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Monopoly and Antitrust. Inefficiency of Monopoly. Competitive Outcome P = MC Q = Q C Monopoly Outcome P M > P = MC Q = Q M < Q C. $. A. P M. B. C. MC. D. MR. Q C. Q M. quantity. A+B+C. A. --. B. A+B+C. A+B. --. C. Rent-seeking may add to DWL. Price Discrimination.

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Inefficiency of monopoly l.jpg
Inefficiency of Monopoly

  • Competitive Outcome

    • P = MC

    • Q = QC

  • Monopoly Outcome

    • PM > P = MC

    • Q = QM < QC

$

A

PM

B

C

MC

D

MR

QC

QM

quantity

A+B+C

A

--

B

A+B+C

A+B

--

C

Rent-seeking may add to DWL


Price discrimination l.jpg
Price Discrimination

  • Pricing strategy that attempts to capture more consumer surplus

  • Types

    • 1st Degree:

    • 2nd Degree:

    • 3rd Degree:

  • Conditions

    • Market power

    • Segment the market

    • Prevent resale

Charge each consumer the highest price they’re WTP

Quantity discounts

Charge prices based on price elasticities


First degree price discrimination l.jpg
First Degree Price Discrimination

  • Monopolist is able to capture CS

    …and eliminate DWL by selling until P = MC

CS

PM

PS

DWL

MC

D

MR

QM

QC


Second degree price discrimination l.jpg
Second Degree Price Discrimination

  • Offering discounts based on the number of games attended

  • Offering discounts based on the number of people in your group

PM

MC

D

MR

QC

QM


Third degree price discrimination l.jpg
Third Degree Price Discrimination

  • Segment market into groups with differing elasticities

    • Adults

    • Senior citizens

  • Profit max rule: MRA = MRS = MC

    • MRA = PA[1 – 1/EA]

Example:

EA = 3

ES = 5

MC = 8

PA = $12

Charge higher price to group

less elastic demand

PS = $10


Personal seat licenses l.jpg
Personal Seat Licenses

  • People pay for the right to buy season tickets

  • Two-part tariff: entrance fee + per unit charge

    • Per unit price = MC = $10

    • Entrance fee = resulting CS = $145/game

$5,945 for 41 game PSL

$300

P = 300 – 0.02Q

MR = 300 – 0.04Q

π= $2,102,500

$525,625

$155

MC = 10

$1,051,250

$525,625

MC

$10

Seasonticketrights.com

MR

D

7250

14,500


Monopsony l.jpg
Monopsony

  • Monopoly on the buyer side

  • Labor Market and the Reserve Clause


Are the detroit lions a monopoly l.jpg
Are the Detroit Lions a Monopoly?

  • Relevant Market?

    • Broader the definition, the lower the market power

  • Natural Monopoly?

    • High fixed costs; low MC

       Economies of scale

    • ATC = TC/Q = [FC + VC]/Q ≈ AFC + MC

  • Public Good?

$

ATC

MC

Quantity


Barriers to entry l.jpg
Barriers to Entry

  • Broadcast contracts

    • NFL spread contracts out over CBS, Fox, NBC, ESPN

  • Pre-emptive franchise location

    • AFL vs NFL in Dallas and Minneapolis

  • Limit pricing


Antitrust law l.jpg
Antitrust Law

  • Sherman Act (1890)

    • Section 1: prohibits cartels (or “trusts”)

      • Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations is hereby declared to be illegal.

    • Section 2: attacks monopoly itself

      • Every person who shall monopolize or attempt to monopolize any part of the trade or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations, shall be deemed guilty of a misdemeanor…


Baseball s battle of the leagues l.jpg
Baseball’s Battle of the Leagues

  • Federal League’s 1914-1915 challenge to the AL-NL

American League

New York Yankees

Chicago White Sox

Washington Senators

Boston Red Sox

Cleveland Indians

Detroit Tigers

Philadelphia Athletics

St. Louis Browns

Federal League

Baltimore Terrapins

Brooklyn Tip-Tops

Buffalo Blues

Chicago Whales

Indianapolis Hoosiers

Kansas City Packers

Pittsburgh Rebels

St. Louis Terriers

National League

Boston Braves

Brooklyn Dodgers

Chicago Cubs

Cincinnati Reds

NY Giants

Philadelphia Phillies

Pittsburgh Pirates

St. Louis Cardinals


Federal baseball v nl 1922 l.jpg
Federal Baseball v NL (1922)

  • US District Court (1914)

