 1
N =25 years
HHI =
HHI = 0.187
22222222
25
1
25
1
25
1
25
2
25
4
25
3
25
7
25
6
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Baseball and the HHI1950s
AL Champions Yankees (8); Indians;
White Sox HHI= .660
NL Champions Dodgers (5); Giants (2);
Braves (2); Phillies HHI= .340
2000s AL Champions
Yankees (4); Red Sox (2); Angels; Tigers; White Sox; Rays
HHI=.240 NL Champions
Cardinal (2); Phillies (2); Marlins; Diamondbacks; Giants; Astros; Rockies; Mets
HHI= .140
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Competitive Balance Within Season Variation
“evenness of competition” standard deviation
average distance that observation lies from mean
Actual: σW =
Ideal: σI =
Ratio: R = σW / σI
T
WP )500.(2
G
500.
R > 1 indicates imbalance
T = number of teams
G = number of games
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Dispersion of Winning Percentage for 2011 or 2010-11 Season
Standard Deviation
League Actual Ideal Ratio
NBA .158 .056 2.82
EPL .108 .081 1.33
MLB .069 .039 1.77
NFL .201 .125 1.61
NHL .080 .056 1.43
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Example: 60-40 Gate split
NY: RG = $36m and C = $28.8 πNY = $7.2mKC: RG = $18m and C = $16 πKC = $2.0m
πNY = 0.6(36) + 0.4(18) – 28.8 = $0πKC = 0.6(18) + 0.4(36) – 16 = $9.2m
Attempts to Promote Competitive Balance
Revenue Sharing Indirect method of redistributing players Two conditions:
Teams must benefit financially from improving performance Players must be able to move among teams
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Salary Caps
Luxury Taxes
Attempts to Promote Competitive Balance
Yankees: (212.75-178)(.40) = $13.9mSoft caps:• “Larry Bird exemption”• Injuries/Bonuses
Cap Floor Notes
NFL (2011-12) $120m $108m Cap = % DGR
NBA (2011-12) $58.04m $49.3m Player max 25%, 30%, 35% of cap
NHL (2011-12) $64.3m $48.3m Player max $12.86m
Notes
MLB (2011) Flat rate on amount over threshold
50% player benefits50% IGF + dev. countries
NBA (2011-12) Progressive tax on amount above threshold
$1.5 ($5m or less)$3.25 ($15-25m over)50% goes to non-violators
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2003 2004 2005 2006 2007 2008 2009 2010 2011$0
$5
$10
$15
$20
$25
$30
$35
$40
MLB Luxury Tax (2003-2011)
Yankees Red Sox Angels Tigers
Lu
xu
ry T
ax P
aid
(in
million
s)
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“Change is needed and that is reflected by the fact that over a billion dollars has been paid to seven chronically uncompetitive teams, five of whom have had baseball’s highest operating profits,” the Globe quoted Henry as saying. “Who, except these teams, can think this is a good idea?”
John HenryOwner, Boston Red Sox
December 2009
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Reverse Order Drafts
Schedule Adjustments
Promotion and relegation
Attempts to Promote Competitive Balance
Incentive to lose late in season?
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Impact of Strategies What is correlation between payroll and winning?
Payroll
WinningPercent
?
Correlation coefficient = +1.0 ?
