Scott Corwon, the founder of IMPACTS and leading innovator in

th emerging
the i fi
fields
ld off diff
diffusion
i and
d price
i ththeory, provides
id
contemporary examples of the impact of professional sports pricing
relative to demand.

The purpose of the IMPACTS presentation series is to effectuate

knowledge transfer concerning topical mathematical and scientific
issues. Significant published works form the basis for much of the
presentation series, and these works are interpreted and presented
b recognized
by i d lleaders
d iin th
the ttopic
i area. Th
The presentation
t ti series
i iis
made possible through the generous support of IMPACTS.
The Economics of Modern
P f
Professional
i lSSports
t
Why care about sports economics?
• Sports
S t andd recreation
ti iindustry
d t iis a bi
big b
business.
i
 Amount Year Source
Estimated Size of the Entire Sports Industry, US $441.1 billion 2007 PRE

Annual Company Spending for Sports Advertising, US $32 billion 2007 PRE

National Football League (NFL)

NFL League Revenues $6.54 billion 2007 PRE
Overall Operating Income $568 million 2007 Forbes
Number of NFL teams 32 2008 NFL
Avg NFL Game Attendance 68,661 2007 ESPN
Avg NFL Team Value $957 million 2007 Forbes
Major League Baseball (MLB)
MLB League Revenues $6.08 billion 2007 MLB
Overall Operating Income $492 million 2007 Forbes
Number of MLB teams 30 2008 MLB
Avg MLB Game Attendance 32,767 2007 ESPN
Avg MLB Team Value $472 million 2007 Forbes
PRE: Plunkett Research, Ltd.
 Amount Year Source
National Basketball Association (NBA)
NBA League Revenues $3.57 billion 2007-08 PRE
Overall Operating Income $293 million 2007-08 Forbes
N b off NBA tteams
Number 30 2007 08
2007-08 NFL
Avg NBA Game Attendance 17,394 2007-08 ESPN
Avg NBA Team Value $372 million 2007-08 Forbes
National Hockey League (NHL)
NHL League Revenues $2.44 billion 2007-08 MLB
Overall Operating Income $95 million 2007-08 Forbes
Number of NHL teams 30 2007-08 MLB
Avg NHL Game Attendance 17,308 2007-08 ESPN
Avg
g NHL Team Value $200 million
$ 2007-08 Forbes
Other Sports Industry Revenue
Other Spectator Sports Leagues $3.7 billion 2008 PRE
Horse Racing $8 4 billion
$8.4 2008 PRE
Golf Courses $20.8 billion 2008 PRE
Fitness & Recreational Centers $20.3 billion 2008 PRE
Other Amusement & Recreation $19 3 billion
$19.3 2008 PRE
 Market Model

• Demand shifters
$ S1
– Income
– Price of related goods
– Consumer tastes
– Market size
– Price expectations P1

• Supply shifters D1
– Input prices
– Technology
– Taxes Q1 quantity
– Price expectations
– Number of firms
 Price Elasticity

• Measure of price sensitivity

%ΔQ d
E= • More substitutes
%ΔP • Big budget items
• Longer
g time horizons

• Elastic demand: ||E|| > 1

• Inelastic demand: |E| < 1
 Elasticity…
Elasticity

TR = $50,000
%ΔQ d
E= $
%ΔP E=?

50 TR = $48,000
200 40
1100 0.18
E= = = −0.82
− 10 0.22
45 D1

1000 1200 tickets

 Price Controls

S1
• Price Ceilings
– create shortages
– create black markets P1

Pceiling
D1

Q1 Qd tickets

shortage
 Price Controls

S1
• Price Floors
– Create surpluses
Pfloor

P1

D1

Qd Q1 tickets

surplus
l
 Maximizing Profit

• Profits = π = TR - TC

• Profit-max rule: MR = MC

•What do the NY Yankees sell?

