The lone exception is the Dallas Cowboys, whose value stems directly from their stadium. How does a new stadium impact the revenues of a team? ...
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What does it mean to be a “large market” or a “small market” team? Review
Schmidt, Martin B. and David J. Berri. (2002). “Competitive Balance and Market Size in Major League Baseball: A Response to Baseball’s Blue Ribbon Panel.” Review of Industrial Organization, 21, n.1. (August): 41-54.
According to Forbes: Six of the seven most valuable franchises in the NFL in 2000 play in a stadium built since 1995. The lone exception is the Dallas Cowboys, whose value stems directly from their stadium.
How does a new stadium impact the revenues of a team?
The standard model of a monopoly has a firm facing a downward sloping demand curve. The firm cannot increase output without lowering price. Hence, marginal revenue (the amount of revenue from the last unit sold), is less than the price.
Example: P = $360 – 4Q
MR = $360 – 8Q
MC = $40
Profit is maximized where MR = MC.
Q = 40 P = $200
How much consumer surplus is lost to monopoly power?
Why would a city submit a winning bid to host a new team?
The team can generate a greater stream of profits in the winning city.
The city over-estimates the value of the team.
The auction mechanism may cause a city to submit a bid greater than the value of the team.
Studies have shown that as the number of bidders increases, the amount the winning bid exceeds expected value increases. In other words, winning the auction itself becomes a goal, independent of expected benefits.
Where is the most desirable place for a business to locate? The central business district. Review Figures 5.8 and 5.9
Because the central business district is the most desirable, the price of land is higher in the center of town. Hence, stadiums have generally been located away from the central business district.
The decay of inner cities have lowered the price of land. Combine this event with the desire to utilize stadiums to generate spillovers in the community and one can see why cities have chosen to build newer stadium within the host city.