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

Spectator sports 29,867 32,797 36,882 38,452 37,808 39,850Car 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: 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)

2004 2005 2006 2007 2008 2009

Funeral homes/services 11,485 11,793 11,909 11,943 12,384 12,214Passenger 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: 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 The NBA conspires to ensure The Finals goes seven games

o Anti-scalping laws lower prices at the ticket window

o The DH rule increases offensive output in the ALo Hosting an Olympics is guaranteed to increase

local economic activityo After signing a big-salary contract, players play

worseo The low number of black NFL coaches is evidence

of racismo Higher ticket prices are caused by player salaries

Overview of Course Review of Basic Economics

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

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

D1

S1

Q1

P1

Demand shifters Income Price of related goods Consumer tastes Market size Price expectations

Supply shifters Input prices Technology Taxes Price expectations Number of firms

quantity

$

Price Elasticity Measure of price sensitivity

Elastic demand: |E| > 1 Inelastic demand: |E| < 1

P

QE

d

%

%• More substitutes• Big budget items• Longer time horizons

Elasticity…

82.022.0

18.0

4510

1100200

E D1

tickets

$

50

1000

40

1200

TR = $50,000

TR = $48,000

E = ?P

QE

d

%

%

Price Controls

Price Ceilings create shortages create black

markets

D1

S1

ticketsQ1

P1

Pceiling

Qd

shortage

Price Controls

Price Floors Create

surpluses

D1

S1

ticketsQ1

P1

Pfloor

Qd

surplus

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

S

D

MR = P

MC

ATC

Market Firm

Q1q1

P1

$

Quantity quantity

$

MR = MC

Monopoly Relevant Market

Any close substitutes? Entry Barriers

Economies of scale Control over key input Government restrictions

Monopoly

D

MR

MC

ATC

Q1

P1

ATC1

Profits are maximizedwhere MR = MC

Price is set off of demandcurve

Quantity

$

MR = MC

Pricing Strategy: Phillies vs Flyers

Assume each is a monopoly

MC a backward “L” Does it pay to sell out?

$

MR

D

MC1

P1

Q1

Citizens Bank Park43,500

Wells Fargo Center19,537 NHL20,444 NBA

MC2

P2

tickets43,50019,500

Phillies Flyers

Game Season Game Season

Field Level $70

$53$38

$65$48$34

Cadillac Grille $215 $102

Club Level $38

$30$20

$33$26$16

Lower Level$160 $89

Terrace$38$30$20

$34$25$16

Mezzanine$120$105$93$81

$65$57$47$37

2012 Ticket Prices

Source: philadelphia.phillies.mlb.com and philadelphiaflyers.com

Sixers

Game Season

Cadillac Grille $49 $45

Lower Level$169$109 $59

$149 $95 $55

Mezzanine$45$15

$35$15

2012 Ticket Prices

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)

A = α + βW

A = 20 +50W Winning Percentage

Attendance

intercept slope

(5.63) (9.63)

R2 measures “quality of fit” for entire model

“t statistic”

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 Winning Percentage

2009

% o

f C

apac

ity

MLB

2009 A vs 2008 W

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

2008 Winning Percentage

2009

% o

f C

apac

ity

NFL

R2 = 0.234 R2 = 0.430

A = 0.278 + 0.81 W A = 0.882 + 0.15 W(3.14) (4.94)

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 Std. Error t-StatisticIntercept -1.469 2.98 0.49PAVE Ticket Price -0.451* 0.11 4.10CONAVE Concession Price -0.098* 0.02 4.90FRAGE Franchise Age 0.006 0.03 0.20CITYTEN City Tenure -0.063** 0.03 2.10STAGE Stadium Age -0.087* 0.02 4.35WIN Winning % 0.739* 0.12 6.15LAGWIN Last Season Win% 0.389* 0.13 2.99POP City Population 0.163* 0.03 5.43INCOME City Income 0.957* 0.21 4.55PLAYERC Team Payroll 0.286* 0.06 4.76LEAGUE League 0.055** 0.03 1.83CAPACITY Stadium Capacity -0.266* 0.08 2.32YR90 1990 0.212* 0.07 3.02YR91 1991 0.193* 0.06 3.21YR92 1992 0.073 0.06 1.21YR93 1993 0.203* 0.06 3.38YR95 1995 -0.129* 0.06 2.15YR96 1996 0.055 0.06 0.91R2 = 0.696N =174Dependent Variable is log-Attendance* (**) indicates significance at the 0.05 (0.10) level

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 Financial stability? Competitive balance? Player Salaries?

NFL: = 60%MLB: = 66%NBA, NHL: = 100%

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

Broadcast Revenue: RB

Sports Teams and Leagues

Advertisers (Consumer Products Producers)

Media Providers (Networks, Cable, Satellite)

Programming

Ad Slots

Rights Fees $

Slot Fees $

Broadcast Money Trail

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 $2 billion $200 millionSource: Street & Smith’s Sports Business Journal

Revenue from Broadcast Rights Agreements

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

Rams: LA St. Louis Raiders: LA Oakland Oilers: Houston Nashville Browns: Cleveland

Baltimore

Revenue Sharing is the key!

Question: Why have we seen a move to small markets by NFL teams?

