Rodney Fort's Sports Economics Chapter 2  Demand and Sports Revenue

Figure 2-1 The Economic Trinity Legend: Scarcity is a fact of life. Because scarcity exists, rationing devices must be chosen. Once a rationing device is chosen, people will compete according to that choice in order to obtain the scarce good.

Table 2-1 Willingness to Pay and Close Games, NFL 2008 Team 2008 Ave. Ticket W% % Close Games Tennessee $58.55 0.813 37.5% Indianapolis $81.13 0.750 62.5% Pittsburgh $67.47 56.3% New York Giants $88.06 Carolina $63.32 Miami $66.11 0.688 Atlanta $63.95 New England $117.84 31.3% Baltimore $77.20 Minnesota $73.23 0.625 68.8% Averages for Best Teams $75.69 0.719 47.5% Philadelphia $69.00 0.594 50.0% Chicago $88.33 0.563 Tampa Bay $90.13 New York Jets $86.99 43.8% Arizona $65.08 Dallas $84.12 Washington $79.13 0.500 San Diego $81.39 Houston $66.69 New Orleans $62.22 Denver $76.75 San Francisco $70.55 0.438 Buffalo $51.24 Green Bay $63.39 0.375 Jacksonville $55.30 0.313 Oakland $62.23 Cincinnati $69.85 0.281 Seattle $61.25 0.250 Cleveland $54.41 Kansas City $80.69 0.125 St. Louis $68.28 Detroit $66.39 0.000 25.0% Averages for Worst Teams $64.64 0.226 38.9%

Table 2-2 Demand Schedules for Men’s and Women’s Basketball Season Tickets (Typical class size = 100)

Figure 2-2 Demand Functions for Men’s and Women’s Basketball Season Tickets (Typical class size = 100) Legend: A simple classroom experiment chooses a subset of the class and asks, “How many season tickets to men’s or women’s basketball would you buy at various prices?” Plotting price against their response gives two different demand functions for the two sports. For example, 70 students are willing to buy a men’s ticket at a price of $20. But the price would have to fall to $10 before 70 students would buy a women’s ticket.

Table 2-3 Sports Participation by High School Boys and Girls, 2007=2008, Selected Sports Football 1,108,286 Basketball 449,450 552,935 Outdoor track & field 447,520 548,821 Volleyball 397,968 Baseball 478,029 Fast-pitch softball 371,293 Soccer 383,561 346,545 Wrestling 259,688 Cross country 190,349 221,109 Tennis 172,455 Golf 159,958 Swimming & Diving 147,197 156,285 Competitive spirit squads 111,307 111,896 69,243 Total 4,372,115 3,057,266

Figure 2-3 Varieties of Demand Functions Legend: D1 represents the case of demand with perfect substitutes; raising the price even a bit results in a complete collapse in attendance to zero. D2 takes the polar opposite case of no substitutes at all; fans demand a particular level of tickets regardless of price. D3 is the intermediate case of downward sloping demand; raising price reduces attendance, but not completely.

Table 2-4 Teams, Population, and Per Capita Income, Major League Areas City Number of Teams Number of teams Population 2005-2007 Income 2007 New York—Northern New Jersey—Long Island MLB (2), NBA, NFL (2), NHL (3) 8 9,441,316 $73,088 Los Angeles—Long Beach—Santa Ana MLB (2), NBA (2), NHL (2) 6 6,386,821 $63,569 Chicago—Naperville—Joliet MLB (2), NBA, NFL, NHL 5 4,907,604 $70,715 Dallas—Fort Worth—Arlington MLB, NBA, NFL, NHL 4 3,146,612 $63,719 Philadelphia—Camden—Wilmington 2,967,657 $73,536 Washington—Arlington—Alexandria 2,960,336 $97,095 Houston—Sugar Land—Baytown MLB, NBA, NFL 3 2,775,580 $60,188 Atlanta—Sandy Springs—Marietta 2,721,722 $67,568 Miami—Fort Lauderdale—Pompano Beach 2,680,893 $55,749 Boston—Cambridge—Quincy 2,438,340 $83,103 Detroit—Warren—Livonia 2,233,015 $66,930 San Francisco—Oakland—Fremont MLB (2), NBA, NFL (2) 2,221,909 $86,560 Phoenix—Mesa—Scottsdale 1,988,176 $62,143 Minneapolis—St. Paul—Bloomington 1,805,206 $79,158 Seattle—Tacoma—Bellevue MLB, NFL 2 1,782,632 $75,625 San Diego—Carlsbad—San Marcos 1,510,524 $71,139 St. Louis MLB, NFL, NHL 1,455,449 $64,111 Tampa—St. Petersburg—Clearwater Baltimore—Towson MLB, NBA 1,403,709 $77,501 Denver—Aurora 1,334,413 $71,531 Pittsburgh 1,180,651 $59,095 Portland—Vancouver—Beaverton NBA 1 1,143,930 $66,077 Cincinnati—Middletown 1,099,419 $65,396 Cleveland—Elyria—Mentor 1,082,972 $61,193 Kansas City 1,052,220 $66,504 Sacramento—Arden-Arcade—Roseville 1,042,211 $68,928 Orlando—Kissimmee 1,035,320 $57,186 San Antonio 933,596 $54,141 San Jose—Sunnyvale—Santa Clara NHL 920,884 95,980 Columbus 920,190 $64,886 Indianapolis—Carmel NBA, NFL 882,857 $64,343 Charlotte—Gastonia—Concord 859,243 $62,594 Milwaukee—Waukesha—W. Aliss 808,367 $66,707 Jacksonville NFL 661,231 $61,488 Memphis, Nashville NBA, NFL, NHL 636,871 $54,479 Oklahoma City 600,597 $55,168 Salt Lake City 569,422 $63,851 Buffalo—Niagara Falls 566,372 $59,763 New Orleans—Metairie—Kenner 542,239 $56,375 Raleigh—Cary 541,873 $72,792 Green Bay 165,426 $61,644 Min Max Ave 2.7 1,825,933 $67,457 Median 2.0

Figure 2-4 Upward Sloping Demand V. Change in Demand Legend: A change in demand, from D1 at one point in time to D2 at a later point in time can be confused for a positive relationship between attendance and price. Rather than correctly identifying point (A1, P1) on demand D1 and point (A2, P2) on D2, one could mistakenly conclude that demand slopes upward by failing to account for factors that change demand, itself.

