The Economics of Professional Sports What is the real score? Nicole Sexton

Facts From 1990 – 2000, 10 new NFL stadiums opened at a total cost of $2.677 billion with taxpayers financing 77% or $2.057 billion. From 1990 – 2000, 10 new NFL stadiums opened at a total cost of $2.677 billion with taxpayers financing 77% or $2.057 billion and 2002 seasons six new NFL stadium with taxpayers paying 57% of the cost and 2002 seasons six new NFL stadium with taxpayers paying 57% of the cost. All businesses and individuals suffer from higher taxes tied to football subsidies All businesses and individuals suffer from higher taxes tied to football subsidies The only individuals deriving big benefits from sports subsidies are the team owners and the players. The only individuals deriving big benefits from sports subsidies are the team owners and the players.

Organizational Structure Four major team sports are played in the United States. Four major team sports are played in the United States. In most cases, individual teams, or clubs, are owned and operated for profit by private individual or partnerships. In most cases, individual teams, or clubs, are owned and operated for profit by private individual or partnerships. The team owners are entrepreneurs. The team owners are entrepreneurs.

Organizational Structure The league determines the annual schedule of games, make and enforce the game rules and sets the guidelines for hiring new players. The league determines the annual schedule of games, make and enforce the game rules and sets the guidelines for hiring new players. Professional sports leagues are controlled by the club owners who hire an outside “Commissioner” and staff to oversee the league operations. The decisions are made in the best interest of the sport, not to favor any individual owner or group of owners. Professional sports leagues are controlled by the club owners who hire an outside “Commissioner” and staff to oversee the league operations. The decisions are made in the best interest of the sport, not to favor any individual owner or group of owners.

Teams and Players Pro sports has a unique employer – employee relationship. Pro sports has a unique employer – employee relationship. Productivity from the workers are shown through cheers of thousands for a job well done and released to the press. Productivity from the workers are shown through cheers of thousands for a job well done and released to the press. Also athletes are constantly monitored through statistics. Also athletes are constantly monitored through statistics.

Teams and Players The general public is shocked by a star players multimillion dollar contracts but they claim they are under paid. While some players make 10 to 20 times more than other players. The general public is shocked by a star players multimillion dollar contracts but they claim they are under paid. While some players make 10 to 20 times more than other players. Competition would diminish if the club had the ability to hoard all the best players. Competition would diminish if the club had the ability to hoard all the best players. Athletes are not always free to work for the highest bidder due to the fact that some clubs hold exclusive rights to contact a player. Athletes are not always free to work for the highest bidder due to the fact that some clubs hold exclusive rights to contact a player.

Economics Analysis Sports clubs sell their services in an imperfect product market and hire their players in an imperfect resource market. Sports clubs sell their services in an imperfect product market and hire their players in an imperfect resource market. When a sports clubs sells a ticket to a game or a jacket with team emblem the transaction takes place in the product market. When a sports clubs sells a ticket to a game or a jacket with team emblem the transaction takes place in the product market. When a sports club hires a new player or builds a new stadium the transaction takes place in the resource market. When a sports club hires a new player or builds a new stadium the transaction takes place in the resource market.

The Product Market It is best for the competition to occur on the playing field and not in the market. It is best for the competition to occur on the playing field and not in the market. If one team got all the good players then over time that club would become so strong compared to the lesser teams and the game would become boring to spectators. If one team got all the good players then over time that club would become so strong compared to the lesser teams and the game would become boring to spectators. Then the weak club would eventually have to go bankrupt and strong clubs would lose fans. Then the weak club would eventually have to go bankrupt and strong clubs would lose fans.

Product Market How are they able to do this? How are they able to do this? The league rules and regulations The league rules and regulations Pro sports resemble market cartels Pro sports resemble market cartels Cartel – is a group of firms that formally agree to coordinate its production and price decisions in a manner that maximizes joint profits Cartel – is a group of firms that formally agree to coordinate its production and price decisions in a manner that maximizes joint profits

Cartel For a cartel to be successful, several requirement have to be met. For a cartel to be successful, several requirement have to be met. 1. Have to be responsible for most of the outputs produced in there market – must be able to prevent new competition from entering the market and be able to integrate new competitors into the cartel. 1. Have to be responsible for most of the outputs produced in there market – must be able to prevent new competition from entering the market and be able to integrate new competitors into the cartel. How – controlling star players contract and contracts to play in major stadiums. Also restriction newly formed rival leagues. How – controlling star players contract and contracts to play in major stadiums. Also restriction newly formed rival leagues.

Cartel 2. Each firm should be producing outputs that are substitutes for the outputs produced by the other firms. 2. Each firm should be producing outputs that are substitutes for the outputs produced by the other firms. How – all teams must follow the same rules and regulations enforced by referees and umpires hired by the league. How – all teams must follow the same rules and regulations enforced by referees and umpires hired by the league. 3. Ability to divide the market into territories controlled by each member and to establish production quotas 3. Ability to divide the market into territories controlled by each member and to establish production quotas How – territories are determined by the league structure, games are controlled by league officials, which set the game schedule for the season. How – territories are determined by the league structure, games are controlled by league officials, which set the game schedule for the season.

Cartel 4. Must have the power to prevent “cheating” by member clubs. 4. Must have the power to prevent “cheating” by member clubs. How – league has the contractual power to enforce league rules and guidelines. How – league has the contractual power to enforce league rules and guidelines.

Coordinated Behavior Sports clubs receive revenue from three major sources: tickets and concession sales, merchandising rights for team souvenirs and novelties, and radio and television broadcast rights. Sports clubs receive revenue from three major sources: tickets and concession sales, merchandising rights for team souvenirs and novelties, and radio and television broadcast rights. Specific rules for dividing the revenue generated Specific rules for dividing the revenue generated Ex. NFL home teams receives 60% and visiting team receives 40% of ticket sales. Ex. NFL home teams receives 60% and visiting team receives 40% of ticket sales. The largest portion of revenue for most sports is the sale of broadcasting rights. The largest portion of revenue for most sports is the sale of broadcasting rights.

Price and Output of Broadcasting Rights The marginal revenue curve is under the demand curve The marginal revenue curve is under the demand curve Each club maximizes profits by selling up to the point where MC equals MR Each club maximizes profits by selling up to the point where MC equals MR Without the cartel agreement the market would reach equilibrium at point A Without the cartel agreement the market would reach equilibrium at point A Today the revenue is equally divided among the league member clubs Today the revenue is equally divided among the league member clubs