•What kind of cost is Alex Rodriguez
Rodriguez’ss salary?
 Perfect Competition

MC
$ S
ATC

P1 MR = P

D
Q1 Quantity q1

Market Firm
 Monopoly
• Relevant Market
– Anyy close substitutes?
• Entry Barriers
– Economies
E i off scale
l
– Control over key input
– Government restrictions
 Monopoly Profits are maximized
where MR = MC

Price is set off of demand

curve
$
MC

ATC
P1

ATC1

Q1 Quantity
MR
 Pricing Strategy: Phillies vs Flyers

• Each is a monopoly
$ MC2 MC1
• MC a backward “L”
• Does it pay to sell out?
P2
P1

Q1
D
Citizens Bank Park Wachovia Center MR
43,500 19,500
 2006 Ticket Prices
Phillies Flyers
Game Season Game Season
Field Victor’s
Level $44 $39.75 Restaurant $100 $84
$38
$ $34.75
$
$25 $21.83
Club Lower Level
Level $27 $24.88
$24 88 $85 $69
$22 $19.88
$20 $17.93
Terrace Mezzanine
$30 $27.31 $55 $44.50
$22 $19 88
$19.88 $45 $38
$16 $14.88 $40 $31.75
$23 $20

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

 The Role of Uncertainty

• Are the Yankees bad for baseball?

– Are dynasties a bad idea?
– How often should the home team win?
• Why do teams sell season tickets?
– Transfers risk from team to fans
– Whyy do fans buyy them?
 Attendance vs Winning Pct
Pct.

1 1
0.9 0.9
2002 % of Capacity

apacity
0.8 0.8
0.7 0.7
06
0.6

002 % of Ca
06
0.6
0.5 0.5
0.4 0.4
0.3 0.3
0.2 02
0.2

20
2

0.1 0.1
0 0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
2001 Winning Percentage 2001 Winning
Wi i Percentage
P t

NFL MLB
 Can Losing be Good?

• Cleveland Browns won all the time in AAFC

• Fans of AAFC lost interest
– Even Browns fans
– Attendance fell
• Attendance fell in MLB in 1950s
– NY teams in every World Series (sort of)
– Why go see Pittsburgh play Cincinnati?
• Study looked at attendance in MLB
–CControlled
t ll d ffor d
day, titime, weather,
th quality
lit off opponentt
– Attendance highest when home team won 60% of time
 R
Regression
i A Analysis
l i

• Regression is a form of statistical

analysis
l i off economic
i b
behavior
h i and d
theory.
y
– Regression analysis attempts to explain the
variance of a particular variable of interest
interest.
• Attendance Function
A = f(X1, X2, X3, …)
 Regression Analysis
• Regression analysis can be used for
predictive purposes, but in this presentation
we will use it to test our economic theory.
• Two ways that regression results can confirm
economic theory: The sign and magnitude of
the estimated relationship and the statistical
significance.
 Regression Example
• Consider a model of baseball attendance. We think that the following
g influence overall team attendance in the following
items might g ways
y

Variable Sign of Relationship

Price Negative
Population Positive
Concession Prices Negative
Income Positive
Team Quality Positive
O
Opponent’s
t’ Quality
Q lit P iti
Positive
Weather Ambiguous

A = β0 + β1P + β2POP + β3C + β4I + β5QH + β6QV + β7W

• Here are some actual regression results from Depken (2000,
Journal of Sports Economics)
Franchise Economics and
Owner Objectives
j
 Franchise Objectives
• Maximize profits?
p
Profit = TR – TC

• Championships?
• Bad things can happen if bottom line is forgotten
• Case
C in point: O
Ottawa S
Senators
– Best record in NHL: 2002-2003
– Declared bankruptcy: 2003

• Ego premium?

• Civic-mindedness?
 Franchise Revenues
TR = RG + RB + RL + RS

– Where:
• RG = Gate Revenue
• RB = Broadcast Revenue
• RL = Licensing Revenue
• RS = Stadium Revenue
 Gate Revenues: RG
RG = α Rh + (1-
(1 α)Rp NFL: α = 60%
MLB: α = 66%
• α = home team’s share NBA, NHL: α = 100%
• Rh = home team gate
• Rp = pooled gate from all other teams

• Impact of Revenue Sharing

– Financial stabilityy (early
( y NFL struggled
gg to maintain
league); "luxury tax" in MLB
– Competitive balance
– Shifts funds from teams that spend a lot on good
players to teams that do not; tends to depress what
teams are WTP for players (“tax on quality”)
 Broadcast Revenue: RB

• National revenue is shared equally

q y
• Local revenue is not shared equally
– KC: A small market for MLB but not NFL
– Green Bay would have disappeared
• Tradeoff: RB vs RG?
Î blackouts
• What
Wh t determines
d t i b
broadcast
d t rights
i ht payments?
t ?
– Demand by Advertisers
– Super Bowl XLIII:
• NBC received $206m for 69 spots ($3m per 30 seconds)
Broadcast Money
y Trail

