Lecture notes 3/23, 3/25, 3/30, 4/2 (by Kristen Calandrelli)
March 23
3 Tier Systems and Franchise Values
-Compared to an all free-agent system, reserve clause keeps salaries low. Payroll under an all free agent system would be higher
-So a 3 tier system lowers payroll and thus increases franchise value
-Franchise valuation-High/Low ratio – measures inequality in distribution of franchise values-Football has low ratio – most equal distribution of revenues
-Gate sharing 60/40-Nationwide TV contract split among all teams-“Most socialist sport”
Parity & New Teams
-Why is parity too difficult to maintain when a new team enters?-New teams finish below .500-Existing teams must stock new team – won’t stock them with the best players
Statistical Discrimination
-Racial profiling-Assuming that when you choose between 2 player, you choose the black for certain functions and the white for others-Evaluating by stereotype, not the individual
Salary Discrimination
-Unequal pay for equal performance OR equal salaries for unequal performance-Scully’s regressions
-Same regression for blacks and whites-Arithmetic – amount of disc. Is a constant dollar amount-Run as log - % of discrimination is constant
-Separate regressions for black and white variables-Discrimination depends on level of performance
Market Structure
-Need a central league-Uniform rules, schedules championships
-Teams are independently owned (except soccer)-Can set ticket prices, arrange for their own TV network/contract, reserve right to sell stadiums
-How does a league impose its will to ensure parity?-Gate sharing-Salary cap – min and max salary expenditures-Revenue sharing-Luxury taxes
-Is the league or team the unit of decisionmaking?-Zimbalist: For some things it makes sense to have league, not others
3/25: Midterm Day
I don’t have notes for 3/30, sorry!
April 2
93% of football teams are given stadiums-Even with voting, other checks and balances, teams getting subsidies-Quirk and Fort Study
-Given city/team contract, the team covers the operating costs (paying shares of concessions, etc)
-Stadium subsidy – city doesn’t charge team full amount for stadium. No stadium comes close to covering the cost of building the stadium
-Subsidy types:1. Tax free land2. Construction costs3. Team is spared up front costs it can use from other investments
-City loses money for ALL 25 teams in the study-Amount of subsidy differs across teams, cities
-1990, Largest subsidy – New Orlands franchise-Expected cost: $40 million-Actual cost: $140 million-Subsidy: $42 million
-1989, across all teams receiving subsidies that year…-Total subsidy estimate = $500 million-40%-50% of team’s profit
-Other subsidies-Low-interest lending-Tax depreciation of players
Do these subsidies pay?-Argument is that they attract business, promote growth. Impact jobs, city tax revenue, income
of residents-3 categories of revenue
1. Internalized - $ to support franchise2. City pride/morale3. Benefits to workers in the city, business
-#2 and #3 are externalities. Very hard to measure – how to know these expenditures wouldn’t be made otherwise?
-World Series doesn’t actually bring that many people to NY-2 ways people estimate financial externalities:
1. How many people will come into the city? (Multiplier effect)-How many restaurants will they go to? How much $ will they spend?-This type of eval may pick up a situation where people are going to one specific part of a city instead of another part of that same city – no net gain for city
2. Coats & Humphreys: What is the effect on the rate of growth?-Summarizes 8 or 9 studies-Effect on manufacturing employment by comparing growth to cities in
surrounding areas-Effect on personal income as compared to other cities-IN most cases, no positive effect was found on growth or income
-Impact is insignificant or occasionally negative-Conclusion: There isn’t a strong case to support a stadium on finanacial grounds
NFL & NCAA are two of the most successful sports cartels-Established, lucrative, gaining strength over time-NFL controls:
-# of teams (30 members), location-Revenue sharing arrangements-Arrangements of wage bargaining (but NOT individual player salaries)-Player behavior – drug testing rules, etc-TV contract
-Monopoly on nationwide televising-No team has local TV market
-Scheduling-Contract for selling logos-Rules for college draft
-Profit maximization is the goal
-NCAA is a much different cartel-“Help student athletes get the most out of the college experience” is the stated goal-Can’t restrict entry – over 1000 members-Divided into 3 divisions to maintain financial solvency-D1 brings in most $, gets most $. May give athletic scholarships
Subsidies 1920’s cities pay 100% of stadium cost Taxpayers got pissed Now 62-65% Voting is usually very positive because of the threat of losing the team 98% of football stadiums are given subsidies No publicly funded stadium has come close to covering costs
3 categories of expansion No property tax on stadium Cost of construction-depreciation of stadium Benefit to team about 10%/year of return City loses, team wins
Example: New Orleans: cost was supposed to be 40$ million but instead it was 140$ million 25% of franchise value came from 42$ million subsidy from taxpayers subsidies-method to attract teams Externalities: 2 ways to estimate
Inflow of people to city and how much they will spend Effect of employment There are however no observed positive effects on growth/income Take into account city pride Overrules lack of effects Hard to estimate benefits
Firms team or league? American Needle Case: Each team used to be able to sell logo, gear individually League thought this was not profit maximizing way so they signed a contract with Reebok to
take control of sales Prices then rose over 20% the next year District court said that the NFL was the firm, however other courts had different findings AL Davis vs. NFL: Wanted to move, but required unanimous approval. He sued the NFL and
won 18$ million. Baltimore Colts owner: Moved team and sued for taking facilities with him NFL v. NCAA: NFL
Revenue Sharing Wage bargaining rules Player discipline No local television for teams Sets schedule Draft rules (Maurice Claurett)
NCAA 1200 members Division levels I-scholarships II/III-no scholarships
3-30 Notes
NCAA is going to expand the March basketball tournament to 96 teams This will allow big money conferences to make even more money from their games This will likely be part of the next television contract later this year Initial basis for the NCAA was set up in 1905 In 1905 then newspapers got very worried because of how football was played They wanted to end football because of all of the deaths and injuries that were associated with
the sport Teddy Roosevelt then pulled together the presidents of Yale, Harvard and Princeton to reduce
the destructive nature of football They decided to allow the forward pass, widened the field and the biggest improvement was the
ending of the flying wedge They then decided to try and keep football going with these rules in tact The NCAA then became more involved with recruiting and other things that were designed to
improve the purity of the sport NCAA Publicity: It is designed to help the student-athlete to achieve something at college At the beginning the student athletes were unable to receive money for their performances NCAA accepts no regulations over entry into intercollegiate athletics This means that they are also entitled to profits from the NCAA, causing the NCAA to
drastically increase in size NCAA determines what schools play in what division, what makes students eligible and how
profits are shared Sanity Code: First attempt to regulate payment of money to players, eligibility etc. This came
in 1950 as a result of bad publicity, this code ended two years later but the policies are still in effect today
Almost all of the money that NCAA gets is from basketball and football Women’s version of the NCAA was around for a few years but eventually faded out because no
one likes to watch women’s sports Another rival for the NCAA was in the 1930’s. National Invitation Tournament was set up at this time and this was the first postseason
tournament against the NCAA For a number of years the NCAA started its own similar tournament Argument about who the NCAA represents, whether or not it is players, Directors, ADs,
Presidents etc. NCAA also discusses salary ranges for college coaches at the top levels Assistant coaches were also starting to get paid more as well but they were still getting paid less
than head coaches Presidents wanted to get coaches paid less because they were making much more than the
presidents were
Lecture notes 4/6 - 4/29 (by Tri Chiem)
Lecture notes 4/6 – 4/29 (by Mike Katzer)4/6
NCAA◦ Argues that it wants to restrict recruiting measures as a way to achieve parity◦ Apparently about to expand bball tourney from 65 teams to 96 teams
▪ Will lead to bigger tv contract▪ Only property NCAA owns is the basketball tournament. 90% of NCAA revenue comes
from basketball tournament. They get about 50% of revenue from tournament. So NCAA front office wants to get an increase in television revenue through expansion of tournament
◦ Very peculiar type of Cartel▪ In Professional sports, the league can determine the number of teams in a league, control
entry and location, has control over tv rights and network, determines how bargaining with the players will take place, sets roster sizes
◦ NCAA set up in 1905 because many people were dying in football▪ Teddy Roosevelt called together presidents of big ivy schools. Made changes to football
Forward pass allowed, ending of the flying wedge▪ Initial year it only has 38 schools, it now has over 1000
◦ Its really after 1950 that NCAA gets involved in recruiting and stuff like that◦ Key for the NCAA is the student-athlete
▪ From the very beginning the idea was that the player was not to be paid◦ NCAA has no regulation over entry. Any school can become a member
▪ This meant NCAA has grown rather substantially▪ So NCAA has evolved into an institution that determines what divisions each school
plays in, what is the nature of scholarships, what makes students eligible to play◦ Introduced the Sanity code in 1950 as a response to bad publicity
▪ First attempt to regulate payment of money to player, admissions, eligibility▪ Ended 2 years later because many schools did not participate
◦ Starting in 1970s, the NCAA split into different divisions▪ Division 3
Schools are not supposed to give any athletic scholarships The “hotbed” of the scholar-athlete
▪ Division 2 Permitted to give athletic scholarships although they don’t usually give that many
▪ Division 1 Divided into three divisions: 1a, 1aa, 1aaa
◦ 1a is the big time▪ have to participate in certain sports, eligible for BCS, major football and
basketball powerhouses▪ expensive to join
◦ 1aa▪ lower class football league
◦ 1aaa▪ schools that don’t play football but play basketball
90% of all the revenue from the schools comes from division 1a◦ NCAA has to worry about competition
▪ There have been two major threats in the past Control over women’s basketball
◦ Even after title 9, NCAA still didn’t pay much attention to women’s sports◦ The AAIW existed in the early 1970s and had tournaments◦ To protect its own turf, NCAA set up own women’s tournament at the ext time of
the AAIW’s tournament▪ It paid the teams to come, so as a successful cartel it drove out its first rival
Men’s Basketball◦ In the 1930s NYC was the major hotbed of college basketball◦ To make more money in 1938, the local schools played in the NIT
▪ This was the first postseason tournament in basketball◦ The NCAA started in 1939, the NCAA had its own tournament◦ When NCAA started getting more tv contracts it was able to weaken the NIT
▪ NCAA forbid teams from entering other tournaments if they entered the NCAA
◦ NIT sued NCAA 10 years ago for being a monopoly▪ Finally a couple of years ago the NCAA bought out the NIT
◦ For division , NCAA controls the number of scholarships given▪ Division 1a school can give a total of 85 football scholarships
▪ Give 13 basketball scholarships▪ Rest of scholarships are divvied up among other sports
◦ There are some rules of eligibility before freshmen are eligible to play▪ Students must have a certain grade point average in core classes in high school or a
certain set of SAT scores▪ Second year in school there are no real rules in effect. So many players ineligible their
first year are eligible for second year Schools themselves are basically in charge of eligibility requirements
◦ The problem is that what are these classes like◦ NCAA controls the years of eligibility that a player has
A player has 4 years of athletic eligibility that has to be completed within 5 years◦ This led to the phenomena know as redshirting◦ Led to many large schools redshirting kids
Until 1940, Freshmen were not eligible to play Some coaches now do greyshirting
◦ Have them sit out a year before high school and college. Practice with the team but doesn’t count against your years
▪ If you sign up for a school or sign a letter of intent and then want to change, it costs you a year of eligibility
▪ The big issue has to do with what is a scholar-athlete and what payments can he/she receive? The answer is basically none Players cannot make money in any sport, cannot participate in a leaguein which
admission is charged Players are not permitted to have agents
4/13 For basketball, academic requirements are over a 2.5 in high school and over a 700 on SATs or
a 2.0 gpa and over a 900 As a result of proposition 16, two things occurred
◦ Most of the players that didn’t qualify were black▪ Debate over what a core course was
The NCAA decided they had to investigate high school programs and see what programs met the high school requirements◦ The next issue which the NCAA had to confront was the graduation rate problem
▪ This surface in the 1980s with the committees of Bill Bradley and Tom McMillan▪ One problem was that graduation rates for athletes were not as high as they should be▪ What do you do about a player that plays for one year and goes to pros?
◦ Generally if a player leaves early, he is dropped from the graduation rates, not counted
▪ Transfer students are not counted in the initial schoo▪ Arguments against being lenient for graduation rates for athletes
Athletes do not need to worry about financial needs Athletes get free tutoring
▪ Arguments for being lenient for graduation rates for athletes Athletes spend a lot of time with sports so difficult for the to put as much time into
studies▪ Usually a great disparity between graduation rates of black athletes and white athletes
Black much below white
▪ 1993 Division 1: graduation rates for athletes were 53% students were 56% in Basketball the graduation rate was 41% and for football the graduation rate was
50% In basketball, the graduation rate is 53% for whites and 33% for blacks In football, the graduation rate is 60% for whites and 42% for blacks
▪ The low black graduation rates is a social problem Title 9
◦ Passed in 1972◦ Women athletes at Brown University sued NCAA for a redivsion of athletic budget between
males and females◦ Schools ended up reducing part of the male budget and shifting it to the female budget◦ Over time there was an increase in low income sports in women, and a decrease in sports for
men◦ By the mid 1990s, 2600 women teams and 2800 male teams
▪ Male teams got more revenue◦ The change the resulted from title 9 meant that the share of the athletic budget will become
more proportionately favorable to women◦ Changes because of title 9
▪ The majority of women in NCAA sports are white, so the shift in the gender balance shifted the race balance
▪ Coaching of the big money sport (basketball), the number of female coaches decreased and males increased
Who gains and who loses as a result of NCAA policy◦ The NCAA colleges are very lucrative financially, however the schools do not get much
money from athletics◦ The student athlete benefits by receiving a college education and gets to train for pro ball◦ Student athlete loses out on salary of playing professionally◦ The major sports end up subsidizing other athletics◦ Except for major power houses, most of schools end up losing money for their athletic
programs▪ Has to do a lot with how things are treated in terms of accounting▪ Most of the money goes to the athletic directors and the coaches
◦ Nike/Reebok sneaker contract▪ Have exclusive deals with different coaches to make sure that all players use brand of
sneakers◦ Coaches can be provided free of charge the right to use the university for a summer camp◦ Other benefits the school might get
▪ Prestige, more applicants, donations Olympics
◦ In most cases it turns out that the cities that have had the Olympics end up losing a lot of money▪ Barcelona ended up with a debt of 6.1 billion from the Olympics▪ In Japan, cost was 14 billion, ended up with debt of 11 billion▪ Athens lost 9.5 billion
◦ Olympics make you build new facilities for the events which is very costly
“Subsidies” to athletic teams◦ “Subsidy” as in provisions of government policy which increase profits of teams, not as in
handouts
▪ Tax provisions, grants, things that make franchises more valuable, raise profits▪ Some argue they’re justified by positive externalities to the city, etc.