    • Judge Kennesaw Mountain Landis

    • Delayed ruling for a year

    • All Federal League teams were bought out except one

  • Baltimore Terrapins filed suit against NL because of reserve clause

    • Supreme Court (1922)

      • Ruled baseball was not interstate commerce

  • Result: Baseball is exempt from antitrust laws

    • Toolson v. NY Yankees (1953)

    • Flood v. Kuhn (1972)


Contrast with nfl l.jpg
Contrast with NFL

  • Radovich v NFL (1957)

    • Blacklisted for playing in AAFC

    • NFL lost at Supreme Court

       no legal monopoly power or monopsony power

  • Tried to retain monopsony

    • “Gentleman’s Agreement” until early 1960s

    • “Rozelle Rule” imposed when that broke down

      • Mackey v NFL (1976)

      • Players’ Association negotiated deal that allowed Rule to continue

  • Tried to establish monopoly

    • Got limitedexemptions for TV and merger with AFL

    • No games on Friday (HS) and Saturday (NCAA)


Impact of baseball s exemption l.jpg
Impact of Baseball’s Exemption

  • MLB has had few challengers

    • Federal League was last major rival

    • Other leagues have had regular challenges

  • Baseball has been stable

    • Montreal Expos moved to Washington – 2005

    • Washington Senators to Texas – 1972

    • Blocked attempts by Giants, White Sox, & Pirates


Nfl has been far less stable l.jpg
NFL Has Been Far Less Stable

  • 1980: Oakland Raiders sue NFL

    • Challenged NFL’s right to block move to LA

    • Jury – drawn from LA! – agrees

  • NFL cannot force other teams to stay put

    • Moves from Baltimore, Cleveland, LA (2X), Houston, St. Louis

    • Did dissuade

      • New England from moving to Hartford, CT

      • Seattle from moving to LA


Cartel theory l.jpg

Nash Equilibrium

Cartel Theory

  • Prisoner’s Dilemma

Dominant Strategy?

 Each team would set Low Price

Competitive Outcome: (Low, Low)

Cooperative Outcome: (High, High)

Unstable due to incentive to cheat


Ncaa an incidental cartel l.jpg
NCAA: An IncidentalCartel

  • 18 football-related deaths in 1905

    • President Roosevelt threatened to take action

    • NCAA formed to control “on the field” behavior

  • The Sanity Code (1946)

    • Rules for “off the field” behavior

      • Limits to financial “aid” to athletes

      • “Seven Sinners” refuse

      • NCAA failed to get 2/3 majority needed to expel the 7

        • NCAA in tatters – cannot enforce own rules

Boston College

The Citadel

University of Maryland

University of Virginia

VMI

VPI

Villanova


New life for the ncaa l.jpg
New Life for the NCAA

  • “Point shaving” scandal breaks out in 1952

    • CCNY ruined as national power

  • Kentucky implicated

    • UK Coach – Adolph Rupp – likely involved as well

    • Also found illegal payments to players by Rupp

  • NCAA failed to respond

  • Embarrassed SEC suspends UK

  • NCAA establishes “Death Penalty”

    • Boycott by other members

    • UK is suspended for one season

  • SWLa basketball 1973

    SMU football 1987

    Morehouse soccer 2003

    MacMurray tennis 2005

    Alabama** football 2002

    Baylor** basketball 2004


    Applying the ncaa s cartel power l.jpg
    Applying the NCAA’s Cartel Power

    • Monopsony Power

      • Drive down price of labor

      • Problem: Schools cheat

    • Monopoly Power

      • Early TV contract

        • Limited teams to 3 TV games every 2 years

        • CFA lobbied for more TV

        • NCAA created I-A and I-AA; reworked revenue sharing

      • CFA v NCAA (1984)

        • Antitrust result: many broadcasts, but less revenue!

    1984 proposed NCAA deal: $74m

    1984 actual CFA/NCAA deal: $31m

    Football Bowl Subdivision (FBS)

    Football Championship Subdivision (FCS)


    Competitive balance l.jpg

    Competitive Balance

    The Value of Uncertainty of Outcome


    Turnover in champions l.jpg

    1949

    Yankees beat Dodgers

    1950

    Yankees beat Phillies

    1951

    Yankees beat Giants

    1952

    Yankees beat Dodgers

    1953

    Yankees beat Dodgers

    1954

    Giants beat Indians

    1955

    Dodgers beat Yankees

    1956

    Yankees beat Dodgers

    1957

    Braves beat Yankees

    1958

    Yankees beat Braves

    1959

    Dodgers* beat White Sox

    1960

    Pirates beat Yankees

    1961

    Yankees beat Reds

    1962

    Yankees beat Giants*

    1963

    Dodgers* beat Yankees

    1964

    Cardinals beat Yankees

    Turnover in Champions?