Sports Teams and Leagues

Programming Rights Fees $

Media Providers (Networks, Cable, Satellite)

Ad Slots Slot Fees $

Advertisers (Consumer Products Producers)

 Revenue from Broadcast Rights
g Agreements
g
Sport Years Rights Total Fees Annual
Average
NFL 2006-2011 ABC, FOX, CBS, $22.2 billion $3.7 billion
ESPN
NBA 2008-2015 ABC/ESPN, AOL $7.4 billion $930 million
Time Warner
MLB (1) 2007-2013 ESPN $2.4 billion $343 million

MLB (2) 2007 2013

2007-2013 FOX/TBS $3 billion $429 million

NASCAR 2001-2008 FOX/NBC, Turner $2.4 billion $400 million

PGA 2003-2006 CBS, NBC $850 million $212.5 million

NHL 2005-2008 Versus/NBC $207 million $70 million

Source: various sources
 Stadium Revenue: RS
• Concessions
• Parking
g
• Naming rights: pros; colleges; individuals
• Luxury seats
– don't count as gate, therefore, don't have to share

Example:
• luxury suite rents for $500,000 per year
• 20 seats
• claim each seat is worth $50
Î team must share $3200 = 0.4 * 20 * $50 * 8 games
Wh have
Why h we seen a move to
t small
ll
markets by NFL teams?

– Rams: LA Î St. Louis

– Raiders: LA Î Oakland
– Oilers: Houston Î Nashville
– Browns: Cleveland Î Baltimore

Revenue Sharing is the key!

 Licensing Revenue: RL
• Generally shared with all teams
• Cowboys broke ranks with NFL in 1995 by
signing Pepsi for stadium sponsorship
 Franchise Costs
TC = CP + CA + CT + CS + OC
• Player Salaries
– Over 50% of team revenues
– Deferred compensation
– Bonuses
– Workers’ comp Opportunity Costs: Profit that
– Pension contributions could be earned in another city
– Player Development
• MLB and NHL
• Administrative
– Coaches and management
– Marketing
• Travel
• Stadium
 Average costs and revenues (in millions) across
th major
the j sports
t iin 2006
League Gate Other Total Player Other Total Operating
Revenue Revenue Revenue Expense Expense Expense Profit
NFL 44.59 159.75 204.34 125.47 61.11 186.58 17.76
NHL 34.10 47.10 81.20 44.17 33.85 78.02 3.18
NBA 39.23 79.87 119.10 68.77 40.58 109.35 9.75
MLB 61.03 109.33 170.37 93.30 60.55 153.55 16.52
 Accounting Games
• Book Profit and Depreciation
Costs include interest expenses
Profit = TR – TC and depreciation of capital

– Corporate ta
taxes
es 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
 Table C
San Antonio Spurs Depreciation and Tax Savings 1993-4/1994-5
(All figures in $millions)

1993-94 1993-94 1994-95 1994-95

Category w/o Roster w/Roster w/o Roster w/Roster
DEP DEP DEP DEP
(1) NOR 49
4.9 49
4.9 03
0.3 03
0.3
(2) DEP 3.5 (3.5+10.7) 3.5 (3.5+10.7)
(3) NAD 14
1.4 -9 3
-9.3 -3 2
-3.2 -13 9
-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
 Accounting Games
• Vertical Integration
– Media outlet buys
y sports
p team
• AOL Time Warner Î Atlanta Braves
• Tribune Company Î Chicago Cubs
• Disney Î Anaheim Angels /Anaheim Ducks
• FOX Î LA Dodgers
– Double monopoly?
 Upstream
p Firm Downstream Firm
(Team) (Network)