◦ Types▪ Provided by national tax legislation
Affects profits of teams no matter where they’re located May help to keep some teams in business Inceases everyone profits no matter where they are
▪ Location specific subsidies In order to convince a team not to leave or to come i.e. building a stadium Result of competitive bidding between different cities
◦ Uniform subsidies, location inspecific▪ Legislation introduced by Congress -> TV bargaining rights
Each team could sell nationwide rights originally Teams were competing with each other Several court decisions in 1960s that supported Sherman Anti-Trust act -> each team
had to bid themselves, competitive bidding, no collusion Sports Broadcasting Act of 1961
◦ Surprise decision◦ Permitted league to negotiate TV contract as a unit◦ Since then, TV is negotiated by league◦ Professional teams are allowed to negotiate TV contracts are a cartel
Black outs◦ Provisions have varied over time◦ Some acceptance of blackouts if attendance wasn’t there
Local cable television◦ Left up to each individual league◦ NHL, NBA, MLB teams can sell TV rights in local areas◦ NFL teams can sell rights to radio broadcasting stations, but not TV
▪ College football thought it would be covered by same provision as NFL NCAA set up a system where it would televise only 1 game With one only one seller, made a lot of incom For 1960s and 1970s it bargained as a unit, split revenues in varying ways 1982 – suit against NCAA
◦ U of Georgia (with Herschel Walker)◦ U of Oklahoma (Nat’l champions)◦ Both schools though if they were independently selling TV, they would make
more money◦ Argued NCAA was a different organization than NFL◦ They were a part of an optional arrangement, not for financial gain◦ Various conferences ended up joining together – number of sellers went up◦ Notre Dame – has own contract, all other schools are by conference
▪ Courts ruled pro sports can deal as a cartel but NCAA can not b/c NCAA is a different type of organization
◦ Federal Tax law▪ Provides benefits to sports teams that few other industries can benefit from▪ Accounting
Depreciation – an expense, allocated over the life of an asset Various methods of calclualating
◦ Straight line depreciation – write off certain amount of asset each year until you exhaust cost of asset
◦ Declining value Legitimate expenditure item and reduces taxes Stadiums are depreciated
◦ Want to allocate cost of stadium over course of lifetime – estimate expected life Sports have unique provision (that exists for no other firms, industries, individuals)
that IRS still allows◦ Started by Bill Velk◦ When buying a team, buying two things◦ Rights to intangibles and rights to players◦ Players who are bought should be counted as a fixed asset
Sports teams are allowed to deduct the depreciation of the value of players Only situation where IRS allows the write off of amortization of human capital Can count the decrease in player skill as an expense because it reduces profits,
which then lowers taxes Owners argue real profits is only after you deduct player depreciation, others argue it
is only a tax gimmick Amount of losses are much lower than accounting statements claim Regardless, makes team more valuable Courts ruled that they teams could claim how much they paid for intangibles and
how much for players◦ Atlanta Falcons, when formed, argued 91% of the cost of the team was for
players, and was therefore a depreciable asset◦ Lawyers from the IRS analyzed how much players were actually worth that they
took from other teams, saw it wasn’t that high◦ Congress capped amount at 50% that could be claimed as depreciable
4/20
The nature of labor markets in arts and entertainment◦ In entertainment, it is not so clear that the superstars have dragged up everyone else◦ 1% of all the actors made about 35% of all the money◦ people go into acting taking a very big chance
Interesting series of law cases having to do with the art market◦ In art they discuss generally two different markets
▪ Primary market Individual who does the painting sells to the customer. It used to be agreed upon
that all rights were turned over from the painter to the buyer. In recent years, the art market has moved ahead. Original buyers have decided to
sell their paintings to make a profit. This offended some of the artists, who believed they were entitled to a share of the higher price
This argument ahs worked in California and European Union◦ In California, the artist or the artist’s family is entitled to 5% of the gross
proceeds of the sale of the painting. In the European Union it is 3%◦ If buyer sells painting at a loss, there is no clear rules for what happens
◦ One debate which you have in arts and entertainment which you don’t have in sports▪ Baumol’s Disease
The arts were suffering because of the problems having to do with the productivity in the theater and dance market
The debate depends in part on how you define a product and how you define a commodity
Baumol is interested in live performances, and this is what his argument applies to Baumol’s argument is the following: opera, theater, and dance are all labor intensive
industries. He makes two points◦ Labor is paid wages. Increase in other sectors leads to increase in wages for the
entertainment◦ Cannot change the productivity of the entertainment shows
Baumol’s Cost Disease: It involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth.◦ The rise of wages in jobs without productivity gains is caused by the necessity to
compete for employees with jobs that did experience gains and hence can naturally pay higher salaries, just as classical economics predicts
Sports are a very small part of the gross national product◦ There is a lot of attention to it because people care about it◦ Same is true of arts and entertainment
▪ Account for 0.2% of consumer expenditure▪ Same type of argument for subsidies that there is for sports▪ Arts and entertainment are usually participated in by a relatively wealthy part of the
population▪ In many of the arts and entertainment, the admission charges do not cover the costs.
The admission charges are too low. Therefore, these are activities that need either private funds or government subsidies There are some direct subsidies that come from state, federal, and local government
◦ In 1960s federal government set up a national endowment for the arts and humanities. These are grants that are made by government to provide for arts and entertainment
Elements of tax system that benefit arts and entertainment◦ Museums do not charge a sales tax
◦ Tax deductibility of charitable contributions▪ Why subsidize the arts?▪ It is true that arts do not cover their costs
The argument is that arts and entertainment provide a certain amount of external benefits
▪ Benefits the entire population not just the individual that attends Standard arguments for subsidy Art is a legacy to future generations Contribution to national identity and prestige Benefits to the local economy Arts contribute to a liberal education It is something that encourages artistic innovation Merit goods. Things that are good for people even if they don’t want them Favorable effect of the income distribution. Makes it more accessible to people in
lower income groups▪ Arguments against subsidy
Not clear that these external benefits of prestige and to local economy are really there
Only reason that these places need subsidy is because they under price their good
There is a perverse effect on income distribution in general. Subsidies are going to individuals that have higher incomes on average
If you let government make decision about who gets money and how its distributed. It opens up the possibility of a slippery slope
◦ Is art really a superb investment for people?▪ Sometimes you can hit it big and sometimes you cannot▪ Over long periods of time, art does not turn out to be a great investment
Public subsidies include stadium construction, streets near the stadium, water and sewage services, and game-day safety and crowd control services. ◦ Stadium and operations are often exempt from property taxes, and stadium leases frequently
offer high revenues and low rent to team owners
Equity/Political Arguments over Subsidies Some argue that subsidies could be spent on more worthy enterprises such as education. Some argue that, in general, it is not fair for subsidies to benefit billionaire owners and
millionaire players. Some argue that subsidies are needed to field a competitive team.
External Benefits of Subsidies Sports teams can provide increased economic activity to surrounding businesses (newspapers,
TV, restaurants etc.). Sports teams help foster a sense of community.
o For both of the above benefits, no price can be charged, and no one can be excluded. These benefits lead to an external benefit inefficiency in which the team owner collects less
than the full value of his team.o In this scenario, a competitive market produces a level of output that is inefficiently
small. There are two possible remedies for this situation: taxes (such as a tax on a poor
quality of play) or subsidies (the standard approach)
Subsidizing Owners Losses An owner might lose money if operating costs are less than revenues or if opportunity costs
(such as moving the team to a different city) are less than revenues. In the first case, it makes sense for the owner to downsize (perhaps to the minor leagues), but in the second case, he should take advantage of his next best opportunity.
o If, in the second case, a subsidy covers the owner’s cost, the public might well pay it. There is also the issue of who should subsidize the team. It is most fair for the people who enjoy
the benefits to pay the cost, but it is difficult to levy taxes on just these individuals.o Ticket surcharges are one example of this type of tax whereas hotel taxes are a more
inexact means of taxing out of town fans. Owners that actually make money often use tricky accounting to show losses and ask for
subsidies.
Sport Subsidy Costs Infrastructure subsidies are payments by cities and states to owners to pay for infrastructure
costs such as water, electricity, streets, and safety services. Operating subsidies, often embedded in lease clauses for publicly owned stadiums, subsidize
rent costs for the team owners, allocate concession and parking revenues, and apportion the property tax on the stadium.
Stadium construction subsidies are payments by taxpayers to support the construction and operation of a stadium for an owner’s team.
o Stadium subsidies are more popular than direct cash payments because they are politically popular among local contractors and property owners, they tie the team to the city through the lease, and a stadium subsidy—paid out over a period of time—incentivizes the team to play well.
Sports Subsidy Benefits Benefits include direct economic activity (which takes place in the stadium), indirect economic
activity (which takes place on the periphery), and new economic activity.o New economic activity is difficult to measure (for instance, it might be old economic
activity but moved closer to the new stadium) and compounded by the problem of accurately quantifying the spending multiplier.
Benefits also include development value (the idea that cities with sports teams have higher growth rates than cities without them)
The general verdict is that subsidy benefits are often overstated—economic activity arguments offer nearly no support for subsidies. Nevertheless, other benefits, namely development value and external benefits might offset the cost of subsidies (although the studies are unclear).
Are the Costs of Subsidies Worth It? Direct and indirect economic activity do not support a convincing argument as most of the
measured value is simply rearranged from other sources. Analysts can find no development values. External benefits differ widely from case to case (and sport to sport).
More analysis is needed to get an accurate cost-benefit analysis.
Rodney Fort, Sports Economics, Ch. 10 (by By Chelsea Zhu)Sports Economics Chapter 10 – Subsidies and Economic Impact AnalysisI. Sports Team Subsidies
a) Equity/political arguments against subsidiesi. The money could be spent on some other, worthier endeavor such as education or other
social serviceii. Subsidies go to billionaire team owners to enhance the income of millionaire players.
Locally, this benefits very few taxpayers except those who are fans – unfair.iii. Subsidies are needed to keep a team competitive. If the stadium increases revenues, which
are spent on better talent to field winning teams, the increase in quality may cause fans to spend more on the team (tickets & merchandise). However, if the team is already putting out the talent level that fans will pay the most to see, then there’s no merit in terms of increasing quality.
b) Economic explanations for how the absence of a subsidy may hurt societyi. If owners cannot collect all of the value their team generates, they will choose a level of
quality and attendance that doesn’t reflect the true net value of those commodities to society.1. External benefits inefficiency due to benefits owners can’t capture – level of team
quality and level of attendance don’t reflect the true value that fans place on these sports outputs.a) economic activity that occurs in relation to the existence of the team –
newspapers and their writers, TV sports channel news, other writers and analysts report on sports outcomes and make money, but they pay no fee to sports team owners. People who never pay a penny to teams or their advertisers can enjoy televised games.
b) The commonality provided to fans of a given team – sports teams produce local unity, fan loyalty, and civic pride – increases quality of life.
2. Problem with external benefits: A competitive market in the presence of external benefits produces a level of output that’s inefficiently small. If the producers could collect from those nonpayers enjoying external benefits, they would increase output (short-run attendance, attendance-related sales, televised games, long-run quality of team are all lower than efficient level).
3. Remedies: taxes & subsidies. In practice, subsidies are paid for stadium construction and operations.
ii. It makes sense to subsidize an owner who is losing money and who would rationally choose to move the team.1. owners may lose money because 1) actual costs of operation are not covered by
revenues should drop down to minor league status; fans simply are not willing to pay for true major league production; 2) run their major league franchise in a different location that offers higher profitsa) see graph 10.2 on page 345
II. Cost-Benefit Analysisa) Subsidy Costs
i. Infrastructure subsidies – public services such as water, electricity and streets, and safety services such as police, fire, and ambulance.
ii. Operating subsidies – the city or state leases facilities to owners – there could be no rent, large rent, a flat fee, or based on attendance; concession and parking revenues; nonsports revenue; property tax treatment – owners may not pay any property tax.
iii. Stadium construction subsidies – payments by taxpayers to team owners to support the construction and operation of a stadium for the owners’ team. Taxes on good and services like hotels and rental cars; ticket surcharges and rent; increase state and local sales taxes.
iv. Why stadiums rather than a cash payment1. there will be political support from local contractors and property owners at and
around the site. Construction will make contractors who do construction better off, and property owners near the site may see their property values increase.
2. stadium subsidies can tie the team to the city through the lease. 3. the enhanced revenue stream that a stadium subsidy represents must be collected over
time and through good team management. A single lump-sum cash payment doesn’t provide the team owner with any incentive to manage well in order to obtain the payment.
4. Cash payments may draw other parties to demand cash payments as well.5. Stadium subsidies are more politically palatable than cash grants to wealthy people.
v. Formula: annual subsidy = net operating revenue – (depreciation + opportunity cost of funds + forgone taxes)
vi. Subsidies at the state & local level average between $16 million and $18 million in 2004.b) Subsidy benefits
i. Direct economic activity occurring at the stadium – during the construction phase: all site planning, preparation and construction; after construction: all activities generated by the stadium and team operations and the support businesses that serve the team.
ii. Indirect economic activity – benefits to other businesses that don’t pay anything to the team for those benefits – peripheral economic activity near the stadium (restaurants, retail outlets), newspapers & local TV broadcasts
iii. Economic impact analysis (EIA)1. New economic activity – any economic activity created by the subsidy that didn’t
exist before the subsidy = economic growth2. Spending multiplier shows how many times a new dollar changes hands, generating
multiple impacts on incomes and spending.iv. Development value – cities with a pro sports team have higher economic growth rates
than cities without them. Analyses show that they don’t really exist.v. Buyers’ surpluses and external benefits
c) The Baltimore and Seattle examples showed that the economic impacts of subsidies are close to zero. Almost all of the economic activity from the sport is just rearranged from other spending that would have occurred anyway.
Rodney Fort, Sports Economics, Ch. 11 (by Jon Mizrahi)Chapter 11: The Stadium Mess
Political involvement in issues of stadiums can be predicted by the rational actor explanation of political outcomes. Voters are rationally ignorant, so politicians spread the costs of plans thinly over them while concentrating benefits for the politically powerful.
Owners are a central part of the political process, because they have a lot to gain in new revenues. In theory, greater revenues should produce a better quality team if the owner spends the new money this way, but this is not always the case. Owners also have an upper hand in subsidy negotiations, because they can threaten the city by considering relocation.
These two factors (rational actor explanation and owners’ stakes) come together to make a prediction that powerful fans of sports teams will be politically successful in rewarding owners with subsidies, while the voters pay – at a low cost per capita. This is indeed what happens.
Direct democracy does not solve these politicking problems, because people will still cheat the system to get their preferences.
As a case study, Seattle’s MLB and NFL stadiums were given funding by the city. The very rich team owners received the subsidies, and those who pay for the bill (i.e. the taxpayers) receive much less in return.
In order to break this mess, those who pay for the subsidies (the taxpayers) would have to gain much more control in the political process, which is unlikely to happen. An alternative solution would be for leagues to exercise less control over team location.