    Is baseball unique l.jpg
    Is Baseball Unique?

    • In 1960s only 2 NBA champions

      Celtics: 1959-66, 1968-69

    • Since 1987 only 7 NBA champions

      Bulls: 1990-1993; 1996-1998

      Lakers: 1987-1988; 2000-2002

      Pistons: 1988-1989; 2004

      Rockets: 1994-1995

      Spurs: 1999; 2003; 2005; 2007

      Heat: 2006

      Celtics: 2008

    • Similar results for hockey


    Leagues want competitive balance l.jpg
    Leagues Want Competitive Balance

    • Stimulates interest

      • Attendance

      • TV Ratings

    • Optimal Winning Percent?

      • “law of diminishing returns”

      • Market size effects

    • What is competitive balance?

      • Even competition in each game?

      • Turnover among champions?

    $

    MC

    MRL

    MRS

    Winning

    percentage

    WL > WS : League wants large market team to win more often

    WS

    WL


    Measuring competitive balance l.jpg
    Measuring Competitive Balance

    • Between Season Variation

      • Hirfindahl-Hirschman Index (HHI)

        • HHI quantifies turnover in champions

        • Also used to measure monopoly power

        • Where: fi=#championships by team i;

          T=#Years

    Large HHI means

    few teams dominate


    What is the hhi for the nba since 1987 l.jpg

    Championships

    Chi: 6

    LA: 5

    SA: 4

    Det: 3

    Hou: 2

    Miami: 1

    Boston: 1

    N =21 years

    HHI = [62+52+42+32+22+12+12]/21

    HHI = 4.4

    What is the HHI for the NBA since 1987?


    Baseball and the hhi l.jpg

    1950s

    AL Champions

    Yankees (8); Indians; White Sox

     HHI=6.6

    NL Champions

    Dodgers (5); Giants (2); Braves (2); Phillies

     HHI=3.4

    1990s

    AL Champions

    Yankees (3); Indians (2); Blue Jays (2); Twins; Athletics

    HHI=2.1

    NL Champions

    Braves (5); Reds; Phillies; Marlins; Padres

    HHI=3.2

    Baseball and the HHI

    • Conclusion of HHI measure:

      • League Championships less concentrated in 1990s


    Competitive balance28 l.jpg
    Competitive Balance

    • Within Season Variation

      • “evenness of competition”

      • Standard deviation

        • Average distance that observation lies from mean

      • Actual: σA =

      • Ideal: σI =

      • Ratio: R = σA / σI

    T = number of teams

    G = number of games

    R > 1 indicates imbalance


    Dispersion of winning percentage for 2002 or 2002 03 season l.jpg
    Dispersion of Winning Percentage for 2002 or 2002-03 Season


    Attempts to promote competitive balance l.jpg
    Attempts to Promote Competitive Balance

    • Revenue Sharing

      • Indirect method of redistributing players

      • Two conditions:

        • Teams must benefit financially from improving performance

        • Players must be able to move among teams

    Example: 60-40 Gate split

    NY: RG = $36m and C = $28.8  π = $7.2m

    KC: RG = $18m and C = $16  π = $2.0m

    πNY = 0.6(36) + 0.4(18) – 28.8 = $0

    πKC = 0.6(18) + 0.4(36) – 16 = $8.2m


    Attempts to promote competitive balance31 l.jpg
    Attempts to Promote Competitive Balance

    • Salary Caps

      • NFL (2009): $123m

      • NBA (2008-09): $56.7m

      • NHL (2008-09): $56.7m


    Slide32 l.jpg

    2009 NFL Salary Cap Numbers

    (Cap = $123m)

    Source: http://www.profootballtalk.com/2009/02/11/team-by-team-cap-numbers/


    Attempts to promote competitive balance33 l.jpg

    George Steinbrenner

    Attempts to Promote Competitive Balance

    • Salary Caps

      • NFL (2009): $124m

      • NBA (2008-09): $56.7m

      • NHL (2008-09): $56.7m

    • Luxury Taxes

      • MLB (2008): tax on amount over $155m threshold

         goes into league pool

    • Soft caps:

    • “Larry Bird exemption”

    • Contract restructuring

    Yankees (222.2-155)(.40) = $26.9m

    Detroit (160.8-155)(.225) = $ 1.3m


    Attempts to promote competitive balance35 l.jpg
    Attempts to Promote Competitive Balance

    • Salary Caps

      • NFL (2009): $124m

      • NBA (2008-09): $56.7m

      • NHL (2008-09): $56.7m

    • Luxury Taxes

      • MLB (2008): tax on amount over $155m threshold

         goes into league pool

    • Reverse Order Drafts

      • Incentive to lose late in season?

