Chapter Eight: Sports Economics

1
Chapter Eight Sports Economics

• Outline
• 1. Salaries and Ticket Prices (2)
• 2. Market Structure in Sports (3-5)
• 3. Labor Markets in Sports (6-8)
• 4. Strikes and Attendance (9)
• 5. Competitive Balance in Baseball (10)

2
Player Salaries and Ticket Prices

• If players accepted lower salaries, would teams
  lower ticket prices?
• Supply of games is fixed. Therefore, demand
  determines the price.
• Evidence Teams do not raise ticket prices when
  re-signing players, only when the player is
  initially signed. Why? Re-signing a player will
  not impact demand.

3
Cartels

• Cartel-a group of firms that formally agrees to
  coordinate its production and pricing decisions
  in a manner that maximizes joint profits.
• Review the workings of a cartel
• Cartels are inherently unstable.
• Why are professional team sports leagues not
  actually cartels?

4
The Structure of Professional Sports Leagues

• Neal, Walter. The Peculiar Economics of
  Professional Sports Quarterly Journal of
  Economics 78 (February, 1964) 1-14.
• 1. Louis-Schmelling paradox
• In traditional business, the removal of
  competition is a desired outcome. In sports,
  removal of competition reduces profits for the
  remaining firms.
• 2. The inverted joint product or the product
  joint
• Joint product - two products technologically
  resulting from a single process
• Product joint - An indivisible product from the
  separate processes of two or more firms.

5
Cartel or Natural Monopoly?

• Professional baseball produces several
  interrelated streams of utility
• a. Saleable unit of the seat
• b. Broadcasts of games
• c. Fourth Estate Benefit The sale or printed
  media depends heavily on sporting events, hence
  an external economy is produced from sporting
  events.
• Conclusion The several joint products which are
  products joint of legally separate business firms
  are really the complex joint products of one
  firm, and this firm is necessarily an
  all-embracing firm or natural monopoly.
• Why a natural monopoly? There can only be one
  world champion.

6
Brief Review of the History of Labor in Sports

• Reserve Clause - A renewal clause in each uniform
  player contract which permits the team to renew
  the contract for the following year at a price
  which the team may fix.
• Monopsony a market with one buyer.
• Monoposonistic profit the difference between
  the workers contribution to a monopsonistic
  firms receipts and their wages.
• Reservation Wage - the workers opportunity cost.
  The lowest wage a firm can pay and still retain
  the worker. The reservation wage is a function of
  the workers alternative employments and the cost
  of leisure

7
Measuring Player Productivity

• Joan Robinson (1933) What is actually meant by
  exploitation is usually that the wage is less
  than the marginal revenue product
• How do we measure MRP in sports?
• MP is how many wins the player creates.
• MR is the value of each additional win
• More on MP
• Wins are function of points scored and points
  surrendered.
• Points scored and points surrendered can be tied
  to the actions of individual players.

8
Are players overpaid or underpaid?

• The winners curse Firms do not know with
  certainty how productive a worker will be in the
  future. Bids are made according to the firms
  estimate of MRP. Who is likely to have the
  winning bid? The firm who overestimates the
  workers MRP the most. Hence, the winners curse.
• The empirical evidence suggests that non-free
  agents are underpaid and free agents tend to be
  overpaid.

9
Strikes and Attendance

• How do player strikes impact attendance?
• Schmidt, Martin B. and David J. Berri. (2002).
  The Impact of the 1981 and 1994-95 Strikes on
  Major League Baseball Attendance A Time-Series
  Analysis. Applied Economics, 34 471-478.
• http//sportsillustrated.cnn.com/inside_game/john_
  donovan/news/2002/08/08/fans/
• Conclusions
• Strikes have no impact on attendance in Major
  League Baseball
• In other research strikes were shown to not
  impact attendance in the NFL or NHL.

10
Competitive Balance in Baseball

• Does Major League Baseball have a competitive
  balance problem?
• Competitive balance refers to the dispersion of
  wins. Over time, competitive balance has improved
  in Major League Baseball.
• Why? The quality of athletes has improved.