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Chapter Eight: Sports Economics. Outline 1.Salaries and Ticket Prices (#2) 2.Market Structure in Sports (3-5) 3.Labor Markets in Sports (6-8) 4. Strikes and Attendance (#9) 5.Competitive Balance in Baseball (#10). Player Salaries and Ticket Prices.

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Chapter Eight: Sports Economics

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Chapter eight sports economics l.jpg

Chapter Eight: Sports Economics

Outline

1.Salaries and Ticket Prices (#2)

2.Market Structure in Sports (3-5)

3.Labor Markets in Sports (6-8)

4. Strikes and Attendance (#9)

5.Competitive Balance in Baseball (#10)


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Player Salaries and Ticket Prices

  • If players accepted lower salaries, would teams lower ticket prices?

  • Supply of games is fixed. Therefore, demand determines the price.

  • Evidence: Teams do not raise ticket prices when re-signing players, only when the player is initially signed. Why? Re-signing a player will not impact demand.


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Cartels

  • Cartel-a group of firms that formally agrees to coordinate its production and pricing decisions in a manner that maximizes joint profits.

  • Review the workings of a cartel

  • Cartels are inherently unstable.

  • Why are professional team sports leagues not actually cartels?


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The Structure of Professional Sports Leagues

  • Neal, Walter. “The Peculiar Economics of Professional Sports” Quarterly Journal of Economics 78 (February, 1964): 1-14.

  • 1.Louis-Schmelling paradox

    In traditional business, the removal of competition is a desired outcome. In sports, removal of competition reduces profits for the remaining firms.

  • 2.The inverted joint product or the product joint

    • Joint product - two products technologically resulting from a single process

    • Product joint - An indivisible product from the separate processes of two or more firms.


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Cartel or Natural Monopoly?

  • Professional baseball produces several interrelated streams of utility

  • a.Saleable unit of the seat

  • b.Broadcasts of games

  • c.Fourth Estate Benefit: The sale or printed media depends heavily on sporting events, hence an external economy is produced from sporting events.

  • Conclusion:The several joint products which are products joint of legally separate business firms are really the complex joint products of one firm, and this firm is necessarily an all-embracing firm or natural monopoly.

  • Why a natural monopoly? There can only be one world champion.


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Brief Review of the History of Labor in Sports

  • Reserve Clause - A renewal clause in each uniform player contract which permits the team to renew the contract for the following year at a price which the team may fix.

  • Monopsony – a market with one buyer.

  • Monoposonistic profit – the difference between the workers’ contribution to a monopsonistic firm’s receipts and their wages.

  • Reservation Wage - the worker’s opportunity cost. The lowest wage a firm can pay and still retain the worker. The reservation wage is a function of the worker’s alternative employments and the cost of leisure


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Measuring Player Productivity

  • Joan Robinson (1933) “What is actually meant by exploitation is usually that the wage is less than the marginal revenue product”

  • How do we measure MRP in sports?

    • MP is how many wins the player creates.

    • MR is the value of each additional win

  • More on MP…

    • Wins are function of points scored and points surrendered.

    • Points scored and points surrendered can be tied to the actions of individual players.


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Are player’s overpaid or underpaid?

  • The winner’s curse: Firm’s do not know with certainty how productive a worker will be in the future. Bids are made according to the firm’s estimate of MRP. Who is likely to have the winning bid? The firm who overestimates the worker’s MRP the most. Hence, the winner’s curse.

  • The empirical evidence suggests that non-free agents are underpaid and free agents tend to be overpaid.


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Strikes and Attendance

  • How do player strikes impact attendance?

  • Schmidt, Martin B. and David J. Berri. (2002). “The Impact of the 1981 and 1994-95 Strikes on Major League Baseball Attendance: A Time-Series Analysis.” Applied Economics, 34: 471-478.

  • http://sportsillustrated.cnn.com/inside_game/john_donovan/news/2002/08/08/fans/

  • Conclusions:

    • Strikes have no impact on attendance in Major League Baseball

    • In other research… strikes were shown to not impact attendance in the NFL or NHL.


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Competitive Balance in Baseball

  • Does Major League Baseball have a competitive balance problem?

  • Competitive balance refers to the dispersion of wins. Over time, competitive balance has improved in Major League Baseball.

  • Why? The quality of athletes has improved.


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