    • Schedule Adjustments

    • Soft caps:

    • “Larry Bird exemption”

    • Contract restructuring

    Yankees (222.2-155)(.40) = $26.9m

    Detroit (160.8-155)(.225) = $ 1.3m


    Impact of strategies l.jpg
    Impact of Strategies

    • Low correlation between payroll and winning


    Impact of strategies37 l.jpg
    Impact of Strategies

    • Coase Theorem

      • If property rights are well-defined and transactions costs are low enough, then private bargaining can result in an efficient allocation of resources


    Reserve clause vs free agency l.jpg
    Reserve Clause vs Free Agency

    • Reserve Clause: players are the property of the team that drafted them

    • Free Agency: players can negotiate with any team

    New York

    Seattle

    Revenue = $12m

    Revenue = $40m

    Salary = $1m

    Salary = $1.1m

    Reserve Clause

    Revenue = $12m

    Revenue = $40m

    Salary = $12m

    Free Agency


    Impact of strategies39 l.jpg
    Impact of Strategies

    • Coase Theorem

      • If property rights are well-defined and transactions costs are low enough, then private bargaining can result in an efficient allocation of resources

    Rottenberg’s Invariance Proposition

    Initial allocation of player rights does not affect the final distribution of talent


    Public finance l.jpg

    Public Finance

    The Market for Sports Franchises


    Golden age of baseball 1903 1952 l.jpg

    No teams entered, exited, or changed cities

    Construction of “old” parks

    Change:

    Boston Braves  Milwaukee (1953)

    St. Louis Browns  Baltimore Orioles (1954)

    Philadelphia A’s  Kansas City (1955)

    Brooklyn Dodgers  Los Angeles (1958)

    NY Giants  San Francisco (1958)

    Golden Age of Baseball: 1903-1952

    Shibe Park (Phil)

    Fenway Park (Bos)

    Forbes Field (Pit)

    Comiskey Park (Chi)

    Navin Field (Det)

    Wrigley Field (Chi)

    Yankee Stadium (NYY)

    Ebbets Field (Brk)


    Dodger blues l.jpg
    Dodger Blues?

    • Before the move

      • Most profitable team in MLB

      • Alone accounted for 47% of NL’s profits

    • Key Lessons

      • No city “safe”

      • Starts involvement of cities

        • Before 1950 – only 1 stadium publicly built

        • By 1980 – almost all were


    What power do teams have l.jpg
    What Power do Teams Have?

    • Monopoly Power

    • All-or-Nothing Demand Curve

    • Winner’s Curse


    Monopoly power limit output l.jpg
    Monopoly Power: Limit Output

    • Leagues slow to expand

      • By 1953: U.S. demographics had changed

        • Los Angeles had no baseball teams – St. Louis had 2

      • Baseball & Football moved rather than expand

        • NFL did absorb 5 teams from rival leagues

    • MLB expanded (1961-62)

      • Prevent new league (PCL and Rickey)

        • Minnesota, LA Angels, NY Mets, Houston

      • Avert Congressional intervention (Senators)

    • NFL expansion tied to AFL

      • First expanded (1960) to try to kill it

      • Next expanded (1966) to merge with it


    All or nothing demand curve l.jpg
    All-or-Nothing Demand Curve

    • Firms generally can’t set both price and quantity

      • Standard monopoly pricing sets price at P1 and allows buyers to buy Q1

        • Consumers earn surplus

        • Firm earns profit

    • Teams confront cities with an all-or-nothing choice: Point A

      • Consumers willing to absorb loss as long as net gain is positive

      • How far can you push consumers?

    $

    A

    Surplus

    P1

    Loss

    MC

    D

    MR

    Q1

    Q2

    Games


    Paper clip auction l.jpg

    Guess how many clips are in the cup

    Each clip is worth $0.03

    Write down your bid (and name) on a piece of paper

    Average bid usually lower than actual money value of clips

    Winning bid will generally exceed money value

    Why did winner overbid?

    Most bidders are risk averse

    Not all bidders have same expectations

    Only most optimistic bidder wins the prize

    Does winning the auction become the goal itself?

    Paper Clip Auction


    Winner s curse l.jpg
    Winner’s Curse

    • Buyer overbids due to uncertainty over value of prize

      • V =

      • Who wins?

