February 26, 2014

Prices of Other Goods

• Substitute– Used in place of another product or service– Red Wings & Tigers games

• Compliment– Used with another product or service– Football helmets & shoulder pads

• Pricing implications?

• Short run– Costs are fixed– NFL season• Ticket prices• Salary cap• Coaches salaries

• Long run– Costs are variable

Revenue Sharing

• Each MLB team will receive at least $45 million in shared TV revenue this year

• Teams share 34% of their local TV money– For every million dollars a team makes from its

local TV deal, the other 29 teams make $11,133

TV and MLB

Current Trend

• Local TV money is changing the landscape– Allowing more teams to be financially competitive

• Examples– Detroit Tigers • $400million over 10 years• Fox Sports Detroit

– San Diego Padres• $75 million per year for 20 years, up from $14 million

per year

As a Points of Reference

• Milwaukee Brewers– $600,000 for local TV rights in 1970

• Texas Rangers– Bankrupt in 2010– Player payroll of $125 million in 2012– Received $160 million upfront and an equity stake

in Fox Sports Southwest

“Harness the opportunity the market provides”

Teams that Own Networks

• New York Yankees– 30% of YES – Earns in excess of $450 million/year

• Boston Red Sox– 80% of New England Sports Network

Revenue Sharing and TV $$$

• Major league franchises received $28.4 billion from cable TV networks– Total market capitalization of Time Warner is

$27.9 billion– Net worth of Michael Bloomberg (12th richest man

in the world) is $27 billion• Where does this $$$ come from?– Your cable bill

2014 Customer Rates(Per Month)

• ESPN $5.40• Fox Sports 1 $0.90• TNT & TBS $1.80

Regional Networks(Per Month Fees Per Subscriber)

• New York Yankees (YES Network) $3• New York Mets (SportsNet NY) $2.55• Boston red Sox (New England Sports Net)

$3.50• Baltimore Orioles & Washington Nationals

split $2.28

Public Finance

• Teams and networks get paid whether or not anyone watches these games

• People who get cable to watch the Oprah & Soap networks and never watch a game subsidize MLB through their monthly cable bills

• Are “sports games” on cable TV a public good?• What is “good” to one person may be viewed

as bad as others

Noteworthy Aspects of Public Goods

• Even though everyone consumes the same quantity of the good, it need not be valued equally by all

• Classification as a public good is not absolute; it depends on market conditions and the state of technology– impure public good: some rivalry and/or excludable

to some extent– Example: TV Broadcasts, Movies, City Streets,

Seashore, Restaurant Ratings

• Private goods are not always provided only by the private sector– publicly provided private goods (rival & excludable) Ex:

Medical care• (Public provision of a good does not necessarily mean that

it is also produced by the public sector, nor that it is a public good)– Example: Garbage Collection; park maintenance– Other examples of goods in which the government

hires private companies to do work? – Other reasons why government might offer good or

service such as education? Commodity egalitarianism – notion that some commodities ought to be made available to everyone

Free Rider Problem

• Attempting to avoid bearing the cost of financing a public good.

• Results from the non-exclusion aspect of public good

• Failing to reveal true preferences.• The larger the group– the more severe is the free rider problem– more likely a public good will not be financed by

voluntary contributions. • Choosing not to contribute is rational behavior.