Rodney Fort, Sports Economics, Ch. 11 (by Kiran Bhat)The Stadium MessRational Actor Politics: People pursue their self-interest in politics, especially when they can get benefits
different from what they get in markets, like remedies to market failures.(Vm/E) = (R/E)(B/R)(Vm/B), or vote share measure m = registration costs X turnout cost X free-
riding/ignorance. Vm = votes cast for initiative, E = eligible voters, R = registered voters, B = Turnout of registered voters
Rational level of voting: Amount of votes after attrition for registration, turnout and fall off costsPoliticians make policy choices to keep constituents happy, constituents evaluate outcome and choose
to renew or throw out leaders. General population sidelined. Diagram of rational actor model: Page 384Some sports leagues lobby as heavily as big corporations in DC
Owners Benefit from Rational Actor PoliticsSubsidies raise owner profitsRelationship b/w subsidies and team quality more complexOwners strive to find team that maximizes profits in the long run – if he expects profits to increase with
quality, he may spend infusion of subsidy on talentMuddled causal effects – cannot say for certain if subsidy causes increase in stadium negotiations
Benefits of subsidies and new stadiumsIncreased attendance (6.5 multiplier for 1960-82)On-field performance improves following new stadium (stadium draws fans, stronger drawing potential
means more worthwhile for profit-maximizing teams to spend money on caliber, resulting in increased performance)
Tables on pages 388 and 389 on stadium revenue and value of new stadiums to owners themselvesStadium subsidies and NFL salary caps
Quality probably does not increase b/c salary capHowever, stadium revenues are unshared, and high unshared value increases cap – and only some rich
teams will have revenue to take advantageSubsidies and Believable Threat Locations
Leagues facilitate power position of team owners in bargaining for subsidies by limited numbers, vacant cities that they can threaten want a team
"Best believable threat" means some leagues keep big, rational choices for new teams open (NFL and LA) in order to have a threat and induce renovation subsidies
Special Problems for NFLEasier movement rules because of lawsuits and owner prefernecesAlternative "threat" locations may be less important because cities might "call the bluff" and allow
teams to move in hopes that the get a new one easilySt. Louis, Oakland, Baltimore, Cleveland as examples of cities that had teams which left, only to either
return (Oakland) or have a new franchise granted (others)The Stadium Mess
Negotiations for subsidies are sensationalizedDiagram of stadium mess on page 397: Political interests make demands, policymakers explore
financing, demands are met and politicians receive support, while the general taxpayer gets left on the sidelines
Wisconsin State Senator George Petak was recalled for supporting Brewers subsidy after opposing itDirect Democracy and the Stadium Mess
Rather than negotiating subsidies amongst elites, some opponents prefer to take direct plebiscites to keep general population's say "in the game"
Biased turnout (those who support subsidies less likely to be apathetic) and biased information (media and marketing blitzes) can distort direct democracy
"Setter" model in which those in control of ballot initiatives set the alternatives to elaborate new subsidies vs. no team at all, rather than elaborate subsidies vs. a no-frills stadium
Until 1995, referenda tended not to favor new stadiums – then after 80% of referenda on new stadiums
passPublic-Private Spending Mix
In the 1970s, public share of spending on stadiums as 90, went back down to 60 in 80s and 90s. Lowest public shares, though, are actually lowest public shares – perhaps because of "setters"
Seattle's Safeco and Qwest Fields Referendum on baseball stadium vote ($240 million) failed 50.1 to 49.9 %, special funding package
passed in legislature because of DC threat worth even more ($517m)Generous lease – max $2.6 million per year rent with mad unrealistic incentivesPaul Allen leveraged asshole Ken Behring's attempt to move the Seahawks to LA in order to get state
funding for a Qwest Field in SeattleComplex "simple" referendum, $325m subsidy listed on ballot but actually more like $365,
subsidy passed 51.1-48.9They should've known – Kingdome played out under similar circumstances
ConclusionsStadium mess is a political outcome, and elections and plebiscites won't fix itInterest groups have to change, collective action/free riding should be overcome, reduce the availability
of believable threat locations – but this would require federal regulation of the leagues
Rodney Fort, Sports Economics, Ch. 12 (by Jon Mizrahi)
Special tax status for sports teams dates back to Bill Veeck when he convinced the IRS that the roster was a depreciable asset. Now, owners can write off the entire team purchase price for the first 15 years, so taxable income for owners is reduced. Further tax law maneuvering can provide the owner with even lower tax rates, which can help future purchasers of the team.
Sports have seemed almost free from anti-trust laws, even though leagues often act as monopolies and cartels. Players can sue the league in an anti-trust case if there has reached a negotiations stalemate as the result of the league exercising market power. Otherwise, for these suits to take place, the players union has to break down, which is potentially harmful. Leagues still have the right to control territory, locations, movement, broadcasting and mergers with rival leagues.
Owners gain much from these special tax laws and anti-trust immunities. Franchise values have increased dramatically, and expansion fees have soared. Franchise values actually exceed opportunity costs, which means that there are probably speculative bubbles in ownership. Government aids in this process, because they contribute these large subsidies to teams. Players benefit, because they get higher pay as the result of the financial successes of the franchise.
The government allows the special tax status because of special interest groups’ lobbying Congress and the IRS. Owners and their supporters are important constituents. The same logic applies to the ease of passing by anti-trust laws. There are powerful special interest groups that lobby to gain preferential treatment.
Fans expect that promoting competition economically would help solve these problems in sports, but unless they become a more powerful lobbying group than owners, Congress is unlikely to take up their case.
When an owner purchases a franchise, she reorganizes it as a new business enterprise: player roster and other asserts are depreciable under tax law
Because rosters depreciate by millions during the first few years, Form 1040 earnings (taxable income) can be vastly lower for owners but losses have to be passed straight through to owners personal income tax forms
Form of reorg facilitates this pass-through is Subchapter S corporationBill Veeck pioneered the idea of roster depreciation (White Sox owner 1970s)After Selig and others challenged IRS on roster depreciation, Tax Reform Act of 1976 set the level of
roster depreciation at 50 percent of purchase price/5 yr schedTax Act Amendments of 2004 made the numbers 100 and 15 respectivelyIRS justified changes with lower litigation costs, but also claimed that owners would pay more
taxes, a false claim – if net revenue after nonroster depreciation and amortization is >$16 million, IRS loses money (using average figures for sale price of team, real rate of interest and the 35% marginal tax rate) – Full description on pages 420-42
Many owners claim the benefit of depreciation is offset by operational lossesThe tax benefits of what is "an irrational investment" are what justifies purchase of a sports team in the
minds of Okner (1974) and Ambrose (1995)Capital Gains Tax Advantages for Sports Owners
After the 15 years of depreciating player roster, the owner can sell or continueIt is in the owner's advantage to reorganize from a "pass-through" organization with assets and losses
passing directly to the owner's 1040 into a corporation, gaining the lower corporate tax rate – they don't have to pay back the depreciation tax shelter
What happens if an owner sells after the depreciation window runs out? He gets to sell for the discounted future probability (including the tax shelter) of the team – he was in some sense in it for the tax shelter all along
Excess depreciation is when an owner who has claimed roster depreciation tries to value the roster when selling the team, tacitly admitting that the roster did not depreciate. As a penalty, all money sheltered through the depreciation is taxed at the personal tax rate
No excess depreciation cases have ever been brought by the IRS – forming a trend that Fort terms "roster depreciation rollover" whereby an owner can just hold the team for 15 years and sell it as a depreciable asset all over or hold onto it, reorganized as a corporation
Owners can utilize the personal and capital gains tax gap temporally, as personal taxes are higher (but have depreciation shelter for first 15 years) while capital gains taxes are lower (but do not have depreciation shelter, prompting reorg after 15 yrs)
Theoretically, the sale price of a team should include imputed tax advantage values – and indeed, sale prices are greater than the normal rate of return dictates
AntitrustFTC, DoJ administer laws intended to protect consumers from market powerMLB has antitrust exemptionLeagues have full antitrust power over player markets – only one major dominant league in each of the
major American sports (back to reserve clause)Curt Flood Act of 1988: Players can sue individually if behavior prohibited under antitrust law leads to
negotiation breakdownLimitations: minor league players, minor and major leagues, expansion and team location,
ownership/transfer, relationship between owners and MLB commissioner, marketing, joint marketing of broadcast rights
Almost all MLB business remains exempt, from franchise exclusivity, team movement, and expansion to output management activities (season length, playoff structure, broadcasting rights)
In some instances, players decertified their own unions to sue individually under antitrust laws – Jordan argued against it in NBA (decertification dangers)
Franchise moves – Three fourths majority required in all leagues to move teamThree quarters rule found unreasonable in the Raiders Case, an antitrust suit brought by Al
Davis against the NFL, but the ruling has had little effect on the league's practicesGovernment occasionally steps in, but does little to really help the fans
Celler Hearings of 1951 – Congress chooses not to revisit MLB's exemptionKefauver Hearing of 1961 – Chose to let market power stand again, league immediately
expandedSisk Hearings of 1976 and After – Issue of market power in sports
Sports Broadcasting Act of 1961 – leaguewide TV contracts exempted from ATCongress actually took formal merger facilitation steps in pro sports rather than applying antitrust laws
to the benefit of sports consumers (AFL vs. NFL)The Impacts of Special Tax and Antitrust Status
For fans, output reduce, price increased, taxes increased in the case of publicly and privately owned subsidized stadium teams
For media providers, they must negotiate with league rather than with teams, reducing competition and increasing the price of programming
For owners, these statuses increase the value of teams and profits. As long as players are free to move from team to team it benefits them as well – they are staunch supporters of market power because the demand for sports leagues increases with market power
Revenues at the gate, venue revenues, media contracts and claims on future expansion fees all rise because of tax and antitrust status
Team Sale Value puzzles: Benchmark case (no uncertainty), Bayesian Updaters (see p. 434), Team Prices as Speculative Bubbles (see p.435),
Government changes expectations of team owners – policies and owner behavior lag, creating inflated franchise values
Rational Actor Politics, Taxes and AntitrustSee diagrams on 438, 439Basic idea is that owners/interest groups lobby for favorable changes in tax/antitrust policy, and general
constituencies that are less organized get screwedCompetition Policy
Market power problems include high ticket prices, high merchandise prices etc.Media, owners, pro sports leagues, players, players unions, and politicians are all players in this game –
but Fort blames market power problem on failures of the political process (influence of special interest in form of owners)
What are the remedies? Regulatory approaches: Senator Cook (seperate fed. agency to regulate sports), public
ownership of teams – never truly gained tractionAntitrust: Break up leagues, but owners see the advantages of reforming, and the welfare of all
parties other than fans suffers and though talent may dip initially, level of talent will rise to what fans are willing to pay to see – Fort supports this
Demand slopes downward for individual college sports. The lack of substitutes is due to purposeful choices made by the enforcement
arm, the NCAA. An example of one of these choices is the NCAA’s Division assignments,
which are meant to ensure quality control.o Determinants of Demand
Demand shifters include preferences, income, price of other goods, experience, expectation, and population
Experience is interesting with respect to college sports because its effects can be seen in the growing popularity of women’s athletics.
Expectations are interesting with respect to college sports because its effects can be seen in the “lifetime” booster privileges of some fans.
Population is interesting with respect to college sports because it helps explain the large- and small-revenue markets.
Demand, Total Revenue, and Price Elasticitya) Pricing and Inelastic Demand
i. Although based on attendance alone athletic directors would never sell tickets at a price along the inelastic region of the supply curve, they sometimes do this to gain more revenue from concessions, merchandise, and parking.
b) Selloutsi. When prices are below the market-clearing price, scalpers and ticket agencies are
introduced.c) Price Discrimination
i. Most big football programs have donation seating, in which boosters contribute money to the athletic department for access to priority seating.
Revenueo Revenue data sometimes includes institutional support which is the money allocated
from the university’s operating budget.o Revenue Inequality in Sports
There is a substantial revenue imbalance in college sports. The ratio of the top reported revenues to the average revenues has exceed
3 since 1999o Revenue and Spending Differences in Men’s and Women’s Sports
Revenues for men’s sports are dramatically larger than for women’s sports, although revenue for women’s sports has grown at a higher annual rate.
Spending is far greater for men’s sports, but the growth in spending on women’s sports is much higher than in men’s.
o Every college team accepts sponsorships for their uniforms, equipment, and, more recently, stadiums.
The Market for College Sports Broadcastso In college sports, conferences negotiate contracts with media providers under a three-tier
broadcast rights structure. The first tier is the national contract between a conference and a major media provider. Any games not on national TV move to the second tier, national cable (such as ESPN). The third tier games are available for regional cable or local broadcasts.
o Colleges come nowhere close to the pro leagues in size of TV revenue.o TV revenues amongst the conferences reflect an imbalance (e.g. ACC makes twice as
much as any other conference). o Notre Dame is a huge outlier when it comes to this structure as it remains independent
and negotiates its own TV contract.o Sponsorships for bowl games has increased dramatically in the past two decades leading
to added revenue for teams.o The TV contract for March Madness also adds another revenue stream for conferences.
Costs, Profits, and Qualityo Universities behave differently than team owners because they do not necessarily try to
maximize profits.o Athletic departments are purported to provide spillover benefits to the rest of the
university, including fundraising, better applicants, better faculty and administration, benefits to the student-athletes.
o Universities give institutional support to athletic departments just as they would to a business school or other sub-organization.
o With institutional support most athletic departments break even, but without the majority would report losses.
Some people point to this and say college athletics are a losing proposition, but Fort argues that the argument misses the point—so long as athletics are contributing to the university’s goals, they should stay.
Sports Market Outcomes: Athletic Departments, Conferences, and the NCAA1. Conferences accomplish the single-entity aims of creating a schedule, developing rules, and
organizing championship play. It is analogous to leagues in professional sports.2. College conferences have the added difficulty of cooperating to determine a national
championship.3. Championships are also not always anti-competitive in college athletics. For instance, the
NIT tournament offers an alternative to the NCAA tournament.4. Before the three-tier system for broadcasting rights, the NCAA negotiated a single football
contract for all of its teams. The system changed with the 1984 NCAA Decision, aka NCAA vs. Board of Regents of the University of Oklahoma.1. This decision came after football powerhouse Oklahoma believed it could be on TV
more than the system allowed and formed an association with other teams to negotiate its own TV contract. The NCAA sued. Oklahoma countersued. The Supreme Court decided that the NCAA’s policies violated anti-trust laws, leading to the new system. Unsurprisingly, the new system lowers prices and raises output.
5. The BCS Championship in football is nothing more than a coalition of major conferences, Notre Dame, and the ABC television network that decide who will play in the BCS bowl games.
6. The NCAA serves as the go-between for athletes and universities.1. The relationship is pretty one sided as requirements limit payments to players and
restrict their movement between schools.2. The NCAA is important policing cheating at schools.
The Changing Face of Conference Membershipo Although universities cannot physically move like pro sports teams, they can move
between conferences.o All conferences are rivals competing over top schools.
Competitive Balanceo It appears that winning imbalance goes hand-in-hand with revenue imbalance in college
sports.o Recently, however, there has been increased parity within conferences.
Competitive Imbalance Remedies1. Revenue Sharing
1. Schools within conferences share gate revenue but big-market teams generally command a larger share, exacerbating the competitive imbalance.