    • Winner expects greatest payoff – could be:

      • Best suited to exploit opportunity

      • Most optimistic

      • Most intent on winning per se

    • Olympic “competition” for host site

    V = bidder’s value

    Bt = benefits of prize

    r = interest rate


    Case in point the olympics l.jpg
    Case in Point: The Olympics

    • 1976 Montreal: C$1.6 billion

      • Debt ~C$1.0 billion paid over 30 years

    • 1984 LA

      • Only city to bid on 1984 Summer Olympics

      • $200 million profit!

    • 2004 Athens: $15 billion

    • 2008 Beijing: $42 billion

    • 2012 London: $19 billion?


    Stadium economics l.jpg
    Stadium Economics

    • What’s true about each facility in Era #1?

      • Name of owner/builder

      • “park” or “field”

    • In Era #2?

      • Reflects source of funding

      • Municipally built

    • In Era #3?

      • Naming rights

        • $2m per year

      • What do firms get for naming rights?

    What’s in a Name?


    Size matters l.jpg
    Size Matters

    • Saw that baseball teams seldom sell out

      • Best: Giants, Red Sox & Cubs

        • Have new – or very old – ballparks

      • Why?

    • Optimal size for baseball stadium 30-40,000

    • Football has larger optimal size

      • Used to rent space from baseball teams in off-season

      • Municipal stadia built when football took off


    Shape matters too l.jpg
    Shape Matters, Too

    • Municipal “Cookie Cutters”

    • Designed by committee

      • No one happy

      • Lose unique shapes

        • Shibe Park built to fit in city grid

        • Polo Grounds built to fit between tracks & lot


    Slide53 l.jpg

    Metrodome

    Minneapolis, MN


    Location location location the urban ballpark l.jpg
    Location, Location, Location: The Urban Ballpark

    • Retro look

    • Retro location?

      • Municipal stadia often not even in home city

        • Irving Cowboys vs East Rutherford Giants

      • Left decaying stadia in decaying neighborhoods

    • Old ballparks not built downtown

      • > Yankee Stadium built in “Goatville”

      • > Shibe Park on site of hospital for Contagious Diseases


    Location location location cars and costs l.jpg
    Location, Location, Location: Cars and Costs

    • Fans have moved to suburbs

      • Urban neighborhoods decay

      • Need place to leave cars

    • Result: “a sea of asphalt”

    • Stadium is “space intensive”

      • Creates problems for a downtown location

      • Space costs money


    The rent gradient l.jpg

    Rent gradient

    The Rent Gradient

    • Center City v. Outskirts

      • Why are NYC hotels taller than in Zanesville, OH?

    • Cost of land falls as move from center of town

      • Height of buildings mimics cost curve

    Cost of land

    Distance from city center


    Rent gradient a circular city l.jpg
    Rent Gradient: A Circular City

    • People evenly spread

    • Identical stores on city edge

    • What does A do?

      • How does B respond?

      • What is equilibrium location?

    • Move to center

      • Central business district

    • Implication for housing prices?

    A

    B


    Stadia and team values l.jpg
    Stadia and Team Values

    • Problems in stadiums built since 1993

      • 10 of 12 teams drew less in 2003 than last year in old park

      • 4 most valuable teams in 2008 (Yanks, Red Sox, Mets, Dodgers) all in pre-1965 facilities

    • New facilities still seem lucrative in NFL

      • 8 of 10 most valuable teams in new facilities

    • Trend in NBA or NHL?


    Public finance ii l.jpg

    Public Finance II

    What’s in it for the cities?


    Slide61 l.jpg

    • Having a football team back in Houston will bring thousands of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about. Houston Mayor Lee Brown, 1999.

    • Without the Chiefs and the Royals, Kansas City would be nothing but another Wichita… or Des Moines… or Omaha.”

      Kansas City mayor Emanuel Cleaver, 1997.


    What is point of government l.jpg
    What is point of Government? of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Set and enforce rules of behavior

    • Macroeconomic stabilization

    • Deal with monopoly

    • Provide public goods

    • Deal with externalities


    What are externalities l.jpg
    What are Externalities? of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Costs/Benefits imposed on non-consenting people

    • Spillover effects

      • Negative Externalities

        • What you do hurts me

        • You don’t compensate me

        • Examples?

      • Positive Externalities

        • What you do helps me

        • I don’t compensate you

        • Examples?


    Impact of negative externality l.jpg
    Impact of Negative Externality of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Free Market: P1, Q1

    • Games cause congestion

       imposes cost on others

       shifts supply curve left

    • Optimal Outcome: P2, Q2

    • Free market “overproduces”

       causes DWL

    • What can government do?