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$50,000,000.00 $100,000,000.00 $150,000,000.000.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
NFL 2009W
innin
g P
erc
enta
ge
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Impact of Strategies Correlation between payroll and winning: 2010-11
Coase Theorem Initial allocation of player rights does not affect
distribution of talent
Sport Correlation Coefficient
NFL .317
MLB .410
NBA .571
NHL .734
Simon Rottenberg’s “Invariance Proposition”
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Baseball’s Reserve Clause Reserve Clause: players are the property
of the team that drafted them Free Agency: players can negotiate with
any team
Texas New York
Revenue = $20m Revenue = $40m
Salary = $1m Salary = $1.1m
Reserve Clause
Revenue = $20m Revenue = $40m
Salary = $21m
Free Agency
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Impact of Strategies Low correlation between payroll and winning
Coase Theorem Initial allocation of player rights does not affect
distribution of talent Reserve clause is no different than free agency Reverse order draft should have no long-term effect
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Public Finance
The Market for Sports Franchises
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1952 National League: Team Standings
Team Wins Losses WP GB
Brooklyn Dodgers 96 57 .627 0
New York Giants 92 62 .597 4½
St. Louis Cardinals 88 66 .571 8½
Philadelphia Phillies 87 67 .565 9½
Chicago Cubs 77 77 .500 19½
Cincinnati Reds 69 85 .448 27½
Boston Braves 64 89 .418 32
Pittsburgh Pirates 42 112 .273 54½
1952 American League: Team Standings
Team Wins Losses WP GB
New York Yankees 95 59 .617 0
Cleveland Indians 93 61 .604 2
Chicago White Sox 81 73 .526 14
Philadelphia Athletics 79 75 .513 16
Washington Senators 78 76 .506 17
Boston Red Sox 76 78 .494 19
St. Louis Browns 64 90 .416 31
Detroit Tigers 50 104 .325 45
Golden Age of Baseball: 1903-1952
No teams entered, exited, or changed cities Construction of “old” parks Change:
Boston Braves Milwaukee (1953) St. Louis Browns Baltimore Orioles (1954) Philadelphia A’s Kansas City (1955) Brooklyn Dodgers Los Angeles (1958) NY Giants San Francisco (1958)
Shibe Park (Phil)Fenway Park (Bos)Forbes Field (Pit)Comiskey Park (Chi)Navin Field (Det)Wrigley Field (Chi)Yankee Stadium (NYY)Ebbets Field (Brk)
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Dodger Blues? Before the move
Most profitable team in MLB Alone accounted for 47% of NL’s profits
Key Lessons No city “safe” Starts involvement of cities
Before 1950 – only 1 stadium publicly built By 1980 – almost all were
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What Power do Teams Have?
Monopoly Power All-or-Nothing Demand Curve Winner’s Curse
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Monopoly Power: Limit Output
Leagues slow to expand By 1953: U.S. demographics had changed
LA had no baseball teams – St. Louis had 2 Baseball & Football moved rather than expand
NFL did absorb 5 teams from rival leagues MLB expanded (1961-62)
Prevent new league (Continental League) Minnesota, Houston, NY Mets, LA Angels,
Avert Congressional intervention (Senators) NFL expansion tied to AFL
First expanded (1960) to try to kill it Next expanded (1966) to merge with it
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All-or-Nothing Demand Curve
Firms generally can’t set both price and quantity Standard monopoly pricing
sets price at P1 and allows buyers to buy Q1
Consumers earn surplus Firm earns profit
Teams confront cities with an all-or-nothing choice: Point A
How far can you push consumers?
Consumers willing to absorb loss as long as net gain in CS is positive
D
Games
MR
MC
$
P1
Q1 Q2
ALoss
Surplus
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Paper Clip Auction
Guess how many clips are in the cup ($1 for closest guess)
Each clip is worth $0.03 Write down your bid (and name) on a piece of
paper
Average bid usually lower than actual money value of clips Winning bid will generally exceed money value Why did winner overbid?
Most bidders are risk averse Not all bidders have same expectations Only most optimistic bidder wins the prize Does winning the auction become the goal itself?
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Winner’s Curse
Buyer overbids due to uncertainty over value of prize
V =
Who wins?
