Variable ticket pricing

Variable ticket pricing

The Term Paper Project will provide students with an opportunity toinvestigate current issues and topics that are relevant to Economics of sports.

The structure of the paper should begin with a short introduction explaining the research

Question/issue, followed by some theoretical insights using concepts learnt in the class, then discuss using empirical evidence and lastly, conclude the paper.

There are two broad areas and five specific topics, on which you can discuss about. The two broad areas that you may explore are: 1) Industrial Organization and Sports Business, 2) Labour

Economics and Sports Business. The five topics drawn directly from the lectures on which you can discuss about are: (i) Limiting Entry as Cooperative Behavior, (ii) Rent seeking, (iii) Do monopolist always charge monopoly prices?, (iv) Variable ticket pricing, (v) Open Vs. closed leagues.

  1. Industrial Organization and Sports Business:

Students can focus on one of the two areas of the business aspects of the sports market: 1) a professional sports league (NHL, NBA, NFL, MLB, etc.)in North America or Europe, or, 2) an international sports event (the Olympics, the FIFA world cup, etc.).

Try to choose a topic that is not too broad, and try to focus on a specific aspect of the sports business, and narrow it to a business case. For example,try to avoid writing about the business structure of the NHL itself but instead,write about the success/failure of an NHL franchise. Similarly, you can analyse the short run/long run effects of hosting the Olympics for a hosting

city but should try to avoid writing about the history of the Olympics or the social and economic outcomes of the Olympics that are unquantifiable.

The writing of the paper should be primarily analytical and using economic concepts that were reviewed in class. It is also important to include data analysis (tables, graphs or data observations) to support your findings. Tables and graphs should be properly labelled.

  1. Labour Economics and Sports Business:

Students can focus on the labour market of a professional sport. Students may choose to focus on one of the following research areas:

1) Using player statistics explain pro-league salaries/payrolls and evaluate ateam’s management decisions.

2) Labour relations in pro-sports, conicts and compromises in collective bargaining.

  1. a) Evaluate the economic impact of bargaining outcomes: salary cap,revenue sharing, free agency, draft/entry restrictions . . .
  2. b) Evaluate the economic costs of lockouts/strikes

Please choose a topic that is not too broad. For example, focus on a single sport instead of sports in general; focus on a specific outcome of the collective bargaining process but not the general outcomes.

Topics

Sports Franchises as Profit-Maximizing Firms:

Topic 1: Limiting Entry as Cooperative Behavior

Using the paper: “The New Economics of the NHL”, Keller and Neville, School of Policy and Governance, University of Toronto, 2011; discuss about the advantages and disadvantages of having an NHL team in Hamilton, Ontario.

Topic 2: Rent seeking

In theory, we saw that when a team set the ticket price to the monopolist pricepm instead of the competitive market price pc, its producer surplus rises by thearea defined by the rectangle EFBG which translates into a dead weight loss(triangle BGC) which correspond to a net loss for the society. Some economistsbelieve that the social costs of monopoly exceed the dead weight loss triangle.

They regard the expenditure the monopolist makes to obtain and protect theirmarket position – behaviour they call rent seeking- as an unproductiveexpenditure that adds to society’s dead weight loss. They would claim, forinstance, that the 1.6$ million that the NFL spent on congress represented anexpense by football to protect its monopoly power. Theoretically, if the teams

invest all of their respective producer surplus for lobbying, the net loss for thesociety would be equal to the dead weight loss plus the invested producersurplus: BCG+EFBG. Using the data from the Center for Responsive Politics,discuss about the following: In 2012 and 2016, did the US presidentcandidate/party that received the highest contribution from the NFL won the

election? What are the advantages and disadvantages for the society of having the NFL supporting a candidate or a political party more that another?

Topic 3: Do monopolist always charge monopoly prices?

