Chapter 2 Demand and Total Revenue

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Chapter 2Demand and Total Revenue

• To Accompany
• Sports Economics 2ED
• Rodney Fort
• (PrenticeHall, 2006)

• I remember Arthur Wirtz (former owner of the
  Chicago Blackhawks, dec. 1983) delivering his
  most famous line. Somebody said, We need some
  paint for the seats, and Arthur said, We dont
  need paint, we need asses.
• -Stan Mikita, former Blackhawk great.

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Overview

• Demand, its variation across sports and market
  power.
• Demand and sports fan welfare.
• Demand, elasticity, total revenue and marginal
  revenue in sports.
• Price discrimination.
• Revenue variation and competitive imbalance in
  sports.

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Introduction

• Old fans like me argue that the hoopla and
  commercialism have greatly compromised the
  gentler game we loved But who is buying the
  T-shirts, fawning (and pawning) over every
  utility infielder for autographs.. Us of course
  nobody but us How can we moan that baseball has
  fallen to mammon when we willingly rushed into
  each new purchase?
• - Stephen Jay Gould, natural scientist and
  baseball fan.

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Scarcity in Sports

• The inescapable chain
• Scarcity
• gt Rationing
• gt Competition.
• Whence the scarcity?

• Prowess.
• Competition.
• Commonality.
• Winning.

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Worth Some Thought. . .

• Absolute and relative competition.
• In any game, we care about the teams relative
  skills. But. . .
• We also care about the level of competition
  minor v. major leagues, mens v. womens
  versions.
• Implications for PEDs.

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The Amazing Rod

• Guesses about class demand for college basketball.

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Demand Quantifying scarcity.

• Remember the definition
• The relationship between price and quantity
  demanded, all else held constant.

Ticket Price
Individual Team Demand As price rises, fewer
people attend.
Attendance
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Demand shifters.

• Whats held constant?
• Preferences- especially for team quality.
• Fan income.
• The price of other goods enjoyed by fans.
• Fan expectations about the future
• Population.

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Lets See If You Get It

• Sometimes, it seems that demand curves slope
  upward
• Ticket prices and attendance over time appear to
  be positively related.
• Many factors can change over time, so that demand
  is shifting, rather than upward sloping!

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Market power in sports

• Why the downward slope at the individual team
  level?
• Market power for teams.
• Teams make it happen through leagues and
  conferences
• Exclusive territory membership control.
• Exceptions?
• When population warrants more than one team.

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Tool Time!

• So far, covering concepts of demand.
• But we need some tools to actually analyze it!
• Buyers surpluses.
• Elasticity.
• Total and Marginal Revenue.

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Buyers Surpluses
Ticket Price
At some price, willingness to pay (wtp) on every
unit exceeds price. Summation-gt buyers
surpluses.
wtp
P0
Attendance
A0
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Elasticity, total and marginal revenue.
Lower price, response exceeds price reduction, so
revenues rise GL gt 0. Elastic region.
Ticket Price
P0
L
P1
C
G
Attendance
A1
A0
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Elasticity
Ticket Price
Lower price, response less than price reduction,
so revenues fall GL lt 0. Inelastic region.
Switch Point
P0
L
P1
G
C
Attendance
A1
A0
Abar
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Team Total Revenue
Ticket Price

Eventually, increase output, decrease TR.
Max TR
At first, increase output, increase TR.
Demand
Elastic Demand
Inelastic Demand
TR
Attend.
Abar
Abar
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Marginal Revenue

• Definition MR .
• In the limit, MR is the slope of the TR function.
• Derivation Just track the slope of TR as output
  increases.

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Marginal Revenue

Max TR
MR 0
Inelastic Demand
Elastic Demand
MR gt 0, Declining
MR lt 0
TR
Attend.
Abar
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A Simple Trick

• For linear demand
• Demand P a bX.
• TR PX aX bX 2.
• MR ? TR/ ? X a 2bX (exponent rule).
• So For linear demand, MR has the same
  y-intercept, but is twice as steep, as the demand
  function.

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Lesson 1 inelastic pricing?

• At A0, reduce attendance, increase revenue and
  lower cost. Unless
• Attendance-related revenue offsets (concessions,
  parking, memorabilia)

Max TR
Inelastic Demand
Elastic Demand
MR gt 0, Declining
MR lt 0
TR
Attend.
A0
Abar
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Lesson 2 shifting demand and total revenue.

