The Economics of The Economics of Professional SportsProfessional Sports

What is the real score?What is the real score?

Nicole Sexton Nicole Sexton

Facts Facts From 1990 – 2000, 10 new NFL stadiums From 1990 – 2000, 10 new NFL stadiums

opened at a total cost of $2.677 billion with opened at a total cost of $2.677 billion with taxpayers financing 77% or $2.057 billion. taxpayers financing 77% or $2.057 billion.

2001 and 2002 seasons six new NFL stadium 2001 and 2002 seasons six new NFL stadium with taxpayers paying 57% of the cost. with taxpayers paying 57% of the cost.

All businesses and individuals suffer from All businesses and individuals suffer from higher taxes tied to football subsidies higher taxes tied to football subsidies

The only individuals deriving big benefits The only individuals deriving big benefits from sports subsidies are the team owners from sports subsidies are the team owners and the players. and the players.

Organizational StructureOrganizational Structure

Four major team sports are played in Four major team sports are played in the United States. the United States.

In most cases, individual teams, or In most cases, individual teams, or clubs, are owned and operated for clubs, are owned and operated for profit by private individual or profit by private individual or partnerships. partnerships.

The team owners are entrepreneurs.The team owners are entrepreneurs.

Organizational StructureOrganizational Structure

The league determines the annual schedule The league determines the annual schedule of games, make and enforce the game rules of games, make and enforce the game rules and sets the guidelines for hiring new and sets the guidelines for hiring new players.players.

Professional sports leagues are controlled by Professional sports leagues are controlled by the club owners who hire an outside the club owners who hire an outside “Commissioner” and staff to oversee the “Commissioner” and staff to oversee the league operations. The decisions are made league operations. The decisions are made in the best interest of the sport , not to favor in the best interest of the sport , not to favor any individual owner or group of owners. any individual owner or group of owners.

Teams and PlayersTeams and Players

Pro sports has a unique employer – Pro sports has a unique employer – employee relationship. employee relationship.

Productivity from the workers are Productivity from the workers are shown through cheers of thousands shown through cheers of thousands for a job well done and released to for a job well done and released to the press. the press.

Also athletes are constantly Also athletes are constantly monitored through statistics. monitored through statistics.

Teams and PlayersTeams and Players

The general public is shocked by a star The general public is shocked by a star players multimillion dollar contracts but they players multimillion dollar contracts but they claim they are under paid. While some players claim they are under paid. While some players make 10 to 20 times more than other players.make 10 to 20 times more than other players.

Competition would diminish if the club had the Competition would diminish if the club had the ability to hoard all the best players. ability to hoard all the best players.

Athletes are not always free to work for the Athletes are not always free to work for the highest bidder due to the fact that some clubs highest bidder due to the fact that some clubs hold exclusive rights to contact a player. hold exclusive rights to contact a player.

Economics AnalysisEconomics Analysis

Sports clubs sell their services in an Sports clubs sell their services in an imperfect product market and hire their imperfect product market and hire their players in an imperfect resource market. players in an imperfect resource market.

When a sports clubs sells a ticket to a When a sports clubs sells a ticket to a game or a jacket with team emblem the game or a jacket with team emblem the transaction takes place in the product transaction takes place in the product market.market.

When a sports club hires a new player or When a sports club hires a new player or builds a new stadium the transaction takes builds a new stadium the transaction takes place in the resource market. place in the resource market.

The Product Market The Product Market

It is best for the competition to occur on It is best for the competition to occur on the playing field and not in the market.the playing field and not in the market.

If one team got all the good players then If one team got all the good players then over time that club would become so over time that club would become so strong compared to the lesser teams and strong compared to the lesser teams and the game would become boring to the game would become boring to spectators.spectators.

Then the weak club would eventually have Then the weak club would eventually have to go bankrupt and strong clubs would to go bankrupt and strong clubs would lose fans. lose fans.

Product MarketProduct Market

How are they able to do this?How are they able to do this? The league rules and regulationsThe league rules and regulations Pro sports resemble market cartelsPro sports resemble market cartels Cartel – is a group of firms that Cartel – is a group of firms that

formally agree to coordinate its formally agree to coordinate its production and price decisions in a production and price decisions in a manner that maximizes joint profits manner that maximizes joint profits

Cartel Cartel

For a cartel to be successful, several For a cartel to be successful, several requirement have to be met.requirement have to be met.

1. Have to be responsible for most of the 1. Have to be responsible for most of the outputs produced in there market – must outputs produced in there market – must be able to prevent new competition from be able to prevent new competition from entering the market and be able to entering the market and be able to integrate new competitors into the cartel.integrate new competitors into the cartel.

How – controlling star players contract and How – controlling star players contract and contracts to play in major stadiums. Also contracts to play in major stadiums. Also restriction newly formed rival leagues. restriction newly formed rival leagues.

Cartel Cartel 2. Each firm should be producing outputs that are 2. Each firm should be producing outputs that are

substitutes for the outputs produced by the other substitutes for the outputs produced by the other firms. firms.

How – all teams must follow the same rules and How – all teams must follow the same rules and regulations enforced by referees and umpires regulations enforced by referees and umpires hired by the league.hired by the league.

3. Ability to divide the market into territories 3. Ability to divide the market into territories controlled by each member and to establish controlled by each member and to establish production quotasproduction quotas

How – territories are determined by the league How – territories are determined by the league structure, games are controlled by league structure, games are controlled by league officials, which set the game schedule for the officials, which set the game schedule for the season. season.

Cartel Cartel

4. Must have the power to prevent 4. Must have the power to prevent “cheating” by member clubs. “cheating” by member clubs.

How – league has the contractual How – league has the contractual power to enforce league rules and power to enforce league rules and guidelines. guidelines.

Coordinated Behavior Coordinated Behavior

Sports clubs receive revenue from three Sports clubs receive revenue from three major sources: tickets and concession major sources: tickets and concession sales, merchandising rights for team sales, merchandising rights for team souvenirs and novelties, and radio and souvenirs and novelties, and radio and television broadcast rights.television broadcast rights.

Specific rules for dividing the revenue Specific rules for dividing the revenue generatedgenerated

Ex. NFL home teams receives 60% and Ex. NFL home teams receives 60% and visiting team receives 40% of ticket sales. visiting team receives 40% of ticket sales.

The largest portion of revenue for most The largest portion of revenue for most sports is the sale of broadcasting rights. sports is the sale of broadcasting rights.

Price and Output of Price and Output of Broadcasting RightsBroadcasting Rights

The marginal revenue curve is under The marginal revenue curve is under the demand curve the demand curve

Each club maximizes profits by selling Each club maximizes profits by selling up to the point where MC equals MRup to the point where MC equals MR

Without the cartel agreement the Without the cartel agreement the market would reach equilibrium at point market would reach equilibrium at point AA

Today the revenue is equally divided Today the revenue is equally divided among the league member clubsamong the league member clubs