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

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

+ OC

Some revenue and cost averages from professional sports in 2006

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!

League Decisions Setting the Rules

# 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

Source: Major League Sports Teams, ODU Forecasting Project, 2001

1993 NHL 2000 NHL 1993 MLB 1999 MLB 1995 NBA 2004 NBA 1995 NFL 1999 NFL 2001 NFL$0

$100

$200

$300

$400

$500

$600

$700

$800

$50$80

$95

$130 $125

$300

$140

$530

$700

Recent Franchise Fees

MinnesotaColumbus

ArizonaTampa Bay

Charlotte

Houston

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 expensesand depreciation of capital

San Antonio Spurs Depreciation and Tax Savings (All figures in $ millions)

1993-94 1994-95

Category 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

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 (1993-2005)

Fox LA Dodgers (1998-2004)

Double monopoly?

DMR

DMR

MC

Qup

PupMC

Pdown

Qdown

Upstream Firm (Team) Downstream Firm (Media)

Vertically integrated firm sets transfer price to allocate profit acrosscombined entity

Set low broadcast rights fee to reduce team profits in order to plead poverty during lobbying for public subsidy

Vertical Integration

Broadcast rights fee

Clicker Review

If a team always sells out its home games, economists would say it is very likely that:

A s

urplu

s ex

ists

Ther

e is

exc

ess.

..

Ther

e is

exc

ess.

..

Pric

es a

re to

o hig

h

0% 0%0%0%

a) A surplus existsb) There is excess

supplyc) There is excess

demandd) Prices are too high

If an industry is a monopoly, output is _____ and prices are _____ than if it were perfectly competitive.

Lower

, lower

Hig

her, l

ower

Lower

, hig

her

Hig

her, h

igher

0% 0%0%0%

a) Lower, lowerb) Higher, lowerc) Lower, higherd) Higher, higher

If demand for tickets to see the LA Lakers is inelastic,

Fan

s w

ill re

s...

fans

will

resp

o..

fans

will

resp

o..

fans

will

resp

o..

0% 0%0%0%

a) Fans will respond to a price increase with a proportional decrease in quantity demanded.

b) fans will respond to a price increase with a less than proportional decrease in quantity demanded.

c) fans will respond to a price increase with an infinitely large decrease in quantity demanded.

d) fans will respond to a price increase with a more than proportional decrease in quantity demanded.

If income decreases and tickets to see a Notre Dame football game are a normal good, then the

dem

and fo

r tic

...

supply

of t

ick.

..

dem

and fo

r tic

...

supply

of t

ick.

..

0% 0%0%0%

a) demand for tickets will decrease.

b) supply of tickets will increase. c) demand for tickets will

increase. d) supply of tickets will decrease.

A negative aspect of anti-scalping laws is

they

pre

vent .

..

they

cau

se ..

.

they

pre

vent..

.

they

hurt

tick.

.

0% 0%0%0%

a) they prevent sell-outs. b) they cause people to pay more than

they are willing to in order to get tickets.

c) they prevent the market from matching willing buyers and sellers.

d) they hurt ticket agencies.

If a game is not sold out, then the marginal cost to a team of accommodating one additional fan is

0% 0%0%0%

a) almost infinite.b) about equal to the team's payroll c) essentially zero. d) about half the cost of a ticket.

To determine the market demand for tickets to see the Boston Bruins play hockey we

add th

e m

argi..

.

div

ide

the

re...

add th

e pr

ice.

..

add th

e qu

anti.

.

0% 0%0%0%

a) add the marginal revenue at each price.

b) divide the revenue of the team by the number of fans.

c) add the price consumers are willing to pay at each quantity.

d) add the quantity demanded at each price.

a) The NFLb) The NBAc) Baseball’s National Leagued) The NHL

The league with the most equal split of gate receipts between the home and visiting teams is

The

NFL

The

NBA

Bas

ebal

l’s N

at...

The

NHL

0% 0%0%0%

a) zero. b) fixed.c) variable. d) shared by all teams in the

league.

Over the course of a single season, the largest proportion of team cost is

zero

.

fixe

d.

var

iable

.

shar

ed b

y al

l t...

0% 0%0%0%

The ownership of professional teams by media outlets

pre

vents

cro

ss...

is k

nown as

ho...

is k

nown as

ver..

.

is b

ecom

ing le

..

0% 0%0%0%

a) prevents cross subsidization. b) is known as horizontal

integration. c) is known as vertical integration. d) is becoming less common.

The Dallas Cowboys are such a valuable franchise because they

can

tap

into

b...

hav

e a

traditi

..

hav

e done

an...

hav

e so

man

y...

0% 0%0%0%

a) can tap into both U.S. and Mexican media markets.

b) have a tradition of winning that attracts fans from all over.

c) have done an expert job of managing the salary cap.

d) have so many luxury boxes.

Marketing for a league is a public good if

all

team

s pay

for..

.

all

team

s pay

a...

all

team

s der

ive.

..

all

team

s pay

s...

0% 0%0%0%

a) all teams pay for the cost of advertising for small market teams.

b) all teams pay an equal share of the cost of advertising campaigns.

c) all teams derive benefit from an advertising campaign.

d) all teams pay some share of the cost of advertising campaigns.