• Increasing attendance can only take you so far in
  your aim to increase revenue.
• Eventually, the only recourse is to shift the
  total revenue function.
• How can this happen?
• Something must increase demand.
• Any ideas?

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Lesson 2, contd.

• Rules Innovations Expanded play-offs, rules
  changes, rules enforcement.
• Other Innovations Half-time shows, cheerleaders
  (then pro cheerleaders), musical interludes,
  applause-meter races, DiamondVision, mascots,
  food service, the incredible exploding woman,
  Eddy Goedel, uniform innovations and sales.
• Just go to a minor league baseball game to find
  out whats coming next.

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Lesson 2 corollary Pricing to capacity?

• Teams generally inherit stadium capacity in the
  short run, its fixed.
• Can it make sense that revenues are highest if
  the stadium is not sold out?
• Yes! If capacity exceeds Abar. (and
  attendance-related revenues dont more than make
  up the difference!)
• In the longer term, alter capacity, but that can
  be a long time coming. (MLBs move to new,
  smaller venues).

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Price Discrimination

• If
• Can tell fans apart, somehow.
• Resale can be prevented.
• Enforcement is cheap enough.
• Then
• Charge different fans different prices for the
  same game.
• Charge the same fan a lower price for successive
  games purchased all at once.

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Price Discrimination Methods

• Different prices to different fans
• Student discounts.
• Faculty discounts.
• What about different prices for different
  locations? Or different times during the season?
• Nope. The quality of the good has changed! Not
  selling the same product to different people.

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Price Discrimination Methods

• Different prices to the same buyer
• Buy one, get one half price.
• Season ticket prices lower than summed cost of
  individual attendance.
• Family Plan quantity discounts.
• What about season tickets that cost the same
  amount as individual attendance?
• Nope. Paying to reserve a particular seat.
• Raises another interesting issue. . . .

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Price Discrimination PSLs

• Each fan will pay more than P, e.g., V0 gt P for
  attendance A0. How can sellers get it?

Ticket Price
V0
P
Demand
Attendance
A0
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PSLs, contd.

• Need even more information
• What is the level of the surplus, V0 gt P.
• Offer rights to a particular seat, for the entire
  season, but require payment equal to V0 gt P
  so-called donation seating or, in the pros,
  personal seat licenses.
• Charge P for the tickets in addition to the
  donation.
• Result . . . .

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PSLs, contd.

• Extract V0 gt P, for all buyers.

Ticket Price
Additional Revenue
V0
P
D
Attendance
A0
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Pro Revenue Data, 2005
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Small v. Large Market

• Important Point of Analysis
• Much is bandied in the press about small and
  large market teams. But just what does this
  mean? Data show that it doesnt always go by
  population. Well take DeepThroats advice and.
  . . .
• Follow the money.

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A Useful Construct

• Comparing Small and Large Market Teams
• Large and small only can be meaningful in
  terms of revenue.
• Demand (willingness to pay) for sports is greater
  in some places.
• Large can be taken to mean a greater
  willingness to pay for all levels.

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A Useful Construct Contd

• GB Packers, large or small market?
• Pop (incl. Milwaukee) 1.8 million
• NFL city ave. Pop 3.7 million
• 05 revenues 194 million, 12th in NFL
• NFL team ave. revenues 192 million
• NFL team median revs 186 million
• NFL team min. revenue 158 (AZ)
• So, Packers are
• Half the ave. pop. Right at ave. rev.
• 5 greater than median rev.
• 23 greater than min. rev.

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A Useful Construct Contd

• Always think of teams in terms of market revenue
  potential
• Larger potential Larger market team
• Lower potential Smaller market team.
• Go back to the general data NYY top MLB, NYI
  bottom NHL!

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And Dont Forget Things Change!

• A Revenue Tale of Two Cities (MLB)
• 1990
  2005
• Atlanta Braves 25/26 12/30
• Seattle Mariners 26/26 8/30
• It is typically true that larger revenue market
  teams dominate, but dont forget that the faces
  change.

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Summary

• Demand, its variation across sports and market
  power.
• Demand and sports fan welfare.
• Demand, elasticity, total revenue and marginal
  revenue in sports.
• Price discrimination.
• Revenue variation and competitive imbalance in
  sports.