McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 37 If We Build it Will They Come? And Other Sports Questions

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline THE PROBLEM FOR CITIES THE PROBLEM FOR OWNERS THE SPORTS LABOR MARKET THE VOCABULARY OF SPORTS ECONOMICS

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Problem for Cities If a city wants a team should it –wait for expansion? Cities that succeeded with expansion –Football »Jacksonville, Charlotte, Cleveland*, Houston* –Baseball »Miami, Tampa, Denver, Phoenix –lure a team from another city? Cities that succeeded with luring others –Football »St. Louis, Nashville, Oakland-LA-Oakland, Baltimore

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Economic Impact of a Sports Teams Are lures to sports franchises the same as lures to other business? –Most economists, argue that sports teams do not offer much economic impact. The reasons are Few home games (8 in football up to 81 in baseball) Local substitution: the effect of the substitution of one economic activity for another within a community, so the net effect is zero. Money spent at the stadium is mostly money that would have been spent in the city anyway.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Why are Stadiums Publicly Funded The external benefits to a city that exist because a team is in the town. People in a city may enjoy following a local team and be willing to pay higher taxes to experience that enjoyment.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Problems for Owners To Move or to stay –Owners often threaten to move to get better stadiums or luxury boxes added to existing stadiums. To Win or to Profit –Small market teams rarely succeed in baseball because the bulk of revenue is locally derived (local TV deals) whereas this is not a factor in football because the revenue is generally shared.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Rate of Return and Capital Gains owners often claim an operating loss on their teams history suggests that owners make a significant profit on the sale of their franchise the capital gain more than makes up for the loss the annual rate of return on franchise sales has been 9% to 23% for recent sales

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sports Labor Market To economists all firms compare the revenue they gain by having an employee, their marginal revenue product, with what that employee gets in wages and benefits. Sports is no different except there are often limits on what players can do. They can not –pick the team they want to play for. –agree to a lower salary than league minimums –make so much that their team violates a salary cap.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Negotiation The wage for any player will be between the most they are worth (their marginal revenue product) and the least they will accept, their Reservation Wage ( the least amount that a player will accept because it is the next best offer) Where the negotiation ends up depends greatly on the institutional framework of the sport.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Necessary Vocabulary Free Agent: A player that is able to offer services to the highest bidder Draft: The process by which new talent is assigned to teams Salary Cap: the maximum in total payroll that a team can pay its players Revenue Sharing: the process by which some revenues are distributed to all teams rather than simply the teams that generate them Reserve Clause: a clause that requires that players resign with the team to which they belonged the previous year Strike: an action by labor to deny employers the services of the employees Lockout: an action by employers to deny employees access to their jobs

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Various Sports Team Sports –Football League minimum salaries Limited free agency after several years of service Salary cap –Baseball League minimum salaries Binding arbitration after 3 years Free agency after 6 years No salary cap –Basketball League minimum salaries Free agency after several years Salary cap

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Various Sports Individual Sports –In golf, tennis etc. talent is paid appearance fees and winnings. –In motor sports (NASCAR, CART, IRL, F1) talent is paid a salary and a share of winnings.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Strikes and Lockouts There have been repeated strikes and lockouts in the team sports and none in the individual sports. The fundamental economic reason for this is that there is a direct relationship between pay and performance in individual sports and no such relationship in team sports.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Motor Sports and Monopoly NASCAR, IRL and F-1 are family- owned enterprises NASCAR, IRL and F-1 own monopolies in their respective aspects of racing All set race dates that are in their own interest (rather than drivers’, fans’, teams’ or track owners’ interest) All have substantial market power