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THE ECONOMICS OF MAJOR LEAGUE BASEBALL Jonathan Flickinger Nicole Erwin Shannon Kane Jen Pergola Economics of Major League Baseball Jonathan : Defining the market, Supply and Demand, Goals and Constraints Nicole : Substitutes and Preferences Shannon : Utility, Income, and Price

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The economics of major league baseball l.jpg

THE ECONOMICS OF MAJOR LEAGUE BASEBALL

Jonathan Flickinger

Nicole Erwin

Shannon Kane

Jen Pergola


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Economics of Major League Baseball

  • Jonathan: Defining the market, Supply and Demand, Goals and Constraints

  • Nicole: Substitutes and Preferences

  • Shannon: Utility, Income, and Price

  • Jen: Monopolistic Activity

  • Jonathan: Conclusion


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Defining the Market

•30 Major League Baseball teams

•Each team has their own stadium/dome

•Each team consists of 18-22 players

•Coaches, Personnel, etc.

•Teams spread across the US and Canada


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Supply and Demand

• 30 Major League Teams

• 162 games a season


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Goals and Constraints

  • Substitutes

  • Preferences

  • Utility

  • Changes in Income, Price


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Substitutes

A good that can be used in place of some other good and that fulfills more or less the same purpose


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Substitutes

• Minor League baseball

• College baseball

• High School baseball

• Recreational/Youth baseball


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Effect of Substitutes

•Most people prefer major league baseball

•Entertainment purposes

• Location

• Price


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Substitution Effect

  • As the price of a good falls, the consumer substitutes that good in place of other goods whose prices have not changed.


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Preferences

  • When something is preferred or else things would be valued equally


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Preferences in Baseball

  • People are going to have a team preference

  • Typically, the hometown team.

  • Winning teams have long term fans

  • Winning means fans typically will attend more games


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Consumer Decision Making

  • The consumer will always choose a point on the budget line rather than a point on or below the line.


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COST OF TICKETS &BUDGET CONSTRAINTS


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Major League Baseball

  • Major League vs. Minor League

  • Lowest price: $9 vs. $4

  • Highest price: $35 vs. $11


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Comparable prices

  • Major League vs. other substitutes

  • College baseball tickets are free

  • High School Baseball is free

  • Youth baseball is free

  • Tickets may cost consumer money during playoffs, world series, etc.


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Budget Constraint

The different combinations of goods a consumer can afford with a limited budget, at given prices.


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UTILITY

  • Pleasure or satisfaction obtained from consuming goods and services.


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Utility in Major League Baseball

  • Large television/radio coverage

  • Opportunity for advertising/sponsorship


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Large TV/Radio Coverage

  • Fox Sports Net covers the games on television.

  • ESPN Radio carries the game on their station.

  • If you miss the game, catch the highlights on Sportscenter.


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Opportunity for Advertising/Sponsorship

• Restaurants within the ballpark

  • Quaker Steak & Lube, Primanti Bros., and Manny’s BBQ in center field

    • Between Innings: t-shirt toss & mullet moments

    • Special Promotions: Fireworks & Bobbleheads


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Example

  • The Pittsburgh Pirates spent:

    • 7.6 million dollars on signage

    • 2.2 million dollars on promotions

    • 3.1 million on radio

      • Information taken from Pittsburgh Pirates ticket office


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What does this mean?

  • It means that when you are at a Pittsburgh Pirates game, the sights and sounds in the ballpark cost money.

  • The team spends this money to ensure that every paying individual gets the satisfaction they are looking for when they purchase their ticket.

  • Hence, the team is ensuring utility.


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INCOME AND PRICE

Income: the amount that a person or firm earns over a particular period.

Price: the amount of money that must be paid to a seller to obtain a good or service


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Interesting Fact

  • The Pittsburgh Pirates have spent the following amount on players salaries:

    • 2000: 29.6 million dollars

    • 2001: 57.8 million dollars

    • 2002: 42.3 million dollars


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Alex Rodriguez

  • $262 million over 10 years

  • Translates into $26.2 million per year

  • Meaning, the Pittsburgh Pirates team payroll almost equals his salary.


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Why does Major League Baseball have the characteristics of a Monopoly?


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Monopoly

  • One seller of a product with no close substitutes

  • Large capital requirements

  • Economies of scale


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Flood Vs. Kuhn (1972)

  • Curtis Flood was a Major League Baseball Player who signed a contract with the Cincinnati Reds in 1956. He later went to the St. Louis Cardinals.

  • In October 1969, he was traded, without consultation, to the Philadelphia Phillies.

  • He petitioned the Commissioner of Baseball to be a free agent, but his request was denied.


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Resulting Action

  • Flood files anti-trust suit against the Commissioner of Baseball, Bowie Kuhn, along with the presidents/owners of each individual league and organization.


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So why is MLB a monopoly?

  • The opinion of the Supreme Court favored Flood, and in the process, said MLB was exempt from anti-trust laws.

  • So, Major League Baseball is a recognized exemption to the anti-trust laws, and only Congress can change it through legislation.


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So what can Major League Baseball do from a monopolistic standpoint?

  • Price discrimination

  • Profit Maximization


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Price discrimination

  • Charging different prices to different customers for reasons other than differences in cost.

  • How does price discrimination occur?


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Example of Discrimination

  • Pittsburgh Pirates vs. New York Yankees

  • Buying a ticket to this game in New York is going to cost you much more than seeing this game in Pittsburgh.

  • This leads to Profit Maximization.


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Profit Maximization

  • When you maximize your profits in any given fiscal year.

  • Profit is equal to Total Revenue minus Total Cost.

  • Revenue is the total inflow from selling a given output.

  • Cost equals fixed cost plus variable cost.


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Why should you care about the economics of Major League Baseball?


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CONCLUSION

  • Major League Baseball has a broad market that incorporates many areas of economics.

  • While your sitting there enjoying the game, you might not think about economics.

  • However, economics is at the heart of our national pastime.


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THE END


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