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THE ECONOMICS OF

PROFESSIONAL
SPORTS

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Introduction
Professional sports, simply, means that the athletes
are paid.

Essentially athletes compete either as individuals


(as in golf), on teams (as in football, hockey, etc.)
or, as in the case of NASCAR, as both an individual
and team member.

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Athletes competing in individual sports meet up in
tournaments held throughout their season.
Their earnings come in the form of prize winnings from
these tournaments, endorsements, sponsored
appearances
Athletes competing on teams meet each other in
regularly scheduled league games and a playoff series
to determine the one champion at the end of the
season.
These athletes receive a salary and can also earn income
from endorsements

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Why the Economics of Professional
Sports?
Recall that economics is the study of how we allocate
scarce resources to satisfy societys unlimited wants.
Labour (athletes, coaches, managers) combine with
capital (fields, equipment, etc) to produce along with
another team a product (entertainment in the form of a
game) thats sold to consumers (spectators and fans)
usually in a stadium or arena.

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Gate revenues are needed to pay salaries, etc.
To maximize consumption and add revenues, leagues
sell broadcast rights to television and radio for
broadcast of matches.
Spectators need accommodation and a means of
payment but access must be denied to non-payees
(free riders) enclosed stadia are necessary to the
supply of sports.
Like firms, team owners want to maximize profits and
must make economic decisions about how to do this.
Sports teams also have an economic impact on their
host cities (jobs created in arenas and local service
industries, for example).
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Well use many of the tools we acquired in first year plus
some new ones and apply them to analyses of professional
sports.

The sports/leagues well talk about are:


National Football League NFL
Major League Baseball MLB
National Hockey League NHL
National Basketball Association NBA
NASCAR
Canadian Football League CFL

For brief overview of each league, see the Appendix at the


end of these slides.
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Development of Pro Sports
Ancient Greeks and Romans believed that athleticism
was an important part of education a sound mind in
a sound body.
In the 19th century in England, it was unthinkable that
the upper class be paid to play sports to be paid for
something meant you were lower class, like a
tradesperson.
Moreover, to be able to have time to pass playing
sports, you had to actually have leisure time to do so.

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Not until the mid 1800s (during the boom of the
Industrial Revolution) did standards of living became
high enough so that the general public could provide a
steady fan base that could support professional
organizations.
Soccer (England) and baseball (US) which had both
appeared among the more prosperous in society were
the first sports to become widely popular national
pastimes.
Note that being the best was not as important as being of
good character and sportsmanlike

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With rising real wages during the second half of the
1800s, more people had access to leisure time.
Soccer spread from its public school roots in England
to northern industrial areas, and playing baseball in the
US became a way for immigrants to show their
Americanness.
As these sports became more popular with the
working class, the games became more professional.

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Working class athletes couldnt afford to play
regularly without compensation for the opportunity
cost of their time.
The upper class soon became financiers of teams
realized they could profit from supplying a well run,
professional product to a public who could now afford
to attend and had the time to participate.
Today, professional sports have become national and
international obsessions and are a $1.5 - trillion dollar
industry globally.

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First Year Principles and Pro Sports

Opportunity Cost and Comparative Advantage

Babe Ruth was considered to be one of the best


(southpaw) pitchers in baseball in the first part of the 20 th
century.
He helped the Boston Red Sox win the World Series in 1916
and 1918.
In 1919, he pitched only 17 games.
Ruth became one of the greatest heavy-hitting outfielders in
history.

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So why the switch?
As the best pitcher and best hitter, Ruth had an
absolute advantage over the competition in both
pitching and hitting.
But Ruth had a comparative advantage in hitting.
He was a better hitter than pitcher.
The Sox would win more games with Ruth in the outfield
than theyd lose without his pitching.
Ruth specialized in hitting and the team realized gains from
trade.

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Demand, Supply and Equilibrium

In 2016 a Wayne Gretzky rookie card sold for


$465,000. In 2013, a 1909 Honus Wagner baseball
card shattered the record price ever paid for a sports
card at auction at $2.1-million.
Why is one more valuable than the other?

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Recall:
Law of Demand: as P increases, Qd decreases and vice
versa.
A change in the own price of a good leads to a change in
quantity demanded (movement along the demand curve).
A shift in the demand curve due to a change in consumer
incomes, prices of related goods, tastes, expectations or
population is a change in demand.
Law of Supply: as P increases, Qs increases and vice
versa.
A change in the own price of a good leads to a change in
quantity supplied (movement along the supply curve).
A shift in the supply curve due to a change in production costs,
technology and hence productivity, expectations or number of
firms in the industry is a change in supply.
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When Qd = Qs, we have a market equilibrium.
No shortages, no surpluses.
The market has cleared.
No reason for consumers or firms to change their
behaviour (how much they are consuming or selling).