Pdown
Pup MC

MC

D D
MR MR

Qup Qdown

• Vertically integrated firm sets transfer price to

allocate profit across combined entity
– Set low broadcast rights fee to reduce team profits in
order to p
plead p
poverty
y during
g lobbying
y g for p
public
subsidy
 League Decisions
– Cincinnati Red Stockings (1869)
• “barnstorming”
– National League
g ((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
– More revenue
re en e sources
so rces
• Costs:
– Sharing of league revenues
– Reduced geographical monopoly
– Reduces threat of moving
– New leagues: ABA, WHA, AFL, USFL
• League-wide
L id MMarketing
k i
– Free-rider problem
• Competitive Balance and Revenue Sharing
 NFL Expansion Fees
Teams Franchise Fee First Season
Houston Texans $700 million 2002
Carolina Panthers and Jacksonville Jaguars $140 million 1995
Seattle Seahawks and Tampa Bay Bucs $16 million 1976
Cincinnati Bengals (AFL) $7.5-$8 million 1968
New Orleans Saints $8.5 million 1967
Atlanta Falcons $8.5 million 1966
Miami Dolphins (AFL) $7.5 million 1966
g
Minnesota Vikings $1 million
$ 1961
Dallas Cowboys $1 million 1960
Original members of the AFL $25,000 1960
Phil d l hi Eagles
Philadelphia E l and
d Pittsburgh
Pitt b h Pirates*
Pi t * $2 500
$2,500 1933
New York Giants $500 1925
Original members of the NFL** $100^ 1920
*Changed nickname to Steelers in 1940
**NFL was known as the American Football Association its first two seasons.
^According to accounts, this fee was never paid by the teams.

Source: http://www.profootballhof.com/history/release.jsp?release_id=1286
If a team always sells out its home games, economists
would say it is very likely that:

a) A surplus exists
b) There is excess supply
c) There is excess demand
d) Prices are too high
 If an industry is a monopoly, output is _____ and prices are
_____ than
th if it were perfectly
f tl competitive.
titi
a) Lower, lower
b) Higher, lower
c) Lower, higher
d) Higher, higher
If demand for tickets to see the LA Lakers is inelastic,

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.
demanded
If income increases and tickets to see a Notre Dame
f tb ll game are a normall good
football d th
then th
the

a) demand for tickets will decrease.

b) supply of tickets will increase.
c) demand for tickets will increase.
d) supply of tickets will decrease.
 The fact that attendance rises at baseball stadiums
during “bobblehead”
bobblehead days suggests
a) baseball games and bobbleheads are
complements.
complements
b) baseball games and bobbleheads are
substitutes.
c) baseball games and bobbleheads are
normal goods.
d) No information about baseball games and
bobbleheads can be determined from this
fact.
A negative aspect of anti
anti-scalping
scalping laws is

a) they prevent sell-outs.

b) they cause people to pay more than
they are willing to in order to get tickets
tickets.
c) they prevent the market from matching
willing buyers and sellers.
d) th hurt
they h t ticket
ti k t agencies.
i
If the Knicks sign LeBron James to a big contract they
may raise
i titicket
k t prices
i b
because

a) their average cost curve shifts up.

b) their demand curve shifts right.
c) their marginal cost curve shifts up.
d) their fixed cost curve shifts up.
If a game is not sold out, then the marginal cost to a
team of accommodating one additional fan is

a) almost infinite.
b) about equal to the team's payroll
c) essentially zero
zero.
d) about half the cost of a ticket.
 To determine the market demand for tickets to see
th B
the Boston
t Bruins
B i play
l hhockey
k we
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.
i
 The league with the most equal split of gate
receipts
i t between
b t the
th home
h andd visiting
i iti tteams iis

a) The NFL
b)) The NBA
c) Baseball’s National League
d)) The NHL
The "naming
naming rights curse"
curse refers to the fact that

a) teams that have sold their naming

rights have performed poorly.
b) t
teams often
ft receive
i too
t little
littl revenue
for their naming rights.
c)) cities g
generally
y do not receive any y of
the naming rights revenue.
d) firms that have bought naming rights
have often run into financial
difficulties.
Over the course of a single season, the largest
proportion
ti off team
t costt is
i

a) zero.
b)) fixed.
c) variable.
d)) shared byy all teams in the
league.
The ownership of professional teams by media
outlets
tl t

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
b
because th
they
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
managingi ththe salary
l cap.
d) have so many luxury boxes.
 Byy declaring
g Subchapter
p S status owners of
professional teams can
a) increase their revenue flow and hence
their
h i profits.
fi
b) reduce the Corporate Tax Rate that they
must pay.
p y
c) use depreciation to reduce their
personal taxes.
d) reduce
d th
the iinterest
t t payments
t they
th mustt
make to their creditors.
Marketing for a league is a public good if

a) all teams pay for the cost of

advertising for small market teams.
b) allll tteams pay an equall share
h off th
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
campaigns.