2. A similar imbalance arises from the TV contracts as the more competitive teams make more appearances and get more money.
3. Conference championship revenue is distributed equally, but money from postseason tournaments only goes to the participants, once again fostering a competitive imbalance.
2. Player Restrictions 1. Schools are limited in their recruiting practices such as number of visits and money
spent. Although these restrictions might seem to level the playing field, it actually benefits the already well-established schools. After all, ceteris paribus, a recruit will pick a good school that gives him the best shot at making the pros.
2. Players are restricted from moving between colleges.3. The NCAA imposes an amateur requirement on all the players, limiting the money they
receive.
The Value of College Sports Talento Economics of Amateurism
College athletes cannot get paid the kind of money they might receive as professionals.
The additional revenue they produce is pocketed by the athletic departments. Estimates of star college athletes’ MRP in basketball and football show that they
produce a huge amount for revenue for the athletic departments and that the rate of exploitation can be as high as 90%.
If players were to be paid, they would receive the extra revenue as opposed to the university.
The argument that there is not enough money to pay college players is not persuasive since players would ultimately earn the revenue that they produce.
The argument that non-revenue generating sports would be hurt by paying college athletes is not persuasive because the costs can be covered by other areas where the MRP is overvalued such as AD salaries.
Government and College Sportso Taxes
Athletic departments generally plowback all of their revenue back into the department during the fiscal year so that they show no gains.
Contributions to athletic departments are tax-deductible.o Anti Trust
The government has not interceded in questions of anti-trust such as joint-venture TV contracts negotiated by conferences.
Rodney Fort, Sports Economics, Ch. 13 (by Andy Choi)
Martin Cave and Robert Crandall, “Sports Rights and the Broadcast Industry,” Economic Journal, 2001 (by Chelsea Zhu)
“Sports Rights and the Broadcast Industry” by Martin Cave & Robert CrandallII. Evolution of sports leagues in the U.S.
a) Both professional and amateur sports are broadcastedb) The bargaining power of the seller of sports broadcast rights depends on the number of
alternative sources of such programming available. Therefore, professional leagues have dominant positions.i. Reasons for lack of entry:
1. the continual expansion of the incumbent leagues – major leagues have expanded westward and southward as the US population grew and expanded
2. the evolution of players’ negotiating power over salaries – players can achieve “free agent” status after a certain number of years. This led to a remarkable increase in players’ salaries. This also reduces the monopoly profits of owning a franchise, making entry less attractive. It also lowers the probability of competitive entry by reducing the incentives for start players to shift to a new league.
3. the pre-emption of broadcast opportunities through expansion of TV coverage by the incumbent leagues
III. Evolution of sports leagues in Europea) Professional soccer is the most commercialized sport.b) Professional and amateur sports leagues have been under the control of government.c) UK Premier League was formed out of the Football Association to escape from the majority
control of the smaller clubs in the League, and to control directly the sale of broadcast rights and distribution of associated revenues.
IV. TV market in U.S. a) Before 1962, national broadcasts of sports leagues were limited. But in 1961, the Congress
passed the Sports Broadcasting Act, which allowed league-wide sales of national broadcast rights. This led to a dramatic increase in the value of national network TV sports rights as TV networks bid for the right to broadcast games.
b) Until the 1970s, US TV industry was highly concentrated due to policies of the FCC, which protected a stable 3-network off-air oligopoly from competition. By the late 1970s, court forced FCC to ease rules on cable TV + new technology of high-powered direct-to-home satellite distribution cable subscription tripled between 1980 and 1990. US TV market became more competitive.
c) In 1982-7, ESPN, a new cable network, secured broadcast rights to a major sports league’s games. This again led to an increase in sports rights value.
d) In 1994, Fox, the 4th off-air network, outbid CBS for a portion of the NFL national contract. This again led to an increase in sports broadcasting rights price.
e) DirecTV (1993) and EchoStar (DISH Network, 1996) also bid for national sports rights, again leading to an increase in sports rights price.
V. TV market in Europea) Cable or wireless pay TV superimposed upon a strong free-to-air broadcasting system.b) In UK, supply at the wholesale level of premium sports and movie channels come from
BSkyB, which uses deep discounting – a form of price discrimination where the first premium channel can be bought at, say, 10 euro per month; a second at 6 euro per month; a third for 3 euro per month.
c) Other countries: the wholesale pay TV market is also dominated by a single suppler.VI. Sports Rights in the U.S.
a) NFL receives >half of its revenue from broadcasting; MLB & NBA about 1/3; hockey much less.
b) U.S. v NFL (1953) invalidated as a violation of the Sherman Act a league-wide TV contract
that limited the ability of individual teams to broadcast their games into other teams’ home territories.
c) The Sports Broadcasting Act (1961) – professional sports leagues are now free to enter into national TV contracts that limited broadcasts into teams’ territories during the days in which the teams were playing home games (eliminates the teams’ own negotiations for local coverage).i. Revenues from TV contracts are shared equally to help teams from smaller cities.ii. NCAA v. Board of Regents of the Univ. of Oklahoma & Georgia Athletic Assn. NCAA
tried to limit the total number of football games that could be telecast and to prohibit individual teams and leagues from negotiating their own packages, but was unsuccessful.
iii. Individual teams may still sell their broadcast rights even if the league has a national contract.
d) Cable Act (1992) requires cable companies with “attributable” interests in satellite-delivered programming to make such programming available to other distribution technologies on comparable terms. But given the limited media ownership of sports teams thus far, such integration isn’t a major issue in the U.S.
VII. Sports Rights in Europea) Live soccer broadcast = highest payment.
i. In 1997/8, accounted for >3/4 of BSkyB’s annual expenditure.ii. 77 out of the 100 most watched free-to-air sports broadcasts in 1998 were soccer.iii. 96 out of 100 most watched pay-TV were soccer games.
b) UK: Before 1964, Football League games not televised. Live broadcasts began in 1983, but the two broadcasters that bid for the rights (BBC & ITV) acted collusively, resulting in low revenues for the league. 1992 Sky TV won a substantial package of live rights. Annual payment increased 4x when re-auctioned in 1997.
c) UK: a limited number of games are sold for live broadcast to 1 broadcaster (which makes them available to other platforms) on the basis that no further rights are sold by individual clubs. – collective & exclusive
d) France: the league itself ended this form of exclusivity despite legislative protection.e) Spain: clubs sell rights individually.f) Italy: the Parliament passed regulation that prohibits a single broadcaster from controlling
>70% of live matches. The Competition Authority prohibited collective selling by the League of live matches.
g) Germany: the Parliament passed a law specifically exempted the football league from anti-cartel legislation. – collective & exclusive
h) European Union regulation: each member state is entitled to “list” certain sporting or cultural events that the Government believes are of national interest. The holders of rights to such events must offer them to free-to-air broadcasters with universal coverage. After this is satisfied, additional rights may be sold to pay broadcasters. – good for consumers, but not for sports leagues.
VIII. Competition issuesa) US
i. NFL is the only league that relies solely on national network telecasts.ii. Other leagues employ a mix of national broadcasts negotiated by the league, and a mix of
local and regional broadcasts negotiated by each team less equal distribution of broadcast income, greater potential for disputes due to overlapping regional broadcasts.
iii. 1984 NCAA lost the suit to Univ of Oklahoma & Georgia freed all member universities to negotiate their own TV contracts sharp increase in the number of games telecast, a large decline in the value of the TV contracts per game, and an increase in competitive
balance in college football.b) UK
i. Clubs in the Premier League were accused of behaving like a cartel by selling live broadcast rights to a limited number of their matches to a single broadcaster, on the basis that the remaining matches weren’t available for broadcast. Premier League rights from 2001 are likely to be sold through multiple packages, with limited opportunities for clubs to sell individual matches for delayed broadcasting.
IX. Vertical Integration between broadcasters and sports clubsa) Theoretical: vertical integration could result in reduced competition in the market for sports
broadcast rights. Toe-hold effect – a firm bidding for a common value object of which it’s already partial owner will find that its net outlay on purchase will be reduced correspondingly, in relation to the highest unsuccessful bid. This interacts with the “winner’s curse”, causing other bidders without a toe-hold to reduce their bids.
b) In the U.S.i. Media ownership of sports teams is so limited that its effect on the supply of games
broadcast is not an issue in the US. There’s no evidence on the degree to which broadcasters have used their ownership of sports teams to gain an advantage in bidding for national broadcast rights, nor is there evidence that this ownership has led to reduction of the amount of programming available in the teams’ own geographical market.
ii. Example: CBS’s unsuccessful purchase of the NY Yankees in 1964.c) In Europe
i. There are a limited number of examples of broadcast firms owning sports clubs, especially soccer clubs. Some restraint on broadcasters’ ownership of football clubs is exercised by national and European football association rules, which prevent a single firm from having a controlling stake in 2 or more clubs playing in the same competition.
ii. In 1999, BSkyB’s attempt to take over the UK Manchester United was blocked.X. Conclusions
a) US has a larger market size.i. In US, interest in sports on the part of the public is much more balanced across sports than
in Europe, where soccer dominates.ii. In US, the broadcast market, especially the pay-broadcast market, has not exhibited the
dominance by one or a small number of firms, which is the case in Europe.
Dennis Coates and Brad Humphreys, “Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events,” Econ Journal Watch, 2008 (by Colin Morris)
In the past 15 years stadium construction across the world has skyrocketed as the percentage of sports fans within the population has increased to keep pace. “By 2006, 89 of the 120 major league teams in the “Big Four” North American sports, football, baseball, basketball, and hockey, played in facilities built or significantly refurbished since 1990. These stadiums and arenas were constructed at a cost of more than $17 billion of which roughly $12 billion was provided by public sources” (Matheson, 2006). Of this massive increase in spending for sports and sports related stadiums and franchise
relocations roughly 35% has come from publicly raised funds and/or subsidies. Still today economists
are split down the middle on the issue of public funding and subsidies for sports organizations. Half of them feel that this money could go to more useful investments that would promote infrastructure, where the other half feels that sports are becoming a crucial part of culture around the world and these
are investments in the happiness of citizens while also investments in their local economies. Regardless of what side of the debate you are on it is important to understand both sides of the issue before making a judgment as to whether or not subsidies and franchise relocations are beneficial or harmful to local communities.
Coates cites these increases in value as a potential reason for local communities to overestimate the positive effects of a franchise on their economy. In the last 20 years three franchise projects in particular stand out as having drastically positive effects on local communities: the Sky-dome is Toronto, the creation of the Jacksonville Jaguars, and the building of the Baltimore Arena. Each of these projects was expected to generate between roughly $100 million and $450 million while creating between 3,000 and 17,000 jobs for the Sky-dome. In the end all three of these projects fulfilled their
promises to the citizens of the communities by increasing jobs and tax revenues across the board. The
interesting point to consider however is while for example in Maryland in 1990 the state collected $3.4
billion in tax dollars. The fact that the stadium increased tax revenues by $3.8 million is beneficial but
almost insignificant on such a large scale. The same held true for the other two projects as well. In essence Coates believes that stadiums and franchises can benefit local communities however their overall effect is often blown out of proportion.
In more economic terms, this disparity between actual effects and perceived effects is referred to as the Mythical Multiplier. “The multiplier is used in all economic impact studies to estimate the effect
of each dollar spent directly on sports on the wider local economy” (Humphreys, 3). Critics of the multiplier method feel that it often overstates the positive effect of a sports team on a local economy because of its inability to differentiate between net and gross spending in the community. This basically means that the multiplier is unable to distinguish between whether or not the individual is spending their money exclusively for the sporting event, or if there were no sports team in the community would they simply spend their money on another form of entertainment. If this were the case then the overall effect of the sports team would be negligible to zero because it would simply represent a displacement of spending and not isolate the specific effect of the team itself on the community. As on offshoot of this point of view some economists believe that sports teams may even be detrimental to local communities as people spend less money on local businesses and use this money instead to go to sporting events, where they eventually end up spending less than they would otherwise. The difficult thing about these points of view is that they require extensive research to prove with any certainty and would likely be too costly to commit too.
Harold Seymour, Baseball: The Early Years, Ch. 7 (by Colin Morris)
Harold Seymour, Baseball: The Early Years, Ch. 8-12 (by Jessie Jiang)
Harold Seymour, Baseball: The Early Years, Ch. 8-12 (by Bryan Dunmire)
Roger G. Noll and Andrew Zimbalist (eds), Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, Ch. 1-2 (by Stephanie Shing)Build the stadium - create the jobs!
General arguments for creating stadiums: Ex. 1997 - A new football stadium and shopping center were built, because it was believed that they would bring substantial economic benefits to San Francisco through increased spending and jobs.
Advocates claimed that new revenues from sales and other taxes would pay the interest and amortization on the bond and so these benefits would be costless to the city.
The arguments for subsidizing a stadium and shopping center: These major facilities will generate new jobs because people who attend sports events spend money at the facility and on other activities while traveling to and from the game. Additionally with a team or important sports event the community will become a major league city and receive free publicity which will help attract new businesses. Furthermore, the city will also receive additional tax revenues and lease payments which will help offset the subsidy.
This book examines the above claims. Beginning in the late 1950s, the sports industry has had an economic boom. Revenues from
attendacne, broadcasting, and concessions have grown rapidly. On the other hand, the proportion of team revenues needed to cover stadium costs has declined because of the increasing eagerness of state and local governments to compete for teams by subsidizing them.
Building these facilities are not cheap - around at least $200 million for baseball or football stadium to be built.
o Questions raised: Are these facilies worth it? Who benefits - the teams, the leagues, or the city?
o Who pays for the stadiums and who benefits? o Why do cities subsidize sports facilities, and what determines the amount of subsidy that
a team receives? o pg.6 - "The overrriding conclusion of this discussion is that the economic case for
publicly financed stadiums cannot credibly rest on the benefits to local business, as measured by jobs, income, and investment....the case for subsidies must rest on consumption benefits, which in this case is consumer satisfaction from the presence of a local team that is not reflected in traditional market transactions such as selling tickets, concessions, broadcast rights, and other good and services."
o **pg. 7 "Stadium financial plans typically overstate the extent to which a stadium can be said to pay for itself."
The total collections from activities attributed to the stadium to to local goverment revenues can sometimes be overstated:
3. It is often forgotten that there are other substitutes for professional sports. For examples if people did not attend a professional sports game that money would be spent on other forms of entertainment and recreation.
4. The multiplier effect is often overstated. 5. **Studies have been done to show that the local economic effect of a sports facilities is
between nonexistent and extremely modest. 6. Case study: San Francisco foot ball stadium with a shopping mall build adjacent
o The presence of stadium actually makes the shopping center a little less financially attractive because the shared parking facilities will be clogged with fans attending the home games. Building the football stadium would be more costly to the city than a plan that contemplated a shopping center with no stadium and therefore no subsidy.
o The shopping center will have national chains plus branches of several famous San Francisco restaurants. These restaurantes would compete with stores of the same and similar chains that are located elsewhere in the city
o The revenue forecasing is also distorted:
Sales taxes, ticket taxes, and rental payments depend on attendance to games and a team's attendance usually does increase sharply when a new or renovated facility is opened.