    S2

    $

    S1

    P2

    External cost

    P1

    D1

    Q2

    Q1

    Games


    Impact of positive externality l.jpg
    Impact of Positive Externality of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Free Market: P1, Q1

    • Games generate “winning attitude”

      •  generates benefits for others

      •  shifts demand curve right

    • Optimal Outcome: P2, Q2

    • Free market “underproduces”

      •  causes DWL

    • What can government do?

    External benefit

    $

    S1

    P2

    P1

    D2

    D1

    Q1

    Q2

    Games


    Subsidizing team losses l.jpg
    Subsidizing Team Losses of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Standard monopoly with high fixed costs may suffer losses

    • Government may offer subsidies to keep team in city

    • Subsidy =

    $

    ATC

    PM

    ATC

    MC

    D

    MR

    QM

    Quantity


    Can a stadium be a profit center for a city l.jpg

    Revenues of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    Rental Payments

    Share of Concessions, Parking, Luxury Boxes, etc.

    Precise arrangements vary by facility

    Costs

    Standard operating costs (labor, utilities, etc)

    Depreciation (facility will eventually be worthless)

    Opportunity Cost: Could have invested $$

    Foregone tax revenue – city can’t pay itself

    Average subsidy to team ~$7 Million/year

    Baltimore Ravens pay no rent.

    Chicago White Sox pay $1 per year

    Cleveland Indians pay rent on a sliding scale:

    $1.25 per ticket if A > 2.5 million

    $1.00 per ticket if 1.85 < A < 2.5 million

    $0.00 per ticket if A < 1.85 million

    Cleveland Cavaliers pay rent on same sliding scale as Indians

    San Diego Chargers

    City receives 10% of ticket revenue

    City reimburses team 100% of value of unsold tickets

    Ex: $50 ticket

    Chargers receive $27 [=(50)(.90)(.60)] if sell ticket

    Chargers receive $50 if don’t sell ticket

    Can a Stadium be a Profit Center for a City?


    Calculating the implicit subsidy l.jpg
    Calculating the Implicit Subsidy of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    S = Operating Revenue – [Depreciation + Opp Cost of Funds + Foregone Taxes]

    Estimated Annual Subsidies

    ($Thousands)

    Source: Quirk and Fort (1992).

    Note:

    NOR = Net Operating Revenue

    DEP = Depreciation

    OCF = Opportunity Cost of Funds

    FPT = Forgone Property Taxes


    Measuring the value of a franchise l.jpg
    Measuring the Value of a Franchise of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Economic Impact Studies

    • Cost/Benefit Studies


    What do sabres bring to buffalo l.jpg
    What Do Sabres Bring to Buffalo? of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • 2003 estimates by NY State Comptroller:

      • $31M in gate receipts

      • $8.6 M in concessions revenue

      • $4 M in advertising and broadcast revenue

    • Subtotal: $43.6 million

    • Total Impact = $65 million = ($43.6) x (1.5)

    Multiplier


    Multiplier effects l.jpg
    Multiplier Effects of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Initial spending generates ripple effects

      DY= DX + DX*MPC + (DX*MPC)*MPC+…

      DY= DX*(1+MPC+MPC2+MPC3+MPC4+…)

      DY= DX

    • Example

      DX = $35

      MPC = 0.80

    Where:

    X = initial spending

    Y = aggregate income

    MPC = ΔC / Δ Y

    Simple multiplier

    Δ Y = 35(5) = $175

    The higher the MPC, the higher the multiplier.


    Modified multiplier l.jpg
    Modified Multiplier of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    Mlocal =

    Example:

    MPC = 0.80

    f = 0.5

    Where f = fraction of spending that is local

    Mlocal = 1.67


    Benefits of a franchise l.jpg
    Benefits of a Franchise of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Direct Benefits (New Spending)

      • Higher APC?

      • Net exports?

        • Players live elsewhere?

        • Substitution effects?

    • Indirect Benefits

      • Positive externalities?

        • Big league image

        • Sense of identity

    MLB revenues < Fruit of the Loom

    Single team worth less than sizable department store

    Chicago has 5 major league franchises

    Sports account for .08% of personal income

    Buffalo Sabres: $65 million

    Marietta College: $40 million

    And now, YOUR Columbus Blue Jackets!