In theory, we saw that the monopolist price pm corresponds to the unique optimal price where the consumer’s demand is unit elastic (meaning if the price increase by one unit, the quantity demanded will decrease by one unittoo). Many studies showed that sports monopolists operate in the inelastic range of demand (meaning in the part where if the price increase by one unit the quantity demanded will decrease by less than one unit) while they can setan higher price up to reaching the unit elastic part of the demand. Using the paper: “Can We Find It at the Concessions? Understanding Price Elasticity”, Krautman, Berri, Journal of Sports Economics, 2007; explain why, in Professional Sports, teams price admissions in the inelastic range of demand.

Topic 4: Variable ticket pricing

Using the paper: “Variable Ticket Pricing in Major League Baseball”, Rascher, McEvoy and Brown & Brown, Journal of sport Management, 2007;

explain how variable ticket pricing can benefits to teams.

Using the paper: “The Effect of Star Quality on Attendance Demand: The Case of the National Basketball Association”, Wen-Jhan, Journal of Sports Economics, 2016; does the appearance of stars increases home and road game attendance?

Topic 5: Open Vs. closed leagues

Using the paper: “The Effect of Star Quality on Attendance Demand: The Case of the National Basketball Association”, Noll, Oxford Review of Economic Policy, 2003; explain the advantages and disadvantages of open and closed leagues. Give an example of each type of league and compare them.

Starting Point References and Resources

_ The Economics of Sports by Leeds and Allmen (Textbook), theearlier editions are available through Ryerson Library.

_ Sports Economics by Rodney D. Fort, the third edition is available athttps://www.amazon.com/Sports-Economics-3rd-Rodney-Fort/dp/

013606602X But the 1st edition is really cheap and available here:

https://www.amazon.ca/Sports-Economics-Rodney-D-Fort/dp/0130850918even though the tables and graphs required an update but the theoriesand concepts of the book didn?t change a great deal.

_ Power Play – the Business Economics of Pro Sports by Hodgsonand Lefebvre (Conference Board of Canada):

This book is written by two economists at the Conference board. Itincludes many case studies that are focused on Canadian professionalsports market. http://www.conferenceboard.ca/powerplay.aspx

_ The Global Economics of Sports by Gratton, Liu, Ramchandani:

(Routledge): available through Ryerson Library (e-book):

http://catalogue.library.ryerson.ca/record=b2417670~S0

The book includes in-depth economic analysis on the globalisation of thesports market, which can be used by students who are interested in casesthat are related to international sports events.

_ Conference board of Canada: http://www.conferenceboard.ca/.

Conference board of Canada produces specific industry reports,

including the sports industry. You can use their search engine and lookfor topics that are related to your research interests.

_ Professor Rodney Fort’s website:

https://sites.google.com/site/rodswebpages/codes Professor

Rodney Fort has the largest sports data collection in North America andit is publicly accessible.

_ Canadian Tourism Sports Alliance (CSTA):

http://canadiansporttourism.com/

CSTA produces industry reports using Sport Tourism EconomicAssessment Model (STEAM). CSTA works with event hosts to prepare apost-event analysis estimating the economic impact arising from hostinga particular sporting event.

_ Box Score Geeks:

http://www.boxscoregeeks.com/players/

compareandTheWagesofWinJournal:http://wagesofwins.com/faq/ or

http://wagesofwins.com/how-to-calculate-wins-produced/

Inspired by the Wages of Wins Journal, A team of sports statisticians provide deep data-driven analysis for basketball and other sports. 

Solution

Sports Economics Open vs. Closed leagues

Introduction

A closer look at sports today will show how it has been influenced by economics. Most of sports economics is drawn from micro – economics as it seeks to identify how a rational individual can use the limited resources at their disposal to meet their needs. This paper will look at sports leagues in general to examine the pros and cons of having an open or closed system. The open league system is commonly used in soccer. This is the case in the English premier leagues, the German Bundesliga, the Spanish Laliga and the Italian Serie A. On the other hand, the closed league system is commonly used in American sports such as the NBA, NFL and the MLS. Due to the broadness of this topic the paper will compare the NBA league and the English premier league. The structure of the league is closely related to the traditional demand and supply ideas. The league organizers will always look at the structure of the market to determine which structure is balanced enough to ensure survivability of the league as a whole. Having only one or two strong team may mean big profits for the said team in the short run but in the long run the whole league will collapse or seize to be attractive this is the case of the French football league where the PSG team is too dominant winning 4 of the last 5 championships and is on its way to win in 2018.