If all teams build a new stadium each one cannot expect to win more games and thereby hold onto the attedance increase arising from the effect of a new stadium on team quality.
Cities subsidize Sports Facilities because the social and psychological significance of sports facility substantially exceeds its economic value.
Monopoly Leagues
Since 1950s professional sports has expanded considerably,however, the number of teams in each sport remains substantially lower than the number of cities that can support a major league team.
There is excess demand for teams among cities because of the structure of the sports industry. All major sports are controlled by monopoly leagues. the leagues profit from a scarcity of teams because they are able to set up competitive bidding for any team that become available.
This monoplogy would normally lead to the formation of new leagues and there have been leagues that have tried to enter professional sports, but none has succeeded since the World Hockey League and the American Basketball Associate merged some of their teams into the established NHL and NBA in the 1970s. This is because of the structural features of the sport.
In order for a league to succeed, the league must include big cities to offer attractive packages of tv rights, b/c so much of the tv audience is in large cities and partly because fans in smaller communities are more likely to watch a team from a large city than from a smaller one.
There is also a lot of free publicity that arises from coverage of a league by national media if the league includes teams in national media centers such as Chicago, Los Angeles, and New York.
o Sports coverage sells newspapers and increases audience ratings, but it also enhances interest in sports.
o This makes it necessary that these new leagues have a presence in at least some of the largest metropolitan areas. The problem for new leagues entering large cities is to find the necessary sports facilities because existing teams have exclusive rights to nearly all facilities in major cities. Additionally, cities are less likely to subsidize a new team in a new league if the city already has a team or two in the established league.
Stadiums as Poor Investments - Stadiums are seldom attractive as private investments.
Conclusion:New facilities rarely, if ever, are worthwhile. Subsidized sports facilities do not exist because they are financially valuable assets in their own right. They exist, instead, because most cities have decided that a subsidized team is better than on team at all, and because scarcity in the number of teams gives owners the advantage in bargaining with cities.
THE ECONOMIC IMPACT OF SPORTS TEAMS AND FACILITIES
Major league sports teams are valuable to local residents, even withouth any benefit to the local economy. They provide public consumption benefits.
The revenue pulled in from all sources is substantially smaller than many other businesses so it must be the cultural importance of a major league team that causes cities to subsidize teams.
It is argued that sports teams attract tourism and new business to a community but Advocates argue for stadiums because they attract tourists and new businesses, they increase
local business, but the costs of building stadiums and the reality of these statements must be examined.
o In building a stadium the opportunity costs must be taken into account. The money used towards building the stadium could have been used elsewhere. Additionally, this money is from taxation which creates a dead weight loss.
o Building a stadium creates jobs, but if the workers were already employed this actually does not increase jobs, but changes the source of the workers' income. If the workers were unemployed, it would be easier to give them a direct subsidy, such as unemployment benefits.
o Stadiums are believed to draw tourists which creates a multiplier effect. Tourists spend money on hotels, restaurants, shoppping, and other consumer activities. This multiplier effect however may often times be over stated. If these tourists who attended the sporting events visited the city for another purpose then these people were already drawn to the area before the stadium existed.
o Much of the gross revenue of a team goes to athletes. A significant portion of the rest goes to owners, executives, on-field managers and coaches, and scouts. Many of these people may live outside the local community so the benefits of the sports team do not go to the local community. The money made by these people would be spent elsewhere, so there is not much contribution to local economic growth.
Building a Stadium: Economic Impact Analysis:
Net benefits = (consumption value of a team to fans) - (annual cost of stadium + team operating cost) - (environmental, congestion, and pulibc safety costs) + (increase in local income x multiplier) pg. 74
The consumption value of stadium comes from three parts: attendance, broadcasting, and the externality value of simply having a local team.
Stadium costs are net of rent, increase in local tax revenues that is due to the stadium, costs of stadium operations, public services such as police.
Consumption benefits include the value of broadcasts of local teams to consumers.
Team operating costs include all costs associated with broadcasting as well as playing games.
Both positive and negative externalities of having a team must be included in the equation. Negative externalities are assocated with travel to games, such as additional air pollution, traffic congestion, and security problems.
M = multiplier
m = 1/(1-s)
where s = c *f; c = fraction of the increment to pre-tax income that is spent on consumption; f = fraction of local consumption expenditures that generate an increase in local net income.
Multiplier for sports facilities is thought to be low. Most of the income of sports teams goes to high-income individuals who allocate more income ot taxes and savings than the typical wage earner (athletes usually make lots of money, but only for a small amount of time, so the amount of income they save tends to be high). Athletes are likely to live outside the city in which they play and even those who live in the city are more likely, along with the team's executives, to spend larger shares of their income outside the area than is ture for employees of typical businesses. The concessions sold at the game usually come from concessionaires who are based in another city. So multiplier for sports teams is 1.2 compared to 1.5 for ordinary public investments.
The magnitude of sports subsidies is certainly due primarily to the fact that leagues monopolize franchises. Because of the limited number of teams, teams are able to bargain with many different cities and use threats to obtain subsidies.
Stadiums are subsidized because sports teams create local consumption value that owners can extract from state and local government because leagues are monopolies. It is believed that cities claim stadiums are good investments by using bogus economic impact studies because the of politics.
Roger G. Noll and Andrew Zimbalist (eds), Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, Ch. 1 (by Bryan Dunmire)
Roger G. Noll and Andrew Zimbalist (eds), Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, Ch. 4 AND 15 (by Jade Clark)
Andrew Zimbalist, May the Best Team Win: Baseball Economics and Public Policy, Ch. 5-7 (by Alan Ibrahim)Chapter 5 – Collective Bargaining
BackgroundSince MLB’s first collective bargaining agreement in 1968, every basic agreement has been marked by
either a strike or lockout.Relationship b/w baseball players and owners: owners exploited players from advent of reserve
clause in 1879 until free agency in 1977, and players have exploited owners for past 25 years1954: formation of Major League Baseball Players Association (MLBPA) and agreement with owners
stipulated 60% of TV revenues from All-Star Game and World Series would finance players’ pension fund
1966: Don Drysdale and Sandy Koufax formed two-person negotiating team and hired lawyer to represent salary interest, ultimately receiving substantial increases from their 1965 salaries
Feb. 1968: First comprehensive agreement b/w MLBPA and owners signed, which established formal grievance procedure w/ limitation that owner-appointed commissioner designated as final arbiter and raised minimum salary from $6,000 to 10,000 and set up joint study group on reserve clause
Dismantling of Reserve Clause
Jan. 1970: Curt Flood challenged baseball’s reserve clause and eventually lost, but shook foundations of reserve system: minimum salary raised to $15,000 in 1972, maximum salary cut reduced to 20%, and players gained right to impartial arbitration of grievances outside commissioner’s office (most important)
Apr. 1972: first players’ strike over funding for pension plan, which established union as contending force1973: player salary arbitration introduced and enabled all players with two years plus one day of major
league service to go before impartial arbitrator to resolve salary disputes with owner1974: Catfish Hunter successfully field grievance against owner of Oakland A’s for not making payments
into insurance fund and became free agent, signing lucrative multiyear contract with Yankees1976: Dave McNally and Andy Messersmith of Montreal Expos won right to free agency against club who
claimed right to renew contract for additional option year without player’s signature; free agency also granted for all players with 6 years of major league experience
Owners determined to stop rapid salary growth and not make further concessions that would strengthen free agency, through introduction of plan to compensate teams who lost free agents by penalizing teams who signed them
By 1984 three issues stood out:New national television package with NBC and ABC quadrupled annual value of previous contract
and MLBPA sought commensurate increase in owners’ pensions contributionsMLBPA wanted to eliminated free-agent compensation poolOwners wanted to weaken salary arbitration
Peter Ueberroth, new commissioner, stated he might invoke Rule 12A to avoid work stoppage, which allows commissioner to make any decision deemed to be in best interest of game, which led to efficient negotiating process and quick compromise, but prepared owners not to bid on free agent
Teams began announcing poly to sign no contracts longer than 3 years for hitters and 2 years for pitchers MLBPA filed several grievances for collusion – led to deep-seated of owners in union that have still not been settled
1990: settlement stated that 17% of players with more than 2 but fewer than 3 years of service would be eligible for salary arbitration, increase in minimum salary to $100,000, increase in yearly pension fund to $55 million, and triple damages for any future owner collusion around signing of free agents
1994: salary cap debateowners proposed players would receive 50% of industry’s revenues, each team’s payroll would
have to between 84 and 100% of average team payroll, and eliminate salary arbitration in favor of introducing free agency after 4 years of major league service, but player’s team would have
right of first refusal after player’s 4th and 5th yearsplayers countered eligibility for salary arbitration should be reduced to 2 years, certain restrictions
on free agency should be eliminated, and minimum salary should be raised to $175,000no compromise reached and remainder of season canceled
1996: new agreement which introduced first revenue sharing system, where ¾ of revenue collected distributed equally to 30 teams and ¼ distributed only to clubs with below-average team revenue
Although system intended to level playing field for high- and low-revenue teams, instead seems to have exacerbated competitive imbalance
If owner did not anticipate making it to postseason, then owner’s profit-maximizing strategy might have been to lowball payroll, meaning team performance would suffer and team revenue would be decreased, but still leading to higher venue sharing transfers which many owners simply pocketed instead of using it to improve clubs
Second innovation was introduction of first luxury tax on high team payrollsSubstituted weakly for salary cap and intended to be drag on high team payrolls by putting tax of
35% on top five payrolls on amount which payroll was above midpoint between fifth and sixth highest team payoffs
Third was establishment of “Industry Growth Fund” (IGF) to promote growth of game in Canada, US, and throughout world
Last was unprecedented clause stating both labor and management would go to Congress to seek partial lifting of MLB’s antitrust exemption as it applied to collective bargaining
Curt Flood Act of 1998: gives players clear opportunity to sue MLB if owners attempt unilaterally to impose new restrictive conditions on baseball’s labor market
MLB under the 1996 AgreementReport blushed in 2000 studying baseball’s economic system and coming up with recommendations on how
to improve it (blue-ribbon panel, no input from players):Increase revenue sharing systemReintroduction of luxury taxChange in baseball’s draft system
Selig wanted to implement long-dormant 60/40 rule which stated that teams were required to maintain ratio between assets and liabilities of at least 60 to 40, as well as franchise valuation rule that team’s value equaled only two times its annual revenue and liability instruction that long-term players contracts would count as liabilities
Put on table as bargaining chip to loosen players’ position on other issuesPlayers perceived his demands to be harsh and unacceptable and none were incorporated in final agreement
The Final AgreementIncreased Revenue Sharing
34 percent net local revenue tax rate on straight-pool basisRedistribute $175.8 million from top to bottom half of teamsFails to address issue of competitive balance b/c high marginal tax rates on low-revenue clubs and
consequence disincentives to spend transfers on player payroll suggest that decentralized decision-making will lead to little improvement in competitive performance of low-revenue clubs
Suggestion: base on potential rather than actual revenues to avoid incentive issuesLuxury Tax
Begins at $117 million in 2003 and rises to $135.6 million in 2006Given negligible effect of 1997-1999 luxury tax, hard to imagine new system will provide much
drag on high-end payrolls – owners may in fact cut payrolls or manipulate themOther Considerations
Team unable to sign 1st-round pick given extra 1st-round pick in same position following yearInternational draft not agreed toOwners’ requested changes in arbitration not acceptedImprove players’ benefit plan
Assessing the Accord2002 agreement product of compromise
Revenue sharing plan closer to owners’ position, while luxury tax much closer to players’ positionOver 4-year period, close to $1 billion will be shifted from top to bottom teamsMLB will generate in excess of $15 billion in revenue, so new revenue sharing schemes will
redistribute less than 7 percent of resources, so competitive balance effect minorSalary restraint likely to flow from new agreement b/c of marginal tax rates and debt rule
(connecting debt to team cash flow) and also outside factors like recessionary economic conditions
What Have We Learned?Two themes: owner discord and distrust between players and owners
e.g. Selig imposed gag order on owners and threatened fines up to $1 million for owners who spoke publicity about collective bargaining process or game’s economics
Pattern of collective bargaining period: owners meet to discuss changes they want to make, can’t agree on basic changes, all agree on lower player salaries, leading to demands for salary cap and raising service limit for arbitration eligibility
Players will not buy into salary cap b/c of distrust of owners’ revenue numbers and need of mechanism to
curtail runaway owner profits when revenue growth exceeds inflation rateAnswer: partnership! Owners must involve Players Association in planning, and union must adopt a new
attitude as players are beneficiaries as well
Chapter 6 – The Stadium Issue
Between 1989 and 2001, 16 baseball stadiums were builtDuring the previous 13 years, none had been builtEach averaged $306 million each to buildTotal was $4.9 billion – of which 66% came from public coffers
Government issues federal-tax-except bonds (comes at 1/3 lower interest)Benefits to owners and playersPresent discounted value government paid was $683 million - $1.37 billion
Cities compete w/ one another for franchises b/c leagues restrict the # of teamsFederal government sees this competition as zero sum – one city’s gain is another’s loss
More competition = more favorable lease terms for teams + more public funds Small cities must give more or some kind of incentive
Ex. city like Boston doesn’t have to worry about Sox leaving because of the large media market, the history, historic ballpark), whereas KC and San Diego do
Ex. 2001 Selig told Florida that w/out public financing for a new stadium, Marlines would be moved or eliminated
For projects submitted to referendum, vote to pass is usually closeThis means that the stadium proponents did a good job of estimating public WTP to support planSwaying of few votes is important, so economic analysis of stadium impacts have to convince only
few people
Economic Impact
No study has found predictable positive effect of stadiums on output or employment. Why? Baseball is a relatively small business
Average for team is $112 million annually. In St. Louis that’s 0.3% of GDP. In NYC that’s 0.03% of GDP
Teams only employ 70 – 130 people in front office and 1K-1.5K unskilled low paying jobs during games
3 main reasons why sports teams don’t promote economic development1) Substitution Effect
Majority of consumers have inflexible leisure budget. So if a new team moves to town, money that is spent at game isn’t spent on movies, bowling alleys, etc.
Net effect on spending if 0 (or close to it). Teams relocate spending, not add to it.Only exception is when teams attract people from out of town (ex. Baltimore attracting people from
DC)About 5-20% of fans are from “out of town”, but really depends on what “out of town means”There is evidence that out of state fans don’t go to town just for baseball games, but rather to see
family, or business trips, etc. So if they weren’t at the games, they would be spending money on other leisure activities.
This reduces the economic effect of teams.Teams also receive distributions of national TV contracts, which remains in the local economy.
However leakage negates this effect.2) Leakage
Majority of added revenue from new stadium goes to the players. The rest goes to owners and to offset other costs.