Winner expects greatest payoff – could be: Best suited to exploit opportunity Most optimistic Most intent on winning per se
Olympic “competition” for host site
)1()1()1(13
32
21
rB
rB
rB
rB
TT
V = bidder’s valueBt = benefits of prizer = interest rate
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Case in Point: The Olympics
1976 Montreal: C$1.6 billion Debt ~C$1.0 billion paid over 30 years
1984 LA Only city to bid on 1984 Summer Olympics $200 million profit!
2004 Athens: $15 billion 2008 Beijing: $42 billion 2010 Vancouver: $9.2 billion 2012 London 2014 Sochi 2016 Rio de Janeiro
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Cost of 2010 Vancouver Winter Olympics
Bid budget $34,000,000
Security $900,000,000
Sea-to-Sky Highway expansion $1,980,000,000
Canada Line construction $1,900,000,000
Venue construction $580,000,000
Cypress Bowl ski facility upgrade $16,600,000
Athlete’s Village construction $1,080,000,000
Opening ceremonies $58,500,000
VANOC operating budget $1,750,000,000
Hillcrest/Nat Baily Stadium Park $40,000,000
Vancouver Convention Centre expansion $883,000,000
Event tickets for provincial MLAs and cabinet ministers
$1,000,000
TOTAL $9,223,100,000
http://this.org/magazine/2010/01/12/alternative-budget-olympics-vancouver-2010/
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Lake
Plac
id 19
80
Mos
cow 1
980
Saraje
vo 1
984
Los
Angele
s 19
84
Calgar
y 19
88
Seoul
1988
Albertv
ille 1
992
Barce
lona
1992
Liliha
mm
er 1
994
Atlant
a 19
96
Nagan
o 19
98
Sydne
y 20
00
Salt L
ake
2002
Athen
s 20
04
Torino
200
6
Beijing
200
8
Vanco
uver
201
0
0
200
400
600
800
1000
1200
1400
1600
1800
2188 103
287325
403
292
636
353
898
513
1332
736
1493
833
1706
900
Olympic Broadcast Rights
Mil
lio
ns
of
US
$
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Stadium Economics
What’s true about each facility in Era #1? Name of owner/builder “park” or “field”
In Era #2? Reflects source of
funding Municipally built
In Era #3? Naming rights
$2m per year What do firms get for
naming rights?
Era #1 Era #2 Era #3
Forbes Field Cleveland Municipal Stadium
Network Associates Field
Wrigley Field Atlanta-Fulton County Stadium
Continental Airlines Arena
Shibe Park Milwaukee County Stadium
Ericsson Stadium
Crosley Field Tampa Stadium Minute Maid Field
Ebbets Field Oakland-Alameda County Stadium
US Cellular Field
What’s in a Name?
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Size Matters
Saw that baseball teams seldom sell out Why?
Optimal size for baseball stadium 30-40,000 Football has larger optimal size
Used to rent space from baseball teams in off-season Municipal stadia built when football took off
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Shape Matters, Too
“Old School”
Municipal “Cookie Cutters”
Retro Look
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MetrodomeMinneapolis, MN
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Location: The Urban Ballpark
Retro location?
Stadia often not even in home city Arlington Cowboys vs East Rutherford Giants
Old ballparks not built downtown > Yankee Stadium built in “Goatville” > Shibe Park on site of Hospital for Contagious Diseases
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Location:Cars and Costs Fans have moved to suburbs
Urban neighborhoods decay Need place to leave cars
Result: “a sea of asphalt” Stadium is “space intensive”
Creates problems for a downtown location Space costs money
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The Rent Gradient Center City v. Outskirts
Why are NYC hotels taller than in Zanesville, OH?
Cost of land falls as move from center of town Height of buildings mimics
cost curve
Cost of land
Distance from city center
Rent gradient
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Two of the perennially top-ranked college hockey teams in the country are Harvard and Yale. While tending to be alike in their national rankings, they differ greatly in their playing style. Harvard consistently opts for fast but small players while Yale fields slower but brawnier skaters. This difference in playing styles has persisted over the past several decades despite coaching changes and turnover in player personnel. What accounts for the difference? Explain in terms of economic analysis.
200 x 85 ft
Yale Ingalls RinkNew Haven, CT
204 x 87 ft
72.8” and 197 lbs. 70.4” and 184 lbs.