    Costs of a franchise l.jpg
    Costs of a Franchise of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Direct Costs

      • Construction

      • Operating

      • Depreciation

      • Opportunity cost of funds

    • Indirect Costs

      • Negative externalities

        • Crime

        • Congestion

        • Noise

    Such costs may already have been

    internalized for older stadiums


    Teams and jobs l.jpg
    Teams and Jobs of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Arizona Diamondbacks [Deloitte and Touche]

      • 340 full-time jobs

      • Cost to city: $240 Million

      • $706,000 per job

    • Baltimore Ravens [MD Dept of B&E Development]

      • Cost per job: $127,000 - $331,000


    Baade and dye 1990 l.jpg
    Baade and Dye (1990) of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • “Impact of Stadiums and Professional Sports on Metropolitan Area Development”

    • Uses sample of 30 cities 1958-87

      Dyit-Dyit-1 = b0 + b1*NTit + b2*NSit+…+ eit

    • Neither coefficient statistically significant

    Growth in per capita income

    Number of

    Teams

    Number of

    Stadiums


    Other studies l.jpg
    Other Studies of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Rappoport and Wilkerson (2001) looks at Quality of Life

      • Direct approach: survey residents

      • Indirect approach: examine housing values

    • Coates and Humphreys (2003) look within cities

      • Find higher property values in immediate neighborhood, but falls off rapidly

    $

    Johnson, Groothuis, and Whitehead (2001):

    “What is the most you would be willing to pay out of your own household budget each year in higher city taxes to keep the Penguins in Pittsburgh?”

    CS

    P

    D

    Answer: $1.56  $50m over 30 years

    Q

    Games


    Allan sanderson l.jpg
    Allan Sanderson of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.


    Stadium financing l.jpg
    Stadium Financing of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Taxes

      • Sales

      • Property

      • Income

      • User fees

    • Debt

      • Delayed taxes?

    • Lotteries

      • Voluntary tax?

    Issues:

    Revenue potential

    Efficiency

    Fairness


    Impact of taxes l.jpg
    Impact of Taxes of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Before Tax: P1, Q1

    • Government imposes tax: supply shifts to St

    • After Tax: P2, Q2

      • Revenue =

      • DWL =

    • Burden of tax

      • Buyers pay part

      • Sellers pay part

    $

    St

    S

    P2

    Per unit tax

    P1

    P2-t

    D

    Hotel Rooms

    Q2

    Q1


    Tax examples l.jpg
    Tax Examples of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Miami

      • Proposed sales tax on cruise ship passengers

    • Cleveland

      • 15-year sin tax on residents of Cuyahoga County

    • Milwaukee (Miller Park)

      • 5 county sales tax

      • Regressive tax

    • Seattle

      • Sales tax on restaurants and bars in King County

      • Tax on tickets to games

      • Tax on rental cars


    Public choice perspective l.jpg
    Public Choice Perspective of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

    • Politicians pursue their own self-interest

    • Special interest groups have their agenda

      • Highly organized groups have advantage

      • Concentrated benefits and dispersed costs promote rent seeking

    A

    B

    C, D

    E

    No Stadium

    Old Stadium

    New, No Frills

    Stadium

    New, Elaborate

    Stadium

    Simple majority vote would lead to New, No Frills Stadium

    All or nothing choice would lead to New, Elaborate Stadium


    Baseball has not been convicted of violating the sherman antitrust act because l.jpg
    Baseball has not been convicted of violating the Sherman Antitrust Act because

    • Baseball is the national pastime

    • Baseball was the first sport to institute the reserve clause

    • The Sherman Act does not apply to sports

    • Baseball has been exempt from the antitrust laws


    The monopoly power that the ncaa held over tv networks fell apart due to l.jpg
    The monopoly power that the NCAA held over TV networks fell apart due to

    • The prisoner’s dilemma

    • The winner’s curse

    • The outlawing of the reserve clause

    • The entry of new schools into the NCAA


    Slide86 l.jpg

    Suppose the demand for tickets to see a soccer game is given by Q = 40,000 – 400P and the marginal cost is $10 per seat. How many tickets would a profit-maximizing monopolist sell and what price would it charge? (Hint: The marginal revenue curve is given by MR = 100 - .005Q)

    • Q = 40,000; P = $10

    • Q = 20,000; P = $45

    • Q = 36,000; P = $10

    • Q = 18,000; P = $55


    Slide87 l.jpg

    The standard deviation of win percentage for the 32 teams in the NBA in 2005–06 was 0.134. The NBA plays an 82-game season. The standard deviation of win percentage for the 20 teams in the English Premier League in 2005–06 was 0.158. The EPL plays a 38-game season. The idealized standard deviation of win percentages for the NBA and EPL are

    • 1.672 (NBA) and 1.580 (EPL).