First, players face over 40% in taxes, which leaks directly from local economy to Washington. Second, players save a lot because their income is transitory, so that goes into the world’s money
market. Third, players don’t live year round in the team’s local community. And if they do, they probably
have homes elsewhere.Fourth, high food prices at parks is siphoned by the concessionary company, which is based
elsewhere. Fifth, 11-12% of revenue goes to player development in minor league systems, which are outside of
the host city. Leakages mean that multiplier from expenditures at baseball stadium is lower than at other leisure
venues. 3) Budgetary Impact
If financing burden is large and is borne primarily by public coffers, then the public obligation to things like infrastructure maintenance, environmental remediation, cost overruns, etc. is likely to generate a substantial budgetary hole in the municipal county/state.
These gaps must be filled with decreased government services or higher taxes, both of which put drag on the local economy.
Over the years as stadiums have gotten more expensive, public contributions have continued to average 70% (about $7 million annually)
Some studies claim that building stadiums provides positive economic stimulusBut they usually don’t take into account the opportunity cost of the fundsOnly when funding comes from the state of federal coffers can the city expect a net job
gain from facility construction, which would still come at the expense of worker layoffs somewhere else in the country.
No empirical evidence to show that stadiums “put a city on the map” and increase tourism and business.
Other EffectsIncome Redistribution – a lot of public financing comes from sales tax. This is regressive. Takes money
from poor people and gives to rich. Also ballparks are gentrified and only the wealthy tend to benefit from them. Reverse Robin Hood scheme.
Core Redevelopment – one positive thing is that it could facilitate efforts to redevelop an urban core. Although this tends to be small because it’s risky to invest in adjacent businesses since there are only 81 home games a year and stadiums try to get fans to spend as much money as possible inside the stadium.
Cultural Enrichment – brings pleasure to the population. Positive externalities.
Stadiums don’t necessarily increase revenue for a team. Star players attract more fans, so if these additional fans are willing to pay more for seats and spend more on concessions, the player’s MRP increases. So with a new ballpark, owners should be able to bid more aggressively for talent and imrove the quality of the team.
Chapter 7 – What is to be done?
Because MLB is a monopoly, many economists believe that it leads to many undesirable outcomes: lower output, higher prices, indifferent service to the customer, and inefficiency.
This chapter discusses what rational public policy toward the MLB might look like. Congress has been pretty passive with the MLB with the only exception being the 1998 Curt Flood Act
which lifted MLB’s antitrust exemption as it applied to collective bargaining.Both the barons of baseball and union supported the bill. Gave the MLBPA another weapon besides strike. In order to bring an antitrust suit, the union would
first have to decertify and would have to wait several years while litigation played out. So it wasn’t a very good step toward helpful public policy.
Public Policy Toward Stadiums
Efforts by cities to form a sports-host cartel haven’t gone so well. Individually they have tried to tried to
include provisions that deter relocation and provide a more equitable sharing of facility returns. But usually only the largest cities have the leverage to do this.
Other cities have required teams to share profits with the public upon future sale of the franchise. Some leases grant the city the right of first refusal to buy the team before it is sold or relocated.Another possible defense for cities trying to hold onto a franchise is the invocation of eminent domain. But
it doesn’t seem promising because it’s hard to pass constitutionally. No rationale for the federal government to subsidize the financial tug-of-war among cities. Moynihan Bill would have eliminated the tax-exempt finance for stadiums, but didn’t make it out of
committee. At the local level, stadium subsidies are a matter of preference. The important point is that residents should
understand that there is no generalized economic benefit. If the city provides a construction subsidy, it is only appropriate for it to be based on the expected consumption benefits that it will provide to residents.
Local governments need to bargain for clear guarantees of tenancy and sharing of capital.
Tax Policies
Thanks to Selig, owners of sports teams are able to use their franchises as tax shelters and they can amortize this value over years.
This makes little sense from an economic point of view. The largest share of franchise value derives from the monopoly rent, baseball players do not depreciate like machines (reach peak in performance at mid-career), players don’t produce a net income stream unless the additional revenue they generate for a team is greater than their compensation, a player can be replaced simply by promoting a player from the minors.
Broadcasting Cable Policies
Core issue is migration to cable/satelliteCompanies lumping sports packages so that non-sports viewers are still payingWithout exclusive territories, each game would potentially have to broadcasting sellers, resulting in
competition and bringing prices down. Would diminish the advantage of big city teams by compelling them to share part of the rent generated in the market.
If revenue that is part of MLB’s central fund because team specific, there would be increasing inequality across teams.
To deal with this the league should mandate some high percentage of these new revenues be shared league-wide, even though they are contracted by decentralized units (teams)
Teams motivation to move to cable is that cable provides two income streams (advertising and carriage fees) = more revenue
Ex. Trend can be seen w/ Red Sox and NESN
James Quirk and Rodney Fort, Pay Dirt, Ch. 4 (by Jessie Jiang)As old, memorable ball parks deteriorate, a wave of parks were built between 1960 and
1990, but were mostly non descript, designed to be multi-purposeCurrent lineup of Stadiums and Arenas
A table of stadiums currently in use in a tableChanges in stadium and arenas over time
Stadiums used to be a lot smallerBetween 1950 and 1980, there was a rather steady increase in public ownership of
stadiums and arenas for all leaguesStadium construction, 1960-1990
Beginning about 1960, local gov’t began to invest in stadiums to replace the older facilities owned by existing major league teas, in order to keep the teams in town.
Boom in sports business will carry with it a boom in stadium and arena construction well into the 1990s.
Impact of New Stadiums on Attendance and PerformanceMajor league teams in all leagues put enormous pressure on local gov’t to finance the
building of new stadiums and arenas over post 1960s into 1990sIncrease in attendance that occurs at new stadiums, with accompanying increases in
revenue and profits for teams housed in the new stadiums. There is also a economic argument that can be made for improved performance at a
new stadium. Attendance and stadium capacity
The spectacular increase in attendance that occurred in baseball with new stadiums cannot be extrapolated to other sports, mainly because teams rarely sell out their stadiums.
While in other sports, that is the rule rather than the exceptionAttendance in sports contests reflects deliberate decisionmaking on the aprt of team
management in setting ticket prices. Stadium rental contracts
Moving from small private owned stadium to new public stadium also decreases costs through favorable rental agreements iwht the manager of the stadium
Teams have bargaining advantage in the hands of playing in publicly owned stadiumsGet rental contracts that allocate as much of the costs of operating the stadium as
possible to the cityStadium finances: construction costs of stadium
In 1883, Washington Park was built for $30000 seating 2500 fansOn average, stadium costs rose from about $25 million per stadium to $55 million per
stadium in the 1970s. Stadium finances: operating revenues and costs
Stadiums have different manageent arrangementsEither a commission that manges and operates the facility, and team is simply a
tenanctOr locality hires a stadium management corporation, to act as its agent in operating
the facility and in dealing with the team and other users of the facility. Financial data on stadium operations are scattered
Operating expenses are those variable costs, mainly labor, management, and supplies, incurred in operating the facility
Operating revenue less operating expensies gives net operating income, the amount by which operating revenue exceeds the variable costs of operating the facility
Estimates of subsidies to teams by publicly owned stadiumsThe model for evaluating the operation of publicly owned stadium or arena is the
model of a privately owned, profit oriented facilityIn a competitive market, the owner of a stadium would be able to charge tenants
rental fees sufficient to cover operating expenses plus depresciation and amortization
What matters is not the historical cost of an asset but its replacement costValue of a facility or team to a city
The large sums that cities spend on stadiums is evidence that public think that professional sports teams are valuable assets for a city.
Sports teams can bring together a diverse group in a city through a common identification with the city’s team
Enhance the quality of life of the cityHelp to establish the city’s reputation as big leagueThe recognition of this role for a pro sports tea is what really underlies the large
subsidies that cities have provided for sports teams, rather than the more mundane expenditures benefits.
Case study: a stadium that didn’t get builtTeam threatens to leave city if a new stadium didn’t get built, city was resolute and
said no. The team left town, three years later, city voters approve da multimillion bond issue to
build a stadium The city was st. louis, and the team was NFL cardinals.
James Quirk and Rodney Fort, Pay Dirt, Ch. 4 (by Andy Choi)
James Quirk and Rodney Fort, Pay Dirt, Ch. 8 (by Tommy Li)In theory, rival leagues could eliminate monopoly rents, so team owners would earn no more than
normal profits.Historically however, rival leagues have usually not survived more than a few years. Up to the 1980s all leagues had provisions giving veto power to members on expansion into their
own territories, but under recent court decisions, those rules have now been replaced by a three-fourths majority vote.
If a new team is placed in the same territory as an existing team, then the existing team at that location is exposed to extra burdens and costs not faced by other teams in the league.
In the 1882 world of baseball, the American Association (AA) moved into markets that the National League (NL) had abandoned. In 1884, to counter the Union Association (UA), the AA expanded to more cities. As a result the AA teams became unprofitable and only a few UA teams were profitable that year. When the UA exited, most AA and NL teams returned to profitability. When the NL absorbed the AA and became a monopoly, all NL teams became generally profitable in the 1890s with few exceptions.
The American League (AL) was able to compete competitively with the NL partly because of the NL’s public relations problem concerning syndication and partly because the big cities of the East were willing to support more major league teams than the NL provided. Surprisingly in this situation it was the AL, the more junior league, that hammered out the terms of agreement for the new league.
The Federal League made bids to players in both the AL and NL. The Federal League also filed an antitrust suit against organized baseball. Ultimately the Federal League agreed to drop its suit and go out of business.
In basketball, the major competitors were the American Basketball Association and the National Basketball Association. The ABA was able to have an upward trend in per-game attendance for a while by winnowing out weak franchises and having honeymoon periods after franchise moves. In its last season the ABA had 9 teams, but many went broke before the season finished. In the end, the ABA folded and certain ABA teams joined the NBA after paying an expansion fee. The ABA lost about $40 million during its nine-year history.
In 1972, the World Hockey Association (WHA) emerged to challenge the dominate National Hockey League (NHL). The WHA tried to start franchises in medium-size Canadian cities
lacking NHL franchises as well as some small American cities. The main problem the WHA faced was that the vast majority of hockey players over the age of 18
were under contract to the NHL. The NHL had setup a system of minor leagues and ties to amateur hockey associations to have control over all of these players. Thus, the WHA had to over on average higher salaries to recruit NHL players.
In 1978, the WHA allowed teams within its league to leave the WHA and join the NHL. The NHL turned down the WHA’s attempts at a merger. The surviving WHA teams each paid $7.5 million each to join the NHL.
James Quirk and Rodney Fort, Pay Dirt, Ch. 9 (by Jeffrey Ye)Rival Leagues: The Great Football Wars
The NFL is known to engage in interleague wars. Chapter focuses on the many battles between the NFL and rival leagues starting in 1926.
IntroductionNFL began in 1920. Originally called the American Professional Football Association.In 1922, league reorganized as the National Football League. This league consisted of a hodgepodge of
teams from small cities and large cities. Records during this time was nonexistent; even newspaper reports of game scores were sketchy at best.
Move from APFA to NFL highlighted the disorderly state of APFA. Under the APFA there were unclear territorial rights, even the schedules of the games were haphazard.
Under the NFL, Joe Carr established enforceable territorial rights for franchise owners. For example, Carr stripped Pottsville Maroons’ 1925 NFL championships because the team violated territorial restrictions.
Some numbers:Football salaries ranged from $75 to $100 per game. Average ticket price was around $1. The
typical NFL roster was 15 players.Most teams in the NFL were hobby enterprises as the franchises were not that profitable.New league, the AFL, was formed by a guy named Red Grange, a famous player from the Fighting Illini.
AFL I, 1926Grange was arguably the most charismatic football player in history of the sport. Played for the Bars in
1925. A match with the New York Giants drew 64,300 fans, an NFL record for more than 20 years.In 1926, Grange offered the Bears owners a deal – he would sign for a share of the gate revenue. The
owners of the Bears refused and Grange and his manager Pyle obtained a lease on Yankee Stadium and petitioned NFL for new NY Franchise. 19/20 owners of NFL franchises like the idea; however, Time Mara, owner of the NY Giants, used his veto power to block the new team.
Grange and Pyle responded by creating the first rival in pro football, the original American Football League.
AFL I decided to compete directly with the NFL in the largest markets and “fill the gaps” in the medium-size-city markets. NFL remained hodgepodge of large, medium, and small city teams.
Yankees (AFL) and Giants (NFL) were in head-to-head competition. Yankees outdrew the Giants every Sunday almost two to one, until the last game of the season, when Grange was benched for an injury.
Besides Yankees and the Philadelphia Quakers, every single other AFL went bankrupt before the season ended.
AFL disbanded after 1926 season; NFL agreed to admit Grange and the Yankees as an expansion team for the 1927 season. Yankees went out of business after 1927.
Consequence of NFL-AFL I war was – Carr eliminated almost all of the small town members. NFL restructured to be a big-city league. Also showed it was not possible for one man to carry an entire league.
AFL II, 1936 – 1937Division play was adopted by NFL beginning in 1934. By 1936, next rival league, the AFL II, came into the
scene.Once again, the rival league placed teams in direct competition with the NFL in New York City.
Competition also added in Boston and Pittsburg.AFL II players were mainly newly recruited ex-collegians and a few ex-NFL players.Attendance-wise, AFL not in the same ballpark compared to NFL except for Yankees and Boston
Shamrocks.AFL failed for this reason and because the LA Bulldogs were simply too good; it ended the season on a 9-0-
0 record.AFL II expired after the 1937 season.
AFL III, 1940 – 1941AFL II operated during the 1940 and 1941 seasons. Except for the NYC, AFL III avoided direct
competition with the NFL teams. The six teams in 1940 shrunk to four teams in 1941.Attendance on average was many times worse than NFL attendance.League did not constitute a credible threat to the NFL, said to be a minor league parading as a major league.AFL II and AFL III were mistakes on the part of the owner/investors in these leagues. They overestimated
the potential of the pro football market.
AAFC, 1946 – 1949Unlike the three AFL teams prior to 1946, the AAFC (All American Football Conference) did post a
credible threat to the NFL.In 1945, Dan Topping, owner of the NFL Brooklyn Dodgers had just purchased the AL New York Yankees.
Topping wanted to move the Dodgers into Yankee Stadium, but would have infringed on rights of Giants. Mara turned Topping down. Topping talked to the Lindehimer Group and was offered $100,000 to move his team from NFL to AAFC.
This move started another major interleague war.Confrontation between the leagues happened in larger cities. AAFC used only minimal number of ex-NFL
players, preferred to stock up on new college grads. Only 21.1% of all players played for the NFL.AAFC developed their own superstars to compete with the NFL superstars.Attendance between the two leagues was comparable. In 1947 and 48, the AAFC actually outdrew the NFL
in total attendance.There were problems, however. The Chicago Hornets were on the verge of bankruptcy. In LA, Rams (NFL)
were beating the Dons (AAFC) by a lot. More importantly, both leagues were losing money – AAFC lost about $5 million between 1946 and 1949 while the NFL lost about $3 million.