Discussion

The pros of an open league

The main advantage of an open league like the EPL is that the system allows for a smooth movement of players between teams both within and outside the specific league. In the European transfer widow, teams in the EPL are able to shop around for the best players around Europe and the world. This leads to the formation of efficient teams as there is no limitations that come from sourcing players form a yearly draft. This also creates a feeling in the society that anyone can be a champion in theory.[1] (Cain, 2015) A small team developed has the possibility to grow from the 2nd tier league and make its way to being the champion. This is was the case for the Leicester team in the EPL, the team was able to come from relegation and win the championship in the 2015 – 2016 season after only two years. This was however against very big odds as at the end of the season most of its influential players were bough off by bigger teams.

Open leagues tend to be more competitive. Going back to the EPL, it is not possible to establish a single organization that can win the champion chip two or three time in raw which is the case of the NBA where teams such as Golden State and Cleveland have been in the finals for the last three years and are favored to in the running this season. In the last five years, 4 teams have won the title in the EPL. Competitiveness is not only at the top of the leagues, in an open system new teams will have to get in which means that some teams must exit every year. The structure in the EPL is that the bottom three teams are replaced by the top three teams in the 2nd tier league.[2] (Jolly, 2017) This helps develop a competitive spirit as no team will willing tank as in the case in a closed system. However, just like in any league there is always a group of three or four teams that have remained dominant in the long run. This is the case in both open and closed leagues in the EPL these teams include, Chelsea, arsenal, Manchester united and Manchester city and finally Tottenham this teams always find a way to the top of the standings. This is still the case in the NBA where teams such as Boston, the Lakers, the spurs and Miami have been dominant over the last 10 years.

Cons of an open league

In theory an open league system sounds very lucrative as there seems to be more freedom for teams / players and the funs get a better show due to highly competitive teams. However in reality there is one main problem which seems to turn everything around. This critical factor is finance availability. A team with access to more money is able to find the best players in the world at any cost.[3] (Szymanski,2010) The best example for this is not in the EPL but the French league 1 where in 2017 PSG signed a player for a record 200 million pounds equivalent to 0.28 billion US dollars. This is more than the worth of an entire team playing in the same league. Teams that are not able to keep up with the financial arms race are often left to fail and fade away. This is the case in a former EPL team the Portsmouth Football Club. The team was doing well until they encountered some financial strains which lead to its liquidation. The team in less than 10 years fell down the ranks and is now straggling to keep on playing.

Finance management is to some extent a hindrance to competitiveness. A team in the EPL can grow to dominance with simply enough money pumped into it. This is the case with the Manchester City team which was straggling less than 10 years ago, the team was purchased by a billionaire Sheikh Mansour and today the team boasts of having the best coach and players in the world. In this season the team is likely to win the league with a number of games to spare.[4] (Taylor, 2017)

Pros of a closed system

Balance is the greatest advantage of closed leagues. With a closed league the governing body such as the NBA is to some extent able to ensure that there is balance among the fixed teams in the league. The NBA issues salary caps to regulate how much a team can spend on the team. The team has to find a way to either pay superstar players less or have only one or two superstar players that surrounded by a number of lower paid players. Maintain this in the long-term is at times very challenging.

With a closed system a team will be in a position to survive even when it is in a period of financial strain. This is because the governing body has measure in place to protect its future.  For instance teams that are straggling in the NBA are given the chance for a better draft pick in the hopes that the new player will change the downward spiral for the team. This was the case in the 1979 draft pick where the Lakers picked Earvin Jonson who grew to be a game changer and legend in the sport with him being better known as Magic Johnson due to the things he could on the court.