We never really get to see demand and supply


curves, but we get to see equilibrium prices.
For example, there are regularly published price
guides for sports trading cards that report the going
market equilibrium price for individuals cards.

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Price Elasticities of Demand and Supply

Elasticity measures how responsive Qd or Qs are to


changes in the price of a good.
For either demand or supply, the following are true:
If Ep = 0, perfectly inelastic (curve is vertical)
If Ep < 1, inelastic (curve is steep)
If Ep > 1, elastic (curve is flatter)
If Ep => infinity, perfectly elastic (curve is horizontal)

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Elasticity is precise when we can calculate the
response of Qd or Qs to marginal changes in price.
This is called point elasticity.
The formula for calculating point elasticity where Q =
f(P) is:

Ep = (dQ/dP)*(P/Q)

IMPORTANT: Q has to be on the LHS.

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EXAMPLE:
Demand for Detroit Lions tickets is given by Qd= 100 2P
At a price of $40 per ticket, what is the price elasticity of
demand?
P

When P = 40, Qd = 100 2(40) = 20


We want the price elasticity at
this precise point

40

20 Q
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The slope of our linear demand curve is constant.
Its dQ/dP = -2

Ep at the point in question is


Ep = -2(40/20) = -2(2) = -4

We drop the minus sign (we know its negative), so Ep = 4,


elastic.
A small change in price leads to a proportionately larger change in Qd for
Lions tickets.

Since demand is elastic, if the Lions want to increase ticket revenues,


they should decrease ticket prices.
If demand had been inelastic, to raise ticket revenues, they should increase
ticket prices.
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Now, back to sports

Consider the demand for sports cards in general.

When the price of sports cards goes up, consumers buy fewer
sports cards and buy relatively cheaper products (could be fan
apparel, snacks etc).
This is the substitution effect.

When the price of sports cards goes up, consumer purchasing


power goes down (they cant buy as much of all products they
were consuming if they have to spend more on sports cards).
This is the income effect.

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Next, lets look at the supply side.

A fixed number of both cards was produced, so the


actual supply of both cards is perfectly inelastic (a
vertical supply curve positioned at the number of cards
produced for sale).

The market supply, however, will be inelastic.


Owners of cards may be more willing to sell them the
higher the price they can get.

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Fewer than 200 cards of the Hall of
Fame shortstop were produced
because Honus Wagner was not
happy with the card's producer, the
American Tobacco Company, and the
smoking message it sent to children.
Wagner, however, smoked and
endorsed cigars, leading some to
believe he was merely upset with not
being paid for his image.
The card is also controversial
because the one that sold for the
highest price, the Wagner in the best
condition, is said to have been
trimmed to improve its condition.
That card, once owned by hockey
star Wayne Gretzky, was sold for
$2.8 million in a private sale.

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From what I could research, there is
only one Gretzky rookie card from
1979 O-Pee-Chee company that is
graded a Gem Mint 10 (the highest
quality grading possible). Hence, the
amazing price it commanded. But,
there were thousands of Gretzky cards
in general printed.

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Logically, it makes sense to assume that if we consider all levels of
quality of both Wagner and Gretzky rookie cards, there exist more
Gretzky cards today.
However, the price each of these cards commands likely has more to
do with consumer demand, specifically, consumer preferences for
owning a rookie card by either player.
Wagner was an American baseball player and those collectors have
been serious collectors for a long, long time. The card is older, making
it less likely that many still exist (scarcity = desirability to collectors).
Gretzky is a hockey player, less valued in the large US market than
here in Canada and more cards exist (scarce supply, but less scarce
than a Wagner card).
Additionally, the demand for any condition Gretzky rookie card is
more elastic since more were produced and fans can shop around,
looking for deals (see eBay at any given time).
The demand and supply curves for Wagner and Gretzky rookie cards
might look something like this:
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The demand and supply curves for Wagner and
Gretzky rookie cards might look something like
this:
Wagner Rookie Cards Gretzky Rookie Cards

P S P S

P*

P*

D D

Q* Q Q*
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Determinants of Demand for Tickets

Ticket Price
Certainly, rabid fans will pay anything to see their
team play, but price is a factor.
Ticket price affects where the fans will sit court side
or in the rafters.
The ticket price effect is closely tied to income.
For example, I buy season tickets for the Buffalo Bills,
but I cant afford to sit at the 50 yard line.
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Income
As consumer incomes increase, the demand for tickets
in general will increase.
The demand for better seats also will increase.

How the Team is Doing


Evidence shows that if a fans team is doing poorly,
attendance declines (exceptions: the Toronto Maple
Leafs and the Green Bay Packers).
This is particularly true in the US and especially for
baseball.