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Public Finance II
What’s in it for the cities?
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Having a football team back in Houston will bring thousands of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.
Houston Mayor Lee Brown, 1999.
Without the Chiefs and the Royals, Kansas City would be nothing but another Wichita… or Des Moines… or Omaha.”
Kansas City mayor Emanuel Cleaver, 1997.
Political Rhetoric
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What is the role of Government?
Set and enforce rules of behavior Macroeconomic stabilization Deal with monopoly Provide public goods Deal with externalities
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What are Externalities? Costs/Benefits imposed on non-consenting people Spillover effects
Negative Externalities What you do hurts me You don’t compensate me
Positive Externalities What you do helps me I don’t compensate you
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Impact of Negative Externality
Free Market: P1, Q1
Games cause congestion imposes cost on others shifts supply curve left
Optimal Outcome: P2, Q2
Free market “overproduces” causes DWL
What can government do?
D1
Sprivate
Games
$
P1
Q1
Ssocial
External costP2
Q2
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Impact of Positive Externality
Dprivate
S1
Games
$
P1
Q1
External benefit
P2
Q2
Free Market: P1, Q1
Games generate “winning attitude” generates benefits for others “social” demand is above “private”
demand
Optimal Outcome: P2, Q2
Free market “underproduces” causes DWL
What can government do?
Dsocial
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Subsidizing Team Losses
Standard monopoly with high fixed costs may suffer losses
Government may offer subsidies to keep team in city
Subsidy =
PM
MC
ATC
DMR
QMQuantity
$
ATC
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Can a Stadium be a Profit Center for a City?
Revenues Rental Payments Share of Concessions, Parking, Luxury Boxes, etc.
Costs Standard operating costs (labor, utilities, etc) Depreciation (facility will eventually be worthless) Opportunity Cost: could have invested $$ elsewhere Foregone tax revenue – city can’t pay itself
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Baltimore Ravens pay no rent. Chicago White Sox pay $1 per year Cleveland Indians pay rent on a sliding scale:
$1.25 per ticket if A > 2.5 million $1.00 per ticket if 1.85 < A < 2.5 million $0.00 per ticket if A < 1.85 million
Cleveland Cavaliers pay rent on same sliding scale as Indians
San Diego Chargers City receives 10% of ticket revenue City reimburses team 100% of value of unsold tickets
Ex: $50 ticket Chargers receive $27 [=(50)(.90)(.60)] if sell ticket Chargers receive $50 if don’t sell ticket
Examples of Stadia Rent
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Calculating the Implicit Subsidy
S = Operating Revenue – [Depreciation + Opp Cost of Funds + Foregone Taxes]
Estimated Annual Subsidies($Thousands)
Facility NOR (1)
DEP (2)
OCF(3)
FPT(4)
Subsidy (1)-(2+3+4)
Green Bay’s Lambeau Field (Minimum)
150 153 155 31 189
Atlanta Fulton County Stadium (Average)
–1,478 2160 3,243 649 7,530
New Orleans’ Superdome (Maximum)
–7,922 8,572 21,400 4,260 42,174
Note: NOR = Net Operating Revenue DEP = Depreciation OCF = Opportunity Cost of Funds FPT = Forgone Property Taxes
Source: Quirk and Fort (1992).
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Measuring the Value of a Franchise
Economic Impact Studies Cost/Benefit Studies
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“Professional sports are an insignificant part of a large city’s economy. For example, in Chicago, the entire professional sports industry accounts for .08 percent of Chicago’s personal income. To put the matter in a somewhat different perspective, the sales revenue of Fruit of the Loom exceeds that for all of Major League Baseball (MLB), while the sales revenue for Sears is about thirty times larger than that of all MLB revenues.”
Robert BaadeSports Economist
Lake Forest College
Measuring the Value of a Franchise
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What Do the Sabres Bring to Buffalo?