Table 2-5 Correlations between NBA Attendance and Prices, 2000-2007 Team Correlation (+) Correlation (-) INDIANA 0.81 HOUSTON -0.85 NEW YORK 0.79 GOLDEN STATE -0.78 DALLAS 0.77 NEW ORLEANS -0.64 SACRAMENTO 0.73 ATLANTA -0.57 PHILADELPHIA 0.72 NEW JERSEY -0.51 PORTLAND MIAMI -0.39 PHOENIX 0.57 CHARLOTTE -0.38 MINNESOTA 0.56 DETROIT -0.37 MEMPHIS 0.47 MILWAUKEE -0.36 TORONTO 0.46 DENVER -0.34 CLEVELAND SEATTLE -0.33 L.A. LAKERS 0.30 BOSTON -0.30 CHICAGO 0.28 ORLANDO -0.26 SAN ANTONIO 0.25 WASHINGTON -0.17 UTAH 0.21 L.A. CLIPPERS 0.02

Figure 2-5 Buyers’ Surpluses for Men’s and Women’s Basketball Tickets (Typical class size = 100) Legend: Buyers’ surpluses are the area above a given price, but below the demand function, on the number of tickets sold. At a price of $20, 40 women’s tickets are demanded. On each and every ticket, willingness to pay (along the demand function) lies above the price. The shaded area shows the buyers’ surpluses enjoyed buy those purchasing the 40 tickets.

Figure 2-6 Price Change and Buyers’ Surpluses for Women’s Basketball Tickets (Typical class size = 100) Legend: Buyers’ surpluses can be used to measure the value buyers put on changes in prices. At a price of $20, buyers’ surpluses on the 40 tickets purchased are the shaded area above $20 and below the demand function out to 40 tickets. When price falls to $10, buyers’ surpluses increase by the shaded rectangle on the original 40 tickets, plus the shaded triangle since the number of tickets purchases increases by 30 to 70 total.

Table 2-6 2007 Forbes Revenue Data (All figures in $ millions) League Smallest Revenue Team Average Largest MLB $128 ($134) Florida $183 ($192) $327 ($343) NY Yankees NBA $82 ($86) Oklahoma City $126 ($132) $208 ($218) New York NFL $195 ($205) Minnesota $222 ($233) Washington NHL $64 ($67) NY Islanders $92 ($97) $160 ($168) Toronto

Figure 2-7 Demand and Elasticity Legend: A linear demand function is defined as P=a–bA, where P=Price, a is the y-interecept, –b is the slope, and A is attendance. Elasticity is . Above the linear midpoint, demand is elastic (e > 1). At the midpoint, demand is unit elastic (e = 1). Below the midpoint, demand is inelastic (e < 1).

Figure 2-8 Demand, Marginal Revenue, and Total Revenue Legend: A linear demand function is defined as P=a–bA, where P=Price, a is the y-interecept, –b is the slope, and A is attendance. Marginal revenue has the same y-intercept but twice the slope, –2b. Total revenues are R(A)=P(A)A. Total revenues rise to a maximum through the elastic region of demand (e > 1), reach their maximum at the unit elastic point (e = 1) associated with attendance A0, and fall through the inelastic region of demand (e < 1).

Figure 2-9 Production in the Inelastic Region of Demand Legend: A linear demand function is defined as P=a–bA, where P=Price, a is the y-interecept, –b is the slope, and A is attendance. Marginal revenue has the same y-intercept but twice the slope, –2b. Total revenues are R(A)=P(A)A. Total revenues rise to a maximum through the elastic region of demand (e > 1), reach their maximum at the unit elastic point (e = 1) associated with attendance A0, and fall through the inelastic region of demand (e < 1). If all that matters is attendance revenue, production in the inelastic region of demand, at A1, has lower total revenue than production at the unit elastic point, A0. Reducing ticket sales raises total revenues.

Figure 2-10 Total Revenue and an Increase in Demand Legend: An increase in demand, from D0 to D1, increases total revenues from R0 (A) to R1 (A). It is important to note that the maximum of the new total revenue, R1 (A), occurs at a higher level of attendance, A1 > A0.

Figure 2-11 Personal Seat License for a Typical Fan Legend: Personal seat licenses, or PSLs, are a form of two-part price discrimination. In addition to charging a ticket buyer the ticket price P*, an additional charge equal to buyer’s surplus (the shaded triangle XP*Z) also is sought. It is the additional charge that discriminates between higher willingness to pay and lower willingness to pay among different buyers.

Figure 2-12 2007 Forbes Revenue Data (Million 2009 dollars) Legend: Each line in the chart shows the smallest, average, and largest team revenues for each of the four major pro leagues. Revenue variation among teams is shown along a given line. Revenue variation between leagues is apparent from a comparison among the lines. The low-end NFL team earns much more than the low-end NHL team. The NFL and MLB averages are the highest, and MLB clearly has the largest revenue team at the high end.