Sports Economics

553 Pages·2011·5.99 MB·English

by  Roger D. Blair

SPORTS ECONOMICS
SportsEconomics,themostcomprehensivetextbookinthefieldbycele-
bratedeconomistRogerD.Blair,focusesprimarilyonthebusinessand
economicsaspectsofmajorprofessionalsportsandtheNationalColle-
giateAthleticAssociation.Itemploysthebasicprinciplesofeconomics
to address issues such as the organization of leagues, pricing, adver-
tising, and broadcasting as well as the labor market in sports. Among
its novel features is the candid coverage of the image and integrity of
players, teams, managers, and the leagues themselves, including cases
ofgambling,cheating,misconduct,andperformance-enhancingdrugs.
Thetextalsodiscussesothercontroversialsubjectssuchasdisciplining
participants,discrimination,thefinancingoffacilities,andhowsalaries
aredetermined.Blairexplainshoweconomicdecisionsaremadeunder
conditions of uncertainty using the well-known expected utility model
andmakesextensiveuseofpresentvalueconceptstoanalyzeinvestment
decisions.Numerousexamplesaredrawnfromthedailypress.Thetext
offersampleboxestoillustratesportsthemes,aswellasextensiveuseof
diagrams,tables,problemsets,andresearchquestions.
Roger D. Blair is Walter J. Matherly Professor and Chair of the Depart-
ment of Economics at the University of Florida, where he has taught
since 1970. He received his Ph.D. from Michigan State University. Pro-
fessor Blair is the author or coauthor of numerous books, including
AntitrustEconomics(withDavidKaserman),LawandEconomicsofVerti-
calIntegrationandControl(withDavidKaserman),Monopsony:Antitrust
Law and Economics (with Jeffrey Harrison), Monopsony in Law and
Economics (with Jeffrey Harrison, Cambridge University Press, 2010),
Intellectual Property: Economic and Legal Dimensions of Rights and
Remedies (with Thomas Cotter, Cambridge University Press, 2005), The
Economics of Franchising (with Francine Lafontaine, Cambridge Uni-
versityPress,2005),andVolumeIIofAntitrustLaw(withHerbertHov-
enkamp,ChristineDurrance,andPhilipAreeda).Heisalsotheeditoror
coeditorofmanyvolumes,includingProvingAntitrustDamages.Profes-
sorBlairhaswrittenmorethan170articlesorchaptersinprofessional
economicsjournals,lawreviews,andbooks.

Sports Economics
Roger D. Blair
UniversityofFlorida
cambridgeuniversitypress
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(cid:2)C RogerD.Blair2012
Thispublicationisincopyright.Subjecttostatutoryexception
andtotheprovisionsofrelevantcollectivelicensingagreements,
noreproductionofanypartmaytakeplacewithoutthewritten
permissionofCambridgeUniversityPress.
Firstpublished2012
PrintedintheUnitedStatesofAmerica
AcatalogrecordforthispublicationisavailablefromtheBritishLibrary.
LibraryofCongressCataloginginPublicationdata
Blair,RogerD.
Sportseconomics/RogerD.Blair.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-521-87661-2(hardback)
1.Sports–Economicaspects. 2.Professionalsports–Economicaspects. I.Title.
GV716.B53 2011
796.06′91–dc23 2011025092
ISBN978-0-521-87661-2Hardback
CambridgeUniversityPresshasnoresponsibilityforthepersistenceoraccuracyofURLsfor
externalorthird-partyinternetwebsitesreferredtointhispublicationanddoesnotguaranteethat
anycontentonsuchwebsitesis,orwillremain,accurateorappropriate.
Coverphoto:SarahGoldberger
Fortherealsportsinmylife–Alec,Devon,Riley,andBrettBlair.