2003 estimates by NY State Comptroller: $31M in gate receipts $8.6 M in concessions revenue $4 M in advertising and broadcast revenue
Subtotal: $43.6 million Total Impact = $65 million = ($43.6) x (1.5)
Multiplier
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Multiplier Effects
Initial spending generates ripple effects
DY= DX + DX*MPC + (DX*MPC)*MPC+…
DY= DX*(1+MPC+MPC2+MPC3+MPC4+…)
DY= DX
ExampleDX = $35MPC = 0.80
Where: X = initial spending Y = aggregate income MPC = ΔC / Δ Y
MPC1
1
Simple multiplier
Δ Y = 35(5) = $175
The higher the MPC, the higher the multiplier.
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Modified Multiplier
Mlocal =
Example: MPC = 0.80 f = 0.5
fMPC *1
1
Where f = fraction of spending that is local
Mlocal = 1.67
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Benefits of a Franchise Direct Benefits (New Spending)
Higher APC? Net exports?
Players live elsewhere? Substitution effects?
Indirect Benefits Positive externalities?
Big league image Sense of identity
And now, YOUR Columbus Blue Jackets!
Chicago has 5 major league franchises
Sports account for .08% of personal income
MLB revenues < Fruit of the Loom
Single team worth less than sizable department store
Buffalo Sabres: $65 million
Marietta College: $40 million
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Costs of a Franchise
Direct Costs Construction Operating Depreciation Opportunity cost of funds
Indirect Costs Negative externalities
Crime Congestion Noise
Such costs may already have beeninternalized for older stadiums
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Teams and Jobs
Arizona Diamondbacks [Deloitte and Touche]
340 full-time jobs Cost to city: $240 Million $706,000 per job
Baltimore Ravens [MD Dept of B&E Development]
Cost per job: $127,000 - $331,000
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Baade and Dye (1990)
“Impact of Stadiums and Professional Sports on Metropolitan Area Development”
Uses sample of 30 cities 1958-87
Dyit-Dyit-1 = b0 + b1*NTit + b2*NSit+…+ eit
Neither coefficient (b1 or b2) statistically significant
Growth in per capita income
Number ofTeams
Number ofStadiums
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Expenditure
CS
Other Studies Rappoport and Wilkerson (2001) looks at Quality of Life
Direct approach: survey residents Indirect approach: examine housing values
Coates and Humphreys (2003) look within cities Find higher property values in immediate neighborhood, but falls off rapidly
DP
Q Games
$Johnson, Groothuis, and Whitehead (2001): “What is the most you would be willing to pay out of your own household budget each year in higher city taxes to keep the Penguins in Pittsburgh?”
Answer: $1.56 $50m over 30 years
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Stadium Financing
Taxes Sales Property Income User fees
Debt Delayed taxes?
Lotteries Voluntary tax?
Issues: Revenue potential Efficiency Fairness
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Impact of Taxes
Before Tax: P1, Q1
Government imposes tax: supply shifts to St
After Tax: P2, Q2
Tax Revenue = DWL =
Burden of tax Buyers pay part Sellers pay part
D
S
St
Hotel RoomsQ1Q2
P1
P2
$
Per unit tax
P2-t
Issues: Revenue potential Efficiency Fairness
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Tax Examples
Miami Proposed sales tax on cruise ship passengers
Cleveland 15-year sin tax on residents of Cuyahoga County
Milwaukee (Miller Park) 5-county sales tax Regressive tax
Seattle Sales tax on restaurants and bars in King County Tax on tickets to games Tax on rental cars
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Why Do Cities Do It?
Politicians pursue their own self-interest Special interest groups have their agenda
Highly organized groups have advantage Concentrated benefits and dispersed costs promote
rent seeking
No Team Old Stadium New, No FrillsStadium
New, ElaborateStadium
A B C, D E
Simple majority vote would lead to New, No Frills Stadium
All or nothing choice would lead to New, Elaborate Stadium