Chapter 9The Economics of Professional Sports: What Is the Real Score?

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

9-2

The Professional Sports Business

• Organizational Structure Privately owned teams Professional sports leagues League franchises

• Teams and Players Productivity is visible and easily measured Salary issues Contract issues

9-3

The Product Market

• Cooperation among teams Professional sports leagues as cartels

• Baseball’s antitrust exemption

9-4

Characteristics of Successful Cartels

• Cartel members responsible for most of output generated by market

• Cartel members produce fairly homogeneous outputs

• Cartel must be able to divide market into territories controlled by each member and to establish production quotas

• Cartel must be able to prevent cheating by members

9-5

Coordinated Behavior

• Revenue sharing

• Joint marketing

9-6

Pricing and Output for Broadcast Rights1 2 3 4 5 6 7

Units of Output

Total Cost ($000)

Marginal Cost

($000)

Price ($000)

Total Revenue

($000)

Marginal Revenue

($000)

Profits ($000)

0 0 100 0

1 40 40 100 100 100 60

2 85 45 95 190 90 105

3 135 50 90 270 80 135

4 190 55 85 340 70 150

5 250 60 80 400 60 150

6 315 65 75 450 50 135

7 385 70 70 490 40 105

8 460 75 65 520 30 60

9 540 80 60 540 20 0

10 625 85 55 550 10 275

9-7

Pricing and Output for a Cartel

Quantity per unit of time

Price ($000)

1 2 3 4 5 6 7 8

102030405060708090

100

MC

D

MR

D

CA

B

9-8

The Number and Location of Teams

• Baseball’s attempt to close “small-market” teams

• Incentive to relocate teams

9-9

The Stadium Controversy• Public financing of stadium construction

and renovation

• Justification for public financing Satisfy local public’s demand for sports

entertainment Status for community jobs and tax

revenue Evidence on impact of sports franchises

Teams, Players, and Salaries in Professional Sports, 2008

9-10

NFL MLB NBA NHL

Number of Teams 32 30 30 30

Number of Players per Team 53 25 12 23

Average Team Revenue (millions) $221.56 $182.96 $125.50 $91.56

Average Player Salary (millions) $1.74 $3.15 $5.36 $1.91

Source: www.rodneyfort.com

9-11

The Employment of Players

• Annual draft of new players

• Exclusive rights to player services for a period of time

• No “tampering” rules

9-12

Monopsony

• Monopsony – market with only one employer

• Why are sports leagues monopsonies? Immobility of new players who have been

drafted Highly specialized skills of players

9-13

Wages and Employment in a Monopsony1 2 3 4 5

Number of Players

Wage ($000)

Total Cost of Labor ($000)

Marginal Cost of Labor ($000)

Marginal Revenue Product ($000)

0 0 0

1 300 300 300 1500

2 400 800 500 1300

3 500 1500 700 1100

4 600 2400 900 900

5 700 3500 1100 700

6 800 4800 1300 500

9-14

Wage and Employment Determination for a Monopsonist

Labor hired per unit of time

Wage $000

1 2 3 4 5 6 7 8

100200

300400500600700800900

1000 S

MRP = D

C

A

B

MCL

MonopsonisticProfit

9-15

Free Agency

• Reserve clause

• Limited reserve clause and free agency

Mean MLB Salaries Since Free Agency

9-16

Source: Major League Baseball

9-17

Labor Disputes

• Labor unions

• Strikes and lockouts

• Salary caps

• Revenue sharing

9-18

Do Professional Athletes Earn Their Pay?

• How does player performance contribute to team revenue?

• Fans and willingness to pay• Does anybody deserve such high pay?

9-19

Illicit Drugs and Professional Sports• Each sports league has a substance abuse problem

Bans on “recreational” drugs Bans in performance-enhancing drugs

• Economic analysis of why players use performance-enhancing drugs Expected benefits versus expected costs

• How to reduce the use of performance-enhancing drugs Forfeiture of salary Increase probability of detection

9-20

The Case of Major League Soccer

• MLS a single-entity league All teams owned by a single corporation Investor-operators Broadcast rights, licensing, merchandizing

centrally controlled Employment contracts between player and league League allocates players to teams

• Is MLS a monopsony?• WNBA