–Papa
Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pagexxi
CommonlyUsedAbbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiii
I INTRODUCTION
1 IntroductiontoSportsEconomics . . . . . . . . . . . . . . . . . . . . . . . . 3
1 Introduction 3
2 ToolsofAnalysis 4
2.1 PresentValueCalculations 4
2.2 EconomicsofUncertainty 4
3 TheSportsBusiness 5
3.1 SportsLeaguesandOrganizations 5
3.2 CompetitiveBalance 6
3.3 PricingDecisions 7
3.4 AdvertisingandPromotion 7
3.5 BroadcastRights 8
3.6 InsuringPlayerTalent 8
3.7 SportsLeaguesandAntitrustPolicy 9
4 ImageandIntegrity 9
4.1 GamblinginSports 9
4.2 CheatinginSports 9
4.3 MisconductbyParticipants 10
4.4 Performance-EnhancingDrugs 10
5 Facilities,Franchises,andPublicPolicy 11
5.1 DemandforSportsFranchisesandEvents 11
5.2 EconomicImpactStudies 11
5.3 FinancingSportsFacilities 11
6 TheSportsLaborMarket 11
6.1 CompetitionandMonopsony 11
6.2 MonopsonyintheNCAA 12
6.3 BiddingandBargainingintheSportsLaborMarket 12
vii
viii Contents
6.4 EconomicValueofMultiyearContracts 13
6.5 FinalOfferArbitration 13
6.6 Players’UnionsandCollectiveBargaining 13
6.7 SportsAgents 13
6.8 TheRoleofSportsAgents 14
6.9 TurningProEarly 14
6.10 DiscriminationintheSportsLaborMarket 14
7 ConcludingRemarks 14
ReferencesandFurtherReading 15
2 TheBusinessofSports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
1 Introduction 16
2 ProfitandProfitMaximization 17
2.1 ANumericalExample 18
3 RevenueandCosts 19
3.1 RevenueSources 19
3.2 CostsofGeneratingRevenues 24
3.3 ClubProfit 24
4 ProfitandTeamQuality 25
4.1 SelectingTeamQuality 25
4.2 QualityandAttendanceintheNFL 26
5 ValueofaProfessionalClub 26
5.1 Stand-AloneInvestments 32
5.2 FranchiseValueGrowthintheNFL 32
5.3 CapitalAppreciationinMLB 33
5.4 OtherBenefits 35
6 ConcludingRemarks 35
ProblemsandQuestions 35
ResearchQuestions 38
Appendix 38
ReferencesandFurtherReading 44
3 SportsLeaguesandOrganizations . . . . . . . . . . . . . . . . . . . . . . . 46
1 Introduction 46
2 LeagueFormation 47
2.1 CooperationofftheField 47
2.2 LeaguesasJointVentures 47
2.3 LeaguesasCartels 48
3 SportsLeaguesandProfitMaximization 48
4 RulesandProceduresofSportsLeagues 50
4.1 LeagueMembership 50
4.2 LeagueGovernance 52
4.3 ProductionofAthleticCompetition 52
4.4 MarketingtheLeague’sProducts 53
4.5 Players’Market 53
Contents ix
4.6 OtherInputs 54
4.7 Consensus 54
5 RevenueSharing 54
5.1 TransfertoWeakerTeams 54
5.2 RevenueSharinginMLB 55
6 SportsLeagues,MonopolyPower,andConsumer
Welfare 56
7 LeagueExpansion 58
7.1 AmericanLeague 59
7.2 NationalLeague 60
8 ConcludingRemarks 62
ProblemsandQuestions 62
ResearchQuestions 63
ReferencesandFurtherReading 63
4 CompetitiveBalance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
1 Introduction 65
2 DefinitionofCompetitiveBalance 65
3 MeasuresofCompetitiveBalance 67
3.1 Noll-ScullyMeasure 67
3.2 Herfindahl-HirschmanIndex 69
3.3 ACaveatonStatisticalMeasures 70
4 EconomicAnalysisofCompetitiveBalance 70
4.1 FreeAgency 70
5 DealingwithCompetitiveImbalance 73
5.1 ReserveClause 73
5.2 RevenueSharing 75