Teams were unable to meet the rising costs of signing college players because of bidding wars.On December 8, 1949, the AAFC merged with the NFL.Once the merger and the shakedown aftermath were accomplished, the NFL experienced a rare period of
franchise stability between 1952 and 1960.The three AAFC teams taken into the NFL survived and eventually became profitable. If Lindehimer did
not have a heart attack, there would’ve been a more complete merger of the two leagues.
AFL IV, 1960 – 1966 In 1960, the fifth and most successful rival league came onto the scene.Profits and attendance have been rising between 1950 and 1960, while the number of NFL teams dropped
from 13 to 12. There have been some discussion in the NFL about possible expansion, but financial issues for certain franchises prevented this from happening.
Halas and Rooney were advocates of the expansion, while Marshall and Wolfners were in opposition; under NFL rules, expansion required unanimous consent.
In 1957, Hunt applied to the NFL for an expansion in Dallas but was turned down. Other individuals in Huston, Minneapolis, etc. were also turned down.
In 1959, Hunted tried one more time, but failed again. At that point, Hunt began organizing a rival league –
AFL IV. AFL IV started its season in 1960. AFL IV was unusual in that the league was originally organized to place
teams in a few medium size cities – Dallas, Huston, and Twin Cities – rather than being oriented toward entry in the NY, Chicago, LA markets.
However, once it decided to officially become a rival league, it placed Titans in NY and chargers in LA.AFL IV is the first rival league were TV income played a critical role in the survival of the league. AFL signed deal with ABC; NFL signed contracts with CBS and NBC.Generally, AFL was a well-financed league. The TV income provided a buffer against low attendance. Both the NFL and the AFL added additional cities; avoided each other for quite a while including when it
came to players. Of all the AFL players, only 16.5% had previous NFL experience.Agreement was reached in 1966 between the two leagues – creation of an interleague championship after
the 1966 season with full amalgamation in 1970, when TV contracts expired.All AFL teams would be moved into the NFL.All teams would be granted equal share of TV revenues.AFL agreed to pay NFL $18 over 20 years for territorial invasion in NY and SF.
AFL achieved a stunning success. NFL could have avoided the war if it was willing to expand into Dallas, Huston and the Twin Cities in late 1950s.
WFL, 1974 – 1975 World Football League was founded by Gary Davidson, the same guy who created the American Basketball
Association and the World Hockey Association.Played ambitious 20-game per team schedule stating in the 1974 season, but disbanded half way through
1975.WFL opted to go head to head with NFL in the five biggest markets, but half the franchises in WFL were in
smaller cities.The inability to develop popular teams in New York, Los Angeles, and Chicago effectively eliminated
national TV as a revenue source. The league was doomed from the beginning.
USFL, 1983 – 1985Last of rival leagues organized in 1982 by Donald Dixon. A major difference – played during the spring
instead of the fall.Franchises in the league moved and changed hands at a pace that even outdid the WFL.What turned out to be a disastrous mistake for the USFL was the decision to expand in the second year of
operation by added 5 new teams.Per team TV income about 1/15 of NFL’s TV per team income.Following a decline in attendance and franchise losses in 1985, Donald Trump (owner of the New Jersey
Generals) pushed for and made the league change schedules to the fall.This lead to the abandonment of several franchises and the collapse of the leage after the 1985 season.
SummaryObvious lesson: getting involved in a rival league is risky business.Only AFL IV was a financial success for its investors.
James Quirk and Rodney Fort, Pay Dirt, Ch. 9 (by Tommy Li)The NFL has dealt with several rival leagues, starting with the first AFL in 1926.
The NFL started as the American Professional Football Association in 1920, and was refashioned into the more strictly organized NFL in 1922.
The early NFL was not profitable. The first AFL was formed in 1926 because popular player Red Grange couldn't reach an agreement to resign with the Bears. Grange and his manager Pyle
couldn't get permission from the owner of the New York Giants to form an expansion NFL team in New York, so they formed a rival league, first AFL (AFL I).
AFL I went bankrupt after one season, but it resulted in the NFL choosing to turn itself into a big city league.
AFL II formed in 1936, lasted only through 1937. This resulted in the Cleveland Rams moving from the AFL to the NFL.
AFL III formed in 1940 and 1941, but it was never a credible threat to the NFL.
All American Football Conference was the first to present a credible threat to the NFL, forming in 1946 and lasting until 1949.
The NFL's Brooklyn Dodgers moved from the NFL to the AAFC for $100,000. This gave the AAFC credibility, and the AAFC was roughly comparable to the NFL in attendance. In 1949, the NFL and AAFC reached a merger agreement. Cleveland, San Francisco, and Baltimore moved to the NFL.
The most successful rival league was AFL IV, which came in 1960 because every single NFL owner had veto power over expansion teams and there were big markets remaining to tap that some NFL owners refused to allow.
The AFL originally intended to be in mid-sized markets, but ended up competing in New York and LA in order to get bigger television contracts. Attendance was high, but not as high as the AAFC; rather, it was the first football league to depend on TV money. It was financially successful.
An antitrust suit by the AFL against the NFL failed when the courts said that the NFL could not prevent the existence of the AFL by expanding into cities the AFL wanted teams in.
The AFL was a credible threat to the NFL, and they started competing for players and eventually even opened up the possibility of competing for cities, so the NFL and AFL reached a merger agreement in 1966.
The next rival league was the World Football League, formed in 1973.
The WFL was disbanded part way through its 1974 season because of lack of money.
The final rival football league was the USFL which played three seasons in 1983, 1984, and 1985 and then disbanded. The USFL was never a credible threat to the NFL and quickly disbanded. It sued the NFL for anticompetitive behavior and was awarded $1 in court.
Arthur A. Fleisher III, et al., “Crime or Punishment? Enforcement of the NCAA Football Cartel,” (Jeffrey Ye)Abstract
Paper presents theoretical and empirical evidence on the methods that the NCAA and its member schools use to detect violations of its cartel agreement. Uses volatility of a school’s winning percentage as a proxy for violations. Findings suggest the enforcement of the NCAA rules has a redistributive effect that benefits consistent winners at the expense of up-and-coming schools.
Introduction
Founded in 1906, the NCAA is a private organization that regulates college athletics in the US. NCAA currently watches over:
Recruitment and financial aid guidelinesLive television appearances by membersSeason schedules
It is in essence a monopsonist with respect to college athletes, designed to preserve amateurism and competitive balance.
What’s interesting here is how the cartel is enforced. The NCAA itself is a small organization with a small staff. Therefore, it does not have the resources to serve as the primary enforcer of the monopsony arrangement.
Paper modeled the process by which the NCAA enforces its monopsony. Develop and test a theory of NCAA enforcement activity. To tell whether a team is cheating, competitors will observe tis on-field performance rather than cancelled checks for illegal payments.
All other things equal, the variability of a school’s winning percentage will be a signal of the amount of cheating by the school.
NCAA as a Monopsony
The NCAA sets the monopsony wage; therefore it must enforce that wage among all member schools. NCAA takes steps to insure that the prescribed wage is the effective wage. Sanctions are placed on schools that depart from regulations.
Basic problem in any cartel is the incentive for individual firms to cheat on the agreement. In deciding whether or not to engage in such behavior, the agents involved in recruitment of athletes will balance the expected gains from violating the agreement against the sanctions imposed if caught times the probability of detection.
Thus, the NCAA must be able to detect violators. NCAA cartel members will use probabilistic or indirect evidence as a guide to the amount of cheating by their rivals. NCAA members will monitor outputs rather than inputs.
Similar model can be applied to the recruitment process. Greater success in recruiting can thus lead to increase security by the cartel.
Empirical Evidence
ENFORCEMENT = f(CV, CV2, DS, SCPOP, AGE, ST AD)
ENFORCEMENT = 1 if the school’s football team has been put on probation, 0 otherwiseCV = coefficient of variation of a school’s football winning percentage
CV2 = CV * CVDC = Interaction of DCONF and CCHAM;
DCONF equal 1 if team has switched conf, 0 otherwise.
CCHAM is equal to the number of conference championships won by the school.SCPOP = average number of secondary schools in the state of each institution;AGE = founding date of each schoolST AD = size of a school’s football stadium
Theory suggests that a higher variability of winning percentage will raise the probability of investigation and probation.
The square of the coefficient of the variation, CV2, controls for a diminishing effect of winning variability on enforcement actions.
DC controls for teams that have switched conferences and have also won conf championships.
SCPOP proxies the cost to cartel members of directly monitoring competition for inputs. An obvious way for schools to achieve a higher winning percentage is to recruit the best players from secondary schools.
ST AD proxies the demand for football under assumption that stadium sizes have adjusted to the demand for seats.
AGE is a proxy for the number of alumni of a school. Older schools have more alumni, more football tradition, higher demand for success, higher probability of shady deals.
Analysis
All of the explanatory variables are significant at the 0.05 level for a two-tailed test.
Coefficient of variation CV has a positive and significant sign. Higher variability in a team’s winning percentage leads to greater probability NCAA taking action against that school. Result supports the output monitoring hypothesis.
DC is positive and significant. Winning teams that switch conferences face a higher probability of sanction by
the NCAA. Suggests that rival teams use conference switching and quality performance as a signal of illegal activity.
SCPOP also has a positive and significant influence on NCAA sanctions. More high schools increase the cost of monitoring and lead to cheating and more sanctions.
ST AD and AGE are both positive and significant, Schools with a higher demand for successful football programs are penalized more than schools with a lower demand for football programs.
Mean Winning Percentage
Found that when mean winning percentage of a team is added to the equation, it does not add significantly to the explanation of NCAA enforcement activity.
Conclusion
Paper derives and tests a theory concerning the methods that the NCAA and its member schools use to detect violations of its monopsony agreement.
Arthur A. Fleisher III, et al., “Crime or Punishment? Enforcement of the NCAA Football Cartel,” (18 pgs) (by Tommy Li)
In this paper, Fleisher presents evidence of a method the NCAA and schools use to detect violations of its cartel agreement.
The NCAA originally began in 1906 to control violence in college football, but it evolved into a college sports cartel by 1950. The cartel extends to several aspects of the market: it enforces certain recruitment and financial aid guidelines for student-athletes using its monopsony (the so-called “Sanity Rule”).
The NCAA used to leverage its monopoly by controlling television appearances, but this was eventually ruled illegal by the courts.
The member schools delegate enforcement of the cartel to the NCAA through the Committee on Infractions, which investigates rules violations and assesses penalties. It suppresses player compensation well below the marginal revenue product through its monopsony.
In practice, because the NCAA office doesn't have many resources, enforcement works by other schools alerting the NCAA to a violating offer so that it can investigate and then enforce penalties.
Fleisher proposes a theory of NCAA enforcement. It is difficult and prohibitively costly for teams to constantly monitor actual violations, so instead they use probabilistic or indirect evidence. Teams monitor variability in output of other teams: sudden rises and drops in win-loss records suggest that cheating has occurred at some point.
As a result, the NCAA enforcement mechanism favors teams that are and remain historically good.
Fleisher finds that even when other factors are taken into account, variation in the school's winning
percentage is empirically a good predictor of whether or not a school's program has been put on probation.
Arthur A. Fleisher III, et al., The National Collegiate Athletic Association: A Study in Cartel Behavior, Ch. 1, 3 (By Katie Ericksen)ONE – The NCAA as a Cartel
College sports earn revenues of $1B per year and are prone to various scandals (player pay, racial issues, etc).
Schools can earn as much as $20M/year from athleticsCollege sports are definitely to be considered a businessThe interesting thing is that schools and coaches get the benefits, not the playersCollege sports are sometimes not recognized as a profit-maximizing business because they occur
in a non-profit, educational settingHowever, economists generally view the NCAA as a cartel
The NCAA has traditionally restricted the number of games played and televisedThe NCAA has traditionally created limits on student athletes or imposed restrictions that
have limited the entrance of college athletesNCAA rules about recruiting and financial scholarships transfer benefits from student-
athletes to schools and coaches
1 - Why study the NCAAAlthough the nCAA has no legal exemption from antitrust laws it has historically fared well because:
sports in the US in general tend to get a lot of leeway in antitrust mattersthe NCAA is viewed alongside higher education and traditions of amateurism
2- Key Issues in a cartel study of the NCAAIs the NCAA Really a Cartel?Things the NCAA does that make it seem like a cartel -
NCAA collaborates to establish rulessets one united TV contractonly pays athletes in scholarship for tuition and fees, room and board, and books“the exclusion of school brand-name and other capital assets from NCAA regulation also suggests
a cartel scheme” (8).Athletes are underpaidThe existence of under-the-table payments suggests that there are some inefficiencies
The Source of NCAA PowerUS antitrust policy helps the NCAA maintain power
National Collegiate Athletic Assocation v. Board of Regents of the university of Oklahoma et. Al (1984) – questioned the right of the NCAA to limit the number of games aired on TV
The NCAA lost the right to limit the amount of games broadcast, so there are now far more games broadcasted than before this decision.
In order to have a good competitive league you need several schools to join together – people will be hesitant to leave the NCAA unless they can get a big group to leave all at once
The NCAA has the “threat of sanctions against a school’s academic programs” (11).The link between academics and athletics may be the real source of the NCAA’s power
Interschool Struggles in College AthleticsSchools fight for the NCAA to have the eligibility requirements that will most favor their
competitive advantage(eg UMich has a big tutoring budget so it supports the institution of GPA eligibility requirements)
Stability of the NCAACollege sports have increased in populatrity, attendance and revenues.But the NCAA is fairly unstable
Eg - Notre Dame broke away from the College Football Association’s network TV packageUnique Characteristics of the NCAA
The NCAA combines athletics and academicsDemand for athletics is built in (students and alums demand games)NCAA contests have different rules which differentiate them from pro sports. This can increase the
appeal of NCAA sports among non-students/alumsNCAA and the Law
The antitrust laws aren’t applied uniformly to the NCAA
CHAPTER 3 – A SYNOPTIC HISTORY OF THE NCAAThe 1948 Sanity Code and the 1951 restriction on televising games = start of NCAA’s monopolistic/monopsonistic polices
1873 – representatives from various Ivy schools met to determine the rules for sports competitions1895 – big 10 formed; Football Rules Committee created1905 – deaths and injuries in College football attracted Teddy Roosevelt’s attention – people questioned whether college football should stop being played1906 – NCAA created to lessen the violence in football (standardized rules and outlawed violent play) – essentially the NCAA was formed to handle the externality issue of violence in football and the lack of clear consistent rules1905-45: schools attempted to collude1906-20: uneventful for NCAA
NCAA power went beyond football1920- college football was in its “golden age” – was very popular
Schools began to build huge stadiums to handle the growth in attendance1924 – NCAA had 135 members, many schools actively sought membership1945 – NCAA had 210 members1940s, 50s – football attendance soared – new stadiums built, old ones expanded1920-1950 growth of the NCAA popularity fueled interest in cartels1946-53 NCAA became an effective cartel1948 – Sanity Code drafted at a convention. Was the “frist attempt by the NCAA to couple rules on amateurism, financial aid, and eligibility with an enforcement mechanism” (47).