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Uncertainty of the Outcome
In the NFL, theres the saying Any given Sunday
any team could win.
The expectation/hope for a close game and/or a
possible victory/loss will increase demand.
If the home team routinely slaughters its opponents,
demand for tickets will decrease.

Superstar Player Acquisition


If a team acquires a hot player, ticket demand increases.

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Who is the Opponent
When long-time rivals, superstar players or reigning
champions come to town, the demand for tickets
increases.

How Meaningful is the Game


If a game has significant impact on a teams standing
(for instance, determines if they make the playoffs),
demand increases.
If it is a playoff game, demand increases.

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Weather
For games played outdoors, the threat of bad weather will
decrease ticket demand.

Time of Match
Demand will increase for prime time games (for
example, Sunday Night or Monday Night NFL games).
Greater demand for Leafs tickets for Saturday night games
than for Tuesday games.

Giveaways
Freebies draw more fans.
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Example: World Series Game 7
2016 Game 7: Chicago v Cleveland (Cubs won 8-7 in the 10 th)
Chicago hadnt won the World Series since 1908; Cleveland
since 1948.
Right before Game 6, the average asking price for a resale
Game 7 ticket was $3,922, with the average actual sale around
$1,800.
After the game, average ticket selling price was $2000 per
ticket for a pair of tickets.
A pair by the Cubs dugout sold for $19500.
Hotels also sold out for crazy prices: from $700 - $1500 for a
regular room that normally sold for $130 - $160 per night.

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Supply of Tickets

In the SR, there is a fixed number of seats at any


venue.
The supply of tickets is perfectly inelastic.

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Ticket Scalping
In July, 2015, Ontario made it legal to resell event
tickets at a higher than face value price if sellers can
provide authentication for the tickets or offer a money-
back guarantee, essentially legalizing ticket scalping.
Anti-scalping laws (where they exist) effectively
impose a price ceiling tickets legally cant be sold for
any price above their face value, keeping prices below
what would be their equilibrium price.
This results in excess demand and a black market for
tickets.
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We assume the scalper knows
S the maximum price s/he can
P charge for the ticket demand
is known.

Scalper
Price

Ticket Face
Value
D

Q* Qd
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Market Structure Review

Competition, monopoly, oligopoly how do we


characterize professional sports?
Lets recall how economists define different market
structures.

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Competition (Perfect Competition)
Many buyers and sellers
Homogeneous products
Firms are price takers market equilibrium price
prevails
Free entry and exit of firms
Firms maximize profit by selling output where
P = MC since P = MR = AR = D
Long run equilibrium economic profits equal
zero
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Monopoly
One seller
No close substitutes
Firm is a price setter
Firm earns economic profit
MR = MC but P > MR and P > MC

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Monopolistic Competition
Many buyers and sellers
Differentiated products
Firms are price setters
Free entry and exit of firms
MR = MC and P > MR and P > MC
Long run equilibrium economic profits equal zero

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Oligopoly

Few firms, usually large


Homogeneous product
Barriers to entry
Interdependence

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Consider pro sports on 3 different levels:

1. As a league that solely provides the sport across


many markets (cities).

2. As a league that has numerous plants (teams)


providing its sport in different markets (cities).

3. As a city that hosts professional sports teams.

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Ticket Pricing
When a venue is not sold out, the marginal cost of
selling one more ticket is close to zero.
It costs the team virtually nothing to admit and clean up
after one more fan.
Economists assume (for simplicity) that MC = 0 when
the venue is not sold out.
When the venue is sold out, MC is infinite since the
team cannot sell an additional seat at any price.
The MC curve becomes vertical once capacity is
reached.
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If the venue is not sold out:

Team prices where MR = MC to


P MC maximize profits where MR = 0.
When MR = 0, TR is maximized.

P*

MR D

43 Max seats available Q tickets


Depending on capacity, the MC curve can be closer to
the origin and prices even higher.
If the venue is sold out:
P MC

Fewer available tickets leads to


higher prices..
P*

MR=MC

MR D

44 Max seats available Q tickets


Why Season Tickets are Cheaper

When fans buy tickets in advance, teams get their


revenue up front and start earning interest on it
earlier than if fans bought their tickets on game day.
How does the team convince fans to buy season
tickets?
Heres an interesting economic explanation.

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When consumers make choices, we allocate our income
to maximize our level of satisfaction our utility.
If we had perfect information and knowledge, this
would be straightforward.
We dont. We make choices under uncertainty, so we
have to maximize expected utility.
Sports is filled with uncertainty.
Owners dont know how well their draft picks will
perform, coaches dont know if their star player will
escape injury, fans dont know if their team will make
the playoffs

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EXAMPLE:
Consider Tony, a huge Toronto Blue Jays fan.
Hes considering buying tickets to their final regular
season home game, and has to purchase them months
before the season ends to ensure he gets tickets.
When he buys the tickets, its too early to know if the
Jays will have a chance to make the playoffs when
game day arrives.
Hell enjoy the game much more if the game has
implications for the Jays in the post season.

