Purpose of Sports? Baseball vs. Football

Economics of Sports Bob Donchez Robert.Donchez@Colorado.edu Unit 1  Warm Up:  The Business of Sports

Sports Play an Outsized Role They have been used for political purposes “Ping pong diplomacy” led to U.S. relations with China Boycotts disrupted the Olympics in 1976, 1980, and 1984 Sports are not a very big business MLB, NBA, NFL, and NHL combined generated $19.09 Billion in revenue in 2008 CIGNA Insurance generated $19.10 Billion But the nightly news doesn’t have a segment devoted to the day in insurance report

The Module Economic / Financial Concepts in Sports The Industrial Organization of Sports The Public Finance of Sports The Labor Economics of Sports Intercollegiate and Amateur Sports

Review of Economic Concepts Key Concepts What is comparative advantage, and how does it apply to sports? Review of Supply and Demand Financial Statements Monopoly Fixed Costs

The Industrial Organization of Sports Key Questions How do teams and leagues maximize profit? What role does monopoly play in sports? What is competitive balance and why is it important?

The Public Finance of Sports Key Questions How do teams and leagues benefit from their relationships with municipal, state, and national governments? How do municipalities benefit from their relationships with sports teams and leagues?

The Labor Economics of Sports Key Concepts How do labor markets function in professional sports? What impact do the monopoly (seller) power of unions and the monopsony (buyer) power of leagues have on labor markets in sports?

Intercollegiate and Amateur Sports Key Concepts How did the concept of amateurism arise? What role does amateurism play in intercollegiate sports? How have changes in admission and eligibility standards affected colleges and athletes? Pay for Play?

Babe Ruth’s Odd Career Path Babe Ruth was originally a star pitcher From 1916 to 1918 he was the top pitcher on Red Sox He was one of the best in all of baseball From 1919 on he pitched in only 22 games Why did the Red Sox stop using their best pitcher?

Babe Ruth and Opportunity Costs The opportunity cost of using Babe Ruth in the outfield was large Opportunity cost is the value of the forgone alternative The Red Sox pitching was not as good without him BUT: The opportunity cost of using Babe Ruth as a pitcher was greater Ruth was the best hitter of his age In 1918 he hit more home runs than the entire Red Sox starting outfield hit in 1917

Babe Ruth And Absolute Advantage Absolute advantage occurs when a person (or nation) is better at doing something than another person (or nation) Babe Ruth was the best pitcher and the best hitter on the Red Sox Ruth had absolute advantage as a pitcher and as an outfielder Despite an absolute advantage as a pitcher, he stopped pitching

Babe Ruth and Comparative Advantage Comparative advantage exists where a person’s (or nation’s) relative advantage is greatest Babe Ruth had a comparative advantage as a hitter He had an absolute advantage as a pitcher He had a much larger absolute advantage as a hitter The opportunity cost of using him as a pitcher was greater than the opportunity cost of using him as a hitter

The Gains from Specialization The Red Sox were better off with Babe Ruth as a hitter The opportunity cost of using him as a pitcher was greater than the opportunity cost of using him as a hitter People, teams, and nations gain from specializing where they have a comparative advantage That means letting others do an activity that you can do better

Table 1-3 Highest Expansion Franchise Rights Fees ($millions) MLB NBA NFL NHL Decade Fee Year 1960s $12.5 ($78.5) 1968 $2.0 ($12.6) $8.5 ($58.9) 1965 $2.0 ($13.1) 1967 1970s $7.0 ($26.9) 1976 $6.2 ($27.5) 1974 $16.0 ($70.9) $6.0 ($24.4) 1975 1980s — $32.5 ($57.2) 1989 1990s $130.0 ($174.2) 1998 $121.3 ($183.2) 1993 $700.0 ($917.0) 1999 $80.0 ($108.8) 1997 2000s $300.0 ($357.0) 2003 Real Annual Rate of Growt 2.7% 10.0% 8.4% 7.3%