The closed system is more relevant in the American sports industry. This is because the market is saturated by very many sports including the American football, hokey, baseball, and soccer. In such an environment and open league would simply not survive. This is because the teams in an open league are always changing which creates uncertainty and lack of continuity.[5] (Shropshire, 2014) The closed system in the NBA helps create a felling in the society that a team’s time to win will come. The idea is to ensure that everyone believes that they have a short at the championship. With an open system, a team that leave the league may mean that its funs may no longer be interested in the sport and switch to the best and close alternative. This is not the case in the EPL where soccer is the main sport and relegating a team does not mean that the individuals will start watching a new sport simply because there is no substitute.

Cons of a closed league

The main short coming of a closed league is that it does not always bring out the competitive spirit. At the beginning of the season, every team is obviously looking to see if they have a chance for the title but by mid season some teams identify that they have no chance and therefore lose the interest to compete since there is no punishment to coming last. In fact the team is rewarded by being offered a chance at a better draft pick. This leads to a popular phenomenon where a team intentionally loses its games.[6] (Rader, 2012) In the 2017 – 2018 season the NBA is about to experience the worst the closed system can offer. At the All star break, six teams were tied at having won only 18 games out of a possible 59 games. This season there is a battle at both ends of the standings, as teams fight for playoff spots, others are playing to lose as much as possible to be last on the other end. Team owners such as Mark Cuban have openly admitted that their best chance this year was for them to tank as they will at least get the chance for a draft pick.

Conclusion

Having looked at the pros and cons of both an open and closed system, it is clear that there is no perfect league. Like in any economic decision one must be aware that it not possible to get it all. It is also clear the contribution of economics to sports and the leagues. This is because whether open or closed, leagues are able to make better decisions based on the type of market they are in. this means that players are continuously getting better pays while the fun is enjoying better games.[7] (Gaines, 2017) It is important to note that despite the advantages of the open leagues, they would not be accepted or viable in the NBA while the EPL would not accept the change to a closed system. This means that the best way forward for both leagues is to find ways to optimally exploit the benefits of their system.

References

Cain, Louis P. and Haddock, David D.; 2015; ‘Similar Economic Histories, Different Industrial

Structures: Transatlantic Contrasts in the Evolution of Professional Sports Leagues’; Journal of Economic History

Gaines, Cork. (2017) “The NBA is the highest-paying sports league in the world”.

BusinessInsider.com. Retrieved 13th March 2018

Jolly, Richard (2017). “Changing dynamics of the ‘Big Six’ in Premier League title race”. The

National.Retrieved 13th March 2018.

Rader, Benjamin G.; (2012) A History of America’s Games; Second Edition; University of

Illinois Press

Shropshire, Kenneth L. (2014) “The sports franchise game: Cities in pursuit of sports franchises,

events, stadiums and arenas”

Szymanski, S., Ross, S. (2010) Open Competition in League Sports. Social Science Research

Network. Retrieved from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=243756

Taylor, Matthew (2017). The Association Game: A History of British Football. Routledge.

[1]Cain, Louis P. and Haddock, David D.; 2015; ‘Similar Economic Histories, Different Industrial Structures

[2]Jolly, Richard (2017). “Changing dynamics of the ‘Big Six’ in Premier League title race”

[3]Szymanski, S., Ross, S. (2010) Open Competition in League Sports. Social Science Research Network.

[4]Taylor, Matthew (2017). The Association Game: A History of British Football

[5]Shropshire, Kenneth L. (2014) “The sports franchise game: Cities in pursuit of sports franchises, events, stadiums and arenas”

[6]Rader, Benjamin G.; (2012) A History of America’s Games

[7]Gaines, Cork. (2017) “The NBA is the highest-paying sports league in the world”