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Tony will derive greater utility from a meaningful
game that could affect the Jays standing in the
playoffs than a game that is not meaningful.
A ticket to a game the Jays need to win is worth more
to Tony than one where it doesnt matter if they lose.
Tony now has to make a decision about purchasing a
ticket faced with uncertainty about how meaningful
that last game will be.

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Tony has to calculate his anticipated level of utility:
his expected utility from consuming the good (the
game).
Expected utility E(U) is the weighted sum of
utilities from all possible outcomes.
The weights are the probabilities of those outcomes.
Tonys E(U) is the utility from seeing a meaningful
game UM times the probability it will be a meaningful
game PrM plus the utility from seeing a meaningless
game UN times the probability it will be meaningless
PrN :
E(U) = PrM(UM) + PrN(UN)
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Say Tony receives 30 utils of happiness from a
meaningless game and 100 utils of happiness from a
meaningful game.
Suppose there is an equal chance of the Jays playing
either game. The probability of each game occurring is .5.
Tonys expected utility is
E(U) = .5(100) + .5(30) = 65
If hes happy with that level of utility, hell buy the ticket
in advance.

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Now suppose Tony has to buy season tickets (or some
kind of multiple-ticket package) in order to ensure he
gets tickets to the final game (assume he will receive
utility from having tickets to the rest of the games).
By selling Tony tickets before Tony knows whether the
game he really wants to see will be meaningful, the Jays
are getting Tony to take the risk that the game may not
be worth seeing.
But, like most of us, Tony probably does not like risk
hes risk averse.
In order to get Tony to take the risk and buy season tickets,
the Jays have to offer him an inducement of lower ticket
prices.
Thats why season tickets typically are cheaper than single
51 game tickets.
APPENDIX: A Quick Snapshot of the
Leagues Well Be Covering
NFL
32 teams, split into 2 conferences (AFC, NFC) with 4
divisions (N, S, E, W) with 4 teams in each division
16 regular season games per team plus a bye week
12 teams make the playoffs
Winners of each conference play in the Super Bowl for
the league championship and the Lombardi Trophy
Founded 1920

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MLB
30 teams (1 Canadian), split into 2 leagues (AL 14 teams,
NL 16 teams) with 3 divisions each (E, C, W)
Each team plays 162 regular season games
10 teams make it to the playoffs
Winners of each league meet in the World Series to play for
the championship and the Commissioners Trophy
Founded in 1869 (date debatable)

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NHL
31 teams (7 Canadian)
Each team plays 82 regular season games
2 conferences, 4 divisions: Central with 7 teams and
Pacific, Atlantic and Metropolitan with 8 as of 2017 -18
(the Leafs are in the Atlantic division).
The top three teams in each division qualify for the playoffs
plus 2 wildcard spots in each conference.
Winners of each conference meet to play for the
championship and the Stanley Cup
Originally organized in Montreal in 1917

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NBA
30 teams (1 Canadian), 2 conferences with 3 divisions with
5 teams each
Each team plays 82 regular season games
8 teams from each conference make the playoffs
Winners from each conference meet for the championship
for the Larry OBrien Championship Trophy
Founded in 1946

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NASCAR
Stands for National Association for Stock Car Auto Racing
3 series Sprint Cup, Nationwide, Camping World Truck
(Sprint Cup is the big one)
36 races over 10 months (43 drivers qualify for each Cup
race) top 16 drivers make The Chase (their version of a
playoff) who compete for the Sprint Cup championship
over the last 10 races of the season
Formed in 1948

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CFL
9 teams split into East and West divisions (Ottawa returned to
CFL in 2014; had been gone after 2005)
Each team plays 18 regular season games
6 best teams make the playoffs (division winners get a 1st
round bye; crossover rule)
Winner wins the Grey Cup
1993 1995: US teams in the league; Baltimore Stallions won
the Grey Cup in 1995 (became the Alouettes the next season)
Each team must have 21 Canadians on their roster
Founded in 1958 (been around since 1909)

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Some Big Differences Between NFL & CFL

NFL CFL
# players on field 11 12
per side
# of downs 4 3
field 100x53.5 yds 110x65 yds
end zone 10 yards 20 yards
fair catch yes no rule
time outs 3 per half 1 per half
2 minute warning 3 minute warning
ball no stripes stripes
roster 53 (45 dress) 46 (42 dress)
21 non-imports
flags penalty - yellow penalty - orange
58 coach - red coach - yellow
The CFL also has something called a rouge.
This is a single point when the kicking team punts
through the end zone, misses a field goal or the
returning team takes a knee in the end zone.
So if you miss a field goal, you can still get a point
for trying.

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