kins 5560 midterm
Arbitrage
"cheat" a segmented market and pay lower than your WTP
Profit =
Total revenue - total cost
Elasticity is < -1
elastic -Luxury goods, most brand consumer goods
All teams have the same
marginal revenue
Demand is driven by
willingness to pay
Elasticity calculation
% change in quantity demanded / % change in price
What are the ways sports are consumed?
-Buying tickets -Watching on TV -Buying merchandise -Following teams or players on social media
How do we measure competitive balance?
-Gini coefficient
Compare and Contrast sports market with more traditional markets
-Many ways to consume sport. -tangible -Very valuable -Measuring demand for sports is more difficult
Monopoly
-Market where one seller exists -Can set their own prices and can sustain profits forever
American vs European based leagues
-Often draft talent-draft order is determined by finishing positions -European leagues use promation/relegation, worst teams are kicked out of the league to be replaced by hopefully more competitive ones
Factors to increase competitive balance
-Salary cap -Draft -promotion/relegation
Signaling
a way of showing you will be a proper match for the task at hand
Consumer surplus definition
at some price, there will be some group of consumers willing to pay more
Targeted ads
displayed to specific consumers based on advertiser's knowledge about those specific consumers
Marginal revenue
he revenue from selling one more good (a stadium ticket, a game, a baseball,etc.)
Demand Shifters
i-ncome, changes in demographics, price of substitutes, price of complements, expectations about future, tastes and preferences, changes in population -Demand shifters unique to sports: Population and performance
Elasticity is > -1
inelastic........ power water, gas
decrease in demand causes an
inward shift
Main source of revenue for most sport leagues
media rights
Since the 1990s
out-of-market sports packages have allowed viewers to watch games outside of their local market Ex. NFL Sunday Ticket (YouTube), MLB Extra Innings (cable), NBALeague Pass
Increase in demand causes an
outward shift
quantity demanded only shifts for
price
Revenue
price x quantity sold
marginal cost
the cost of producing one more unit of a good
Elasticity
How sensitive quantity demanded is to a change in price -Steepness of the demand curve
Price disrcimination
Identify different segments ◦ Enforce that higher WTP are not paying the low WTP price
What determines elasticity in sports
-proximity of substitiues -higher value of the good or service -Neccessity for survival -Brand loyalty -Time
Scarcity
More want for a good than that good exists
How to calculate consumer surplus
1/2quantityX(demand intercept-price)
demand vs quantity demanded
A change in demand is when the whole curve shifts and a change in quantity demanded is movement along the demand curve due to a change in price. Price Doesn't shift the curve....... Demand is the quantity of a good or service that consumers are willing and able to buy at given prices during a period of time. Quantity demanded is the amount of a good or service people will buy at a particular price at a particular time
Rival Leagues
A rival league can be successful by entering and establishing a foothold in market where the primary league isn't active Phoenix used the Arizona Wranglers (which actually didn't bring great attendance) to court the St. Louis Cardinals to relocation When the NBA and ABA merged in 1970, they agreed to accept 4 of the surviving 6 ABAteam
Bundling
Allows multiple networks to share the wealth -Prevents the formation of a rival league -Demand for the NFL is likely more inelastic than the demand for a network
Variable costs
Based on how many items are sold. -The more goods sold, the higher variable costs
Beckers approach to cheating
Becker proposed that criminals were in fact rational individuals that weighed the benefits and costs of committing crimes Becker's calculus for criminals If , commit the crime If , don't commit the crime U is the benefit (utility) of committing the crime. P is the likelihood of conviction (and receiving punishment) and F is the punishment for the crime. We can apply this same logic to cheaters
Supply shifters
Changes to league structure or the stadium◦ Build more seats or have more games Technology changes◦ For example, synthetic fibers made it easier to make athletic clothing, pushing the supply curve outward Change in the price of inputs◦ Rubber used to be an expensive commodity, now it's much cheaper Changes to population◦ Population growth can result in more workers◦ Relaxed immigration can increase the supply of athletes
How to prevent cheating
Cheating occurs when U>PF A note here: This is each individual's calculus based on the information they know at the time- they can be wrong (which is why most criminals get caught). To change behavior, you must change P or F Make punishments more severe Are current punishments not severe enough? https://www.spotrac.com/nfl/suspensions/_/year/2024 Or increase the probability of conviction Drug tests aren't perfect Many schemes are not revealed until years after the fact
Large market teams...
Create more revenue, but do not always havemore fans or are more profitable
Why is demand for womens sport lower than mens
Economics say it is caused by tastes and preferences
Why are broadcasters willing to pay tohost games?
Fear of losing viewers If they don't, another network will Prestige Advertising
"successful" rival leagues
For a rival league to find success, they must Establish a presence in a market where the primary league doesn't Draw fans and viewers by fielding a "good" product On-field product has to look similar to the primary league Must cultivate its own star players Innovate in some way from the primary league, usually through new rules Usually, the goal of most rival leagues is not to replace the primary league,but to merge in some fashion with them. Many primary league teams (San Diego Padres, Buffalo Bills, Seattle Sounders,Indiana Pacers) began their existence in a rival league
Single entry cooperation
One of the reason many early sports leagues failed is that they were decentralized, and left many key rules in the hands of the teams Teams would act according to their self-interest, not the league's Issues arise when those incentives aren't aligned Schedule: Many early teams only wanted to face the best opponents, which would draw larger crowds, and wanted to play more games at home Surviving leagues figured out the importance of balanced scheduling, so everyone has to play the same number of games home/away and tough and easy opponents are dispersed (relatively) evenly Rules: Leagues have to set the rules and enforce them to all teams evenly They also have to develop innovations that make for a more exciting and watchable game NBA 3-point shot NFL overtime rules Champions: a league has to decide how its champion is chosen.
Mechanics of expansion
Potential new owners have to pay an expansion fee to the league Value of last expansions NFL: Texans - $700million, 1999 ($1.28billion today) NHL: Kraken - $650million, 2021 MLB: Diamondbacks/Devil Rays - $130million, 1997 ($250million today) NBA: Bobcats - $300million, 2004 ($500million today) MLS: San Diego FC - $500million, 2023 These are usually dispersed to the other owners New owners predict future revenues will exceed the cost of the expansion fee Expansion fees, combined with facilities and the stadium are all fixed costs Some costs, like the stadium, may be subsidized by the city itself (we'll cover thislater in the semester) Because of this, owners have to be vetted to ensure they are interested in making a competitive team and are financially stable
Short run vs long run
Short run- fixed costs cannot be changed... long run... every fixed cost can be changed or renegotiated
Blackouts
Some leagues engage in blackout policies, where games won't be aired in the local tv market.Done to encourage live attendanceNFL games will be blacked out of the game isn't a selloutMLB and NHL games may black out a national broadcast in favor of the local broadcast The Indianapolis 500 is blacked out for the Indianapolis marke
Positive vs. Normative Statements
Statements of fact (positive) as opposed to value judgements or subjective opinions (normative)
Driven buy willingness to sell
Supply curve
Total Cost
TFC + TVC
Marginal cost
The cost of producing one more unit or reaching one more customer
opportunity cost
The next best option that is given up in order to partake in some endeavor
Monopsony
The only buyers of a good or service, so they can influence the price
