Chapter 8: Economics of Professional Sports. Time Honored Myths Team owners are losing money. They stay in the game for the fun if it! The ball park is.

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The Economics of Professional Sports

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Presentation transcript:

Chapter 8: Economics of Professional Sports

Time Honored Myths Team owners are losing money. They stay in the game for the fun if it! The ball park is a heaven for “ordinary” fans! Players are under-paid! Supreme Court’s rule in 1922 granting MLB exemption from Anti Trust Law is justified!

Product Market Output of this market in entertainment Team owners form a “cartel” named the league franchise to maximize joint profit (e.g., MLB, NFL, NBA, NHL, MLS) Team owners share the “monopoly” profit

Cartel as a Joint Monopoly Price Quantity D D 80 5 MR MC MR=MC 70 7 P=MC

Owners & League Franchise Owners are the ultimate decision makers: hire payers and coaches, rent stadiums, sell tickets, monitor behavior of teams, players, and coaches Owners hire a “commissioner” for interdependent operation of the league: schedule games, sell broadcasting rights, negotiate with players’ union

Owners & League Franchise Players and coaches are under binding contracts. They can’t change teams unless released or traded League franchise controls the market share by preventing or consolidating competition (e.g., NBA-ABA, NFL-USFL)

Labor Market Teams transact in the labor market Monopsony: a market with only one buyer, but many sellers Draft: a parity arrangement where weaker teams hire stronger players

Bilateral Monopsony League franchise to hire players Labor union to represent player rights Exploitation: owners want to pay the “supply” wage, workers want to make the “demand” wage Possibility for conflict and strike

Wage Employment D D-Wage MRP=Labor Demand Marginal Labor Cost MLC=MRP S-Wage A Wage Determination Labor Supply B Range of Negotiations=AB E

Monopsony vs. Competition Wage ($000) No. of Starting Pitchers D 900 MLC MLC=MRP 600 A S B 4 S MRP=D D=S Monopsony: 4 at $600,000 each Competition: 5 at $700,000 each C DW Loss=ABC

Free Agency Players can find the highest paying team after they play several years in the league (NFL: 5 years; MLB: 6 years) Average MLB salary has gone up $21,300 in 1976 to $1,983,850 in 2000