5.3 EconomicImplicationsofRevenueSharing 76
5.4 SalaryCaps 77
5.5 Reverse-OrderPlayerDrafts 79
5.6 LuxuryTaxes 79
5.7 EconomicImplicationsofLuxuryTaxes 80
6 ConcludingRemarks 82
ProblemsandQuestions 82
ResearchQuestions 83
ReferencesandFurtherReading 84
II THESPORTSBUSINESS
5 PricingDecisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
1 Introduction 89
2 CompetitivePricing 89
3 SimpleMonopolyPricing 90
3.1 EmptySeatsandTicketPricing 93
3.2 TicketPricingandDemandElasticity 93
x Contents
4 PriceDiscrimination 95
4.1 ConditionsNecessaryforSuccessfulPriceDiscrimination 96
4.2 ProfitMaximizationandPriceDiscrimination 97
4.3 TicketPricing 97
5 PeakLoadPricing 99
6 SeasonTicketsandOtherBundling 102
7 Two-PartPricing 104
7.1 Two-PartPricing:IdenticalDemands 104
7.2 Two-PartPricing:NonidenticalDemands 105
8 PricingComplements 107
9 TicketScalping:APricingFailure 110
9.1 StudentTickets:AScalpingOpportunity 111
9.2 TicketstotheFinalFour 111
9.3 DemandShiftsandScalping 111
9.4 Example:TheMasters 111
9.5 AntiscalpingLaws 112
10 ConcludingRemarks 113
ProblemsandQuestions 113
ResearchQuestions 115
ReferencesandFurtherReading 115
6 AdvertisingintheSportsIndustry . . . . . . . . . . . . . . . . . . . . . . 117
1 Introduction 117
2 OptimalAdvertisingbyaFirm 118
2.1 NumericalExample 118
3 SportsAdvertisingbyFirms 120
3.1 SportsPublications 124
3.2 NamingRights 124
3.3 Sponsorships 128
3.4 Endorsements 129
4 StrategicBehaviorinAdvertising 130
5 League-WideAdvertising 131
5.1 EconomicTheory 132
5.2 ProblemsinPractice 133
5.3 ANumericalExample 134
6 ConcludingRemarks 135
ProblemsandQuestions 135
ResearchQuestions 136
ReferencesandFurtherReading 136
7 TheMarketforSportsBroadcastingRights. . . . . . . . . . . . . . . .137
1 Introduction 137
2 MarketStructure 138
2.1 SportsBroadcastingAct 139
Contents xi
3 BiddingforBroadcastRights 141
3.1 ANumericalExample 143
3.2 TheWinner’sCurse 145
3.3 BiddingandUncertainty 146
3.4 OtherBenefitstoBroadcasters 147
3.5 MondayNightFootball 148
3.6 BottomLine 149
4 VerticalIntegrationinSports 149
4.1 TransactionCosts 152
4.2 StrategicBehavior 152
5 SportsNetworks 152
5.1 CollegeConferences 153
6 ConcludingRemarks 153
ProblemsandQuestions 154
ResearchQuestions 156
ReferencesandFurtherReading 156
8 InsuringPlayerTalent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
1 Talent:ARiskyAsset 158
2 RiskAversionandInsurance 159
2.1 ExpectedUtilityModel 159
2.2 RiskAversionandRiskNeutrality 160
2.3 RiskAversion 161
2.4 RiskNeutrality 163
2.5 MeasuringExpectedUtility 163
2.6 CertaintyEquivalent 164
3 ShiftingRiskthroughInsurance 164
4 TheNCAAInsuranceProgram 166
4.1 Premiums 167
5 TeamInsurancePurchases 168
5.1 TheJeffBagwellExample 169
5.2 InsuranceDecisions 170
6 ConcludingRemarks 171
ProblemsandQuestions 171
ResearchQuestions 173
Appendix 173
ReferencesandFurtherReading 174
9 SportsLeaguesandAntitrustPolicy. . . . . . . . . . . . . . . . . . . . .175
1 Introduction 175
2 TheEconomicRationaleforAntitrust 175
3 TheAntitrustLaws 178
3.1 Section1oftheShermanAct 178
3.2 Section2oftheShermanAct 179