    • 0.078 (NBA) and 0.115 (EPL).

    • 0.055 (NBA) and 0.081 (EPL).

    • 2.427 (NBA) and 1.948 (EPL).


    Based on the information in the previous question which league exhibits more competitive balance l.jpg
    Based on the information in the previous question, which league exhibits more competitive balance?

    • The NBA exhibits more within-season competitive balance, but between-season competitive balance cannot be determined from the information given.

    • The EPL exhibits more within-season competitive balance, but between-season competitive balance cannot be determined from the information given.

    • The NBA exhibits more between-season competitive balance, but within-season competitive balance cannot be determined from the information given.

    • The EPL exhibits more between-season competitive balance, but within-season competitive balance cannot be determined from the information given.

    • Because the leagues have a different number of teams and/or play a different number of games each season, neither between-season nor within-season competitive balance can be determined from the information given.


    Slide89 l.jpg

    Over the past 12 years in Patriot League Women’s Volleyball, American has won 5 titles, Colgate has won 3 league titles, Bucknell has won 2 titles, and Lehigh and Army have each won 1 title. In the NBA over the past 12 years, the L.A. Lakers, San Antonio Spurs, and Chicago Bulls have each won 3 titles, the Houston Rockets, Detroit Pistons, and Miami Heat have each won 1 title. The HHI for championships in Patriot League Volleyball and the NBA are

    • 2.5 (NBA) and 3.3 (PL).

    • 12.0 (NBA) and 12.0 (PL).

    • 30 (NBA) and 40 (PL).

    • 7.0 (NBA) and 4.0 (PL).

    HHIPL = 52 + 32 + 22 + 12 + 12)/12 = 40/12 = 3.33.

    HHINBA = (32 + 32 + 32 + 12 + 12 + 12)/12 = 30/12 = 2.5


    Based on the information in the previous question which league exhibits more competitive balance90 l.jpg
    Based on the information in the previous question, which league exhibits more competitive balance?

    • The NBA exhibits more between-season competitive balance, but within-season competitive balance cannot be determined from the information given.

    • The PL exhibits more between-season competitive balance, but within-season competitive balance cannot be determined from the information given.

    • The NBA exhibits more within-season competitive balance, but between-season competitive balance cannot be determined from the information given.

    • The PL exhibits more within-season competitive balance, but between-season competitive balance cannot be determined from the information given.

    • Because the leagues have a different number of teams and/or play a different number of games each season, neither within-season nor between-season competitive balance can be determined from the information given.


    Slide91 l.jpg

    Given the following winning percentages of the teams in a league (for a single year) compute the within-season standard deviation for the league.

    • w = 0.063

    • w = 0.251

    • w = 0.281

    • w = 0.315


    Because of the rent gradient most stadiums are built l.jpg
    Because of the rent gradient most stadiums are built league (for a single year) compute the within-season standard deviation for the league.

    • for multiple purposes.

    • on the outskirts of town.

    • larger than they used to be.

    • in the center of town.


    The winner s curse suggests that l.jpg
    The Winner’s Curse suggests that league (for a single year) compute the within-season standard deviation for the league.

    • teams that do well one season will do less well the next season.

    • teams that win will be a burden to the team that hosts them.

    • cities often lose teams with winning records.

    • cities that attract a franchise typically pay too much


    The all or nothing demand curve allows l.jpg
    The all-or-nothing demand curve allows league (for a single year) compute the within-season standard deviation for the league.

    • colleges to under-compensate athletes

    • the IOC to overcharge host cities

    • football teams to move from city to city

    • baseball to avoid the antitrust laws


    Studies of the benefits of a team often overstate the multiplier because l.jpg
    Studies of the benefits of a team often overstate the multiplier because

    • they do not account for inflation

    • they do not consider leakages into surrounding communities

    • they do not count only new expenditures

    • they count expenditures by visitors from outside the region


    Most economists view tax revenues raised through state lotteries as l.jpg
    Most economists view tax revenues raised through state lotteries as

    • progressive since rich people can afford to buy more tickets

    • the best way to raise funds because no one has to buy tickets

    • a poor idea since lottery tickets are inferior goods

    • regressive since poor people spend a greater fraction of their income on tickets


    Slide97 l.jpg

    You are conducting an economic impact analysis of bringing the Division III World Series back to Marietta. The direct spending impact is expected to be $60,000. The marginal propensity to consume is 0.80 and the people who receive the initial $60,000 live in the area only 9 months out of the year. What is the total impact of the World Series on Marietta?

    • $48,000

    • $60,000

    • $150,000

    • $300,000


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