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 • Jen: Monopolistic Activity • Jonathan: Conclusion
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
Supply and Demand • 30 Major League Teams • 162 games a season
Goals and Constraints • Substitutes • Preferences • Utility • Changes in Income, Price
Substitutes A good that can be used in place of some other good and that fulfills more or less the same purpose
Substitutes • Minor League baseball • College baseball • High School baseball • Recreational/Youth baseball
Effect of Substitutes • Most people prefer major league baseball • Entertainment purposes • Location • Price
Substitution Effect • As the price of a good falls, the consumer substitutes that good in place of other goods whose prices have not changed.
Preferences • When something is preferred or else things would be valued equally
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
Consumer Decision Making • The consumer will always choose a point on the budget line rather than a point on or below the line.
Major League Baseball • Major League vs. Minor League • Lowest price: $9 vs. $4 • Highest price: $35 vs. $11
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.
Budget Constraint The different combinations of goods a consumer can afford with a limited budget, at given prices.
UTILITY • Pleasure or satisfaction obtained from consuming goods and services.
Utility in Major League Baseball • Large television/radio coverage • Opportunity for advertising/sponsorship
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.
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
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
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.
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
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
Alex Rodriguez • $262 million over 10 years • Translates into $26.2 million per year • Meaning, the Pittsburgh Pirates team payroll almost equals his salary.
Monopoly • One seller of a product with no close substitutes • Large capital requirements • Economies of scale
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.
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.
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.
So what can Major League Baseball do from a monopolistic standpoint? • Price discrimination • Profit Maximization
Price discrimination • Charging different prices to different customers for reasons other than differences in cost. • How does price discrimination occur?
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.
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.
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.