Also created the enforcement mechanism3 member Complicance Committeefact-finding committee to investigate for the Compliance Committee
(the downfall of the code was ultimately that the only punishment the Compliance Committee could enforce was the removal of schools’ NCAA status, which is fairly harsh).
At a 1951 convention Section 4 was removed from the Sanity Code, which meant that the Compliance Committee had no enforcement mechanism- this made the Sanity Code an empty threat
1952 - NCAA officially disbanded the Compliance Committee and created the Membership Committee, which enforced all NCAA academic and amateur standards
1951 – NCAA began limiting TV broadcasts of gamesNCAA also restricted the number of bowl games
1950-80: demand for college basketball increased greatlywith this increase in demand came an increase in revenue. The increase in revenue heightened the NCAA’s interest in regulating the number of bball games
1950-70 – NCAA more closely regulated the recruiting process (instituted the National Letter of Intent, restrictions on phone calls and visits, capped the allowed number of scholarships, etc)1961 – 5 year rule (athletes get a max of 5 years eligibility)1965 – 1.6 GPA minimum average required
1970s – NCAA expanded its enforcement capabilities to go with these new restrictions
1984: National Collegiate Athletic Association vs. Board of Regents of the University of Oklahoma et al – the US Supreme Court “upheld lower-court decisions which stripped the NCAA of its monopoly power to negotiate the televetison contract for all universities” (59). U OK and UGA had argued that each NCAA member owned the rights to televise college football (not the NCAA as a whole).
Proposition 48 – “ties freshman eligibility to performance on the SAT/ACT college entrance exams and a minimum grade point average in a core curriculum in high school” (61).
Proposition 42 “revises and complements Proposition 48. It basically eliminates the category of the “partial qualifier”” (61). – You must be a “qualifier” to be eligible for financial aid
These propositions have been charged as being racially biased (blacks are generally affected by them more than whites).
1988 NCAA v. Tarkanian Tarkanian was the head basketball coach at the U of Nevada at Las Vegas. He had broken some NCAA rules and went on to question their ability to sanction him. He questioned several basic NCAA procedures. The Supreme Court ruled that because the NCAA is a voluntary association it was not in violation of the due process provision in the Constitution.
Randy R. Grant, et al., The Economics of Intercollegiate Sports, Ch. 1 (63 pgs) (by Sumorwuo Zaza) (NOT SURE IF THIS IS THE CORRECT OUTLINE FOR THIS BOOK)
Collective Bargaining
The owners feel as if they’ve been on the short end of the stick in terms of bargaining since 1977 (the advent of free agency)
Before 1977, the Major League Baseball Players Association generally tried to negotiate for moderate increases in salaries and benefits.
Don Drysdale and Sandy Koufax formed a two-person negotiating team and hired a lawyer to represent their salary interests. After the joint holdout, the players received substantial increases: Koufax’s salary doubled to $125,000 and Drysdale got $115,00.
The first comprehensive collective bargaining agreement between the MLBPA and the owners was signed in Feb 1968.
It established a formal grievance procedure with an owner appointed commissioner as the arbiter
It raised the minimum salary from 6000 to 10000 Set up a joint study group on the reserve clause
In 1972, the players got an impartial arbiter outsider the commissioner’s office In 1974, the A’s violate Catfish Hunter’s contract and Peter Seitz declares him a free agent. He
goes on to sign a lucrative deal with the Yankees. Seitz goes on to decide that players are free to bargain with other clubs once their contract has
expired. The owners get upset and lock the players out of spring training Negotiations continued until players won the right to free agency: For the 1977 season, 281
players sign multiyear contracts, and the average salary triples between 1976 and 1980.Every negotiation from then on until 2002 has been locked in stalemateTwo themes repeat themselves from these negotiations: owner discord and distrust between
players and ownersEver since the onset of free agency, the owners have demanded change, but differences in
opinion concerning how much change has divided them Runaway owner profits: when revenue growth is significantly above the underlying rate of
inflation and the salary share is fixed.The Stadium Issue
Between 1989 and 2001 sixteen baseball-only stadiums were built for major-league teams. During the previous thirteen years, none had been built. The average development cost was $306 million. The total cost was $4.9 billion
The public share of this total was 66.7 percent.While MLB has a monopoly on the sport, cities and towns compete to draw teams through tax
breaks and public financing. Ironically, stadiums have no predictable positive effect on output or employment. Why?
Baseball is a relatively small business. Teams typically employ 70- 130 people in the front office. They hire 1000 to 1500 day of game personnel.
Substitution effect: baseball games may cause citizens to use their income on tickets rather than town and city businesses.
Leakages: Players and owners can escape getting taxed by living elsewhere.Budget: Attracting a team through tax breaks and public financing can put a city in
debt. Other effects
Income redistribution: Baseball tickets transfer wealth from middle income people to the very wealthy.
Core redevelopment: Sports arenas can be a part of the strategy to revitalize a downtown.
Cultural enrichment: Stadiums can enrich the cultural lives of citizens.
What is to be doneThe MLB is a monopoly. There should be some sort of regulation of this monopoly.It is difficult for politicians to do this, as they get a lot of funding from the baseball lobby.
Additionally, many members of Congress have an emotional attachment to baseballIn general, baseball is too small of an issue to be a primary concern of the government.
Randy R. Grant, et al., The Economics of Intercollegiate Sports, Ch. 2-3 (by Eunji Chung)Chapter 2: Cartels in College Sports
Collusion occurs when firms in a market cooperate rather than compete with each other. A cartel is more structured type of collusion, with formal agreements on how much each firm will produce and sell, and limits on other forms of competition such as advertising.
For collusion to be successful, must address three challenges:o Reaching agreement on appropriate actions by all members of the group (in the case of a
difference in costs)o Preventing cheating by some members (think game theory/prisoners’ dilemma)o Dealing with entry into the market by producers attracted by the high profits (if new
firms enter, the existing firms must give up some of their market share to keep total output from rising and the price from falling. This will reduce profits per firm. If the entrants do not join the cartel, then the added output will depress the price, reducing total profits).
The key to success is: high rewards from cooperation and low costs. If collusion can increase profits substantially, the conspirators will find a way to solve any problems that arise. If the elasticity of demand by consumers is low, then a relatively small decrease in total output will result in a large increase in market price and profits. Similarly, a low elasticity of supply will result in a large decrease in the price paid for that input with a small reduction in the quantity used, and the reward to cooperate will be substantial. Also, small # of firms and similar products make cartels more likely to succeed.
Market for College Sports Substitutability of college sports?
o Colleges view professional teams as competitors for fan interest. To increase the separation btw college and professional football, an agreement was reached to have colleges playing on Saturday and the pros on Sunday.
o Various divisions are also imperfect substitutes. How do schools benefit from sports?
o Generate profits that can be used to fund other programs on campus. o Enhance loyalty on the part of alumni and other supporters of the institution
Evidence of Cartels?o Little consensus on profitability of Division I schools, in part because there is little
incentives for athletic departments to report profits accurately. Also, high salaries to coaches and other staff.
o NCAA restricts the amount that schools can pay their players, creates rules about recruiting, limit the number of student-athletes on the payroll, etc.
o Student “wage rates” less than their marginal revenue product (MRP)o Limit the length of scholarships or the # of scholarships (85 football in Division I)o Create an incentive to recruit the most talented players—to avoid excessive spending on
recruiting, limit the # and timing of visits by a coach
o Distribution of proceeds of the TV Contract: Conferences with the most popular teams will argue for a larger shared. Within
each conference, the teams that appear on TV most often will want more money. In 1976, the College Football Association was formed by major football conferences to negotiate own TV contract, separate from NCAA: led to the division of Division I into I-A and I-AA. Conference-wide negotiation of TV contracts.
o Championship games: BCS bowls. Current bowl system excludes the weaker teams. The six elite conferences earn the most. Creates an effective barrier for schools trying to move their way up to the elite ranks.
Alternative would be a national championship tournament, like the NFL’s playoffs. With revenue distributed to a large # of teams, could help equalize funding and opportunities.
Cheating in college sports?o NCAA divides violations of rules into major and secondary infractions. As the amount
of cheating increases, the likelihood of getting caught increases and the penalties increase in severity.
o Reluctant to punish: 1996-2000, the cost of probation is close to zero, while any financial impact of scholarship reductions/bans in football is shifted to other sports like women’s basketball
NCAA hasn’t been entirely successful. o Growing disparity btw elite programs and rest of the members o The major football bowls are controlled by the 6 BCS conferences, a cartel within the
cartel. o Cheating in the form of recruiting violations continues, due in part to the relatively small
amount of resources devoted to policing by the NCAA. The proliferation of self-reported secondary violation reports creates the illusion
that the NCAA is in control, but it has no authority over coaching salaries and spending for facilities.
o The existing structures provide an effective barrier to entry for schools.
Chapter 3: Labor Market for College AthletesNCAA is not really a competitive labor market that would require many buyers and sellers. XI. Overall limit to the amount a student can receive, a full grant-in-aid = price-fixing. XII. Economic contribution of a college athlete: comes from TV contracts, ticket sales, concessions,
advertising, alumni/booster contributions, and flutie effect (athletic success and admissions are positively correlated).
a) Brown/Jewell estimate a star female basketball generates $250K and the average revenue created by the Ohio State football team was 203K per player. Much higher than the scholarship. Wage < MRP.
XIII. Few intercollegiate sports make money (no women’s sport is even close to being profitable). So if payments to athletes were based on MRP, this results in inequality.
XIV. Early entry: when a player still has remaining years of eligibility but chooses to opt out of collegiate sports in the hopes of establishing a professional career. NCAA restricts players’ ability to leave early, claiming it “protects student-athletes from falling victim to unscrupulous agents, own unrealistic expectations, or the greed of friends and family.”
XV. Should student-athletes be paid?a) Pros: reduction of economic exploitation (wage approaching MRP); reduce incentive to cheat;
restructuring in college sports; discourage early entry b) Cons: decreased interest in college sports; declining enrollment; great inequities in
compensation (some receiving $0); less emphasis on academics
Andrew Zimbalist, Unpaid Professionals: Commercialism and Conflict in Big-Time College Sports, Ch. 2 (by Katherine Petti)
When offered scholarships to play sports, if injured, players can lose them. NCAA restrictions
o No pay for playo Athletes cannot hold a job during the school yearo Number of grants in aid per sport is restrictedo Size of max grant is limitedo Athletes cannot sign with an agent and maintain eligibilityo First year students must have attained a certain SAT and high school GPA in order to
competeo Athletes who sign a letter of intent to attend a college must go there or are forced to sit
out a year before competing for another school, even if they coach with which they signed leaves
o Athletes who transfer from another college must sit out a yearo And more
Economists say this is a cartel; NCAA says it is upholding ethical standards Coaches then allow for boosters to make payments on the side to athletes Star athletes can generate millions in revenue for a school but receive less than $40,000 (tuition
costs) Billion-dollar TV contract: Does it take advantage of “poor black kids” (20)? Since college athletic beginning back in the late 1800s at the Ivies, college presidents have
worried about academic standards among athletes. When formed in 1905, the NCAA was “to develop uniform rules for football that would make
the sport less violent and more palatable” (23) 1948: Sanity Code banned a full athletic scholarship can now only receive tuition and fees,
not room and board1956 allowed full grants in aid again, including room and board, books 1989 survey of pro football players: 31% said accepted illicit payments while playing in college
and 48% said knew of others who did so Number of basketball players who left college before NCAA eligibility was up went from 16 in
1995 to 35 in 1996o 1997+: allowed to have a term time job and can make up to $2,000 per year
Prop 48, 1987+, stipulated 2.0 GPA requirement needed in 11 core courses and needed combined 700 SAT score (answer ¼ questions correctly…nationwide, 85% of the men who took the SAT exceeded this standard)
o Black coaches and other educators said that the SAT hurt black students, so the “partial qualifier” category was added if met one of these 2 requirements-could get full grant in aid but couldn’t play for first year and most qualify to play after first year-1989 banned full ride scholarships for partial qualifiers from athletic dept but could come from others departments=more gimmicks
o Blacks were a disproportionate number of partial qualifiers College sports has worse record for hiring people of color than NBA, NFL, or MLB: although
61% of Division I basketball male players are black, only 17.3% of coaches are black
Clearinghouse was established in the mid 1990s in order to determine ether high school courses qualified as core, must be English, math, physical and social science and must be college prep
o Caused eligibility to plummet, especially for black and poor student athletes On the whole, in Division I schools, athletes graduate at rate of 57% versus 56% for the rest of
the student bodyo Nonathletes often drop out for financial reasonso But football and basketball graduation rates are lower than school wide averageo Also, athletes can take really easy courses, pay others to do work for them, special
tutoring, nicer dorms and training facilities Violent sports and treatment from coaches can raise violence from players.
o Players can also look to gambling: in 1996, 4% of players admitted to gambling on games in which they played.
Other students have to subsidize athletics via “student fees.” NCAA directors and administrators make a ton of money. Those who benefit from student athletics in the NCAA are well-qualified students who get a
good college degree. The others are those who weren’t well qualified to get in initially but do well in college and get a good degree.
o Athletes can also make more money after college due to new social connections.
Andrew Zimbalist, Unpaid Professionals: Commercialism and Conflict in Big-Time College Sports, Ch. 7, 8 (by Katherine Petti)XVI. Intercollegiate athletics drain or support university budgets depending on whom you talk to.XVII. No Division II or III athletic programs generate more revenue than expenses.XVIII. Of Division IAA and IAAA, probably none have surplus.XIX. Only 43% of the 110 colleges in Division IA run surpluses.XX. Some say accountants cleverly hide profits by shifting revenue to other departments.
a) Grants in aid can appear as expense to athletic dept or financial aid officeb) Salaries for coaches can go to athletics budget or faculty pay pool.c) Institutional support, subsidies from university and state budgets, are often left out of
accounting statements.XXI. Academic departments don’t ever run surpluses, so the lack of them isn’t necessary a huge
negative for a university.XXII. Sports might attract new applicants, encouraging donations to a general pool, generating
“legislative largesse” (152)XXIII. Equity in Athletics Disclosure Act (EADA) of 1996 requires each college to submit to the US
Dept. of Education an annual report that shows compliance with the gender equity provisions of title IX.
XXIV. Intercollegiate athletics have seen strong revenue growth since 1960. It slowed in the 1990s.a) Slower average growth, however, is followed by faster growth of the highest revenue.
XXV. Ivy League ended all sports scholarships in 1955.XXVI. To upgrade to Division IA, must sponsor at least 14 varsity sports, play 60%+ o games against
other IA, play in stadium with 30,000+ capacity, have average attendance of 17,000+a) Usually needs building a new stadium, increasing scholarships, upgrade training facilities, etc
XXVII. No positive impact of athletic success on giving to general endowmenta) They often give specifically to the athletics department
XXVIII. As TV costs more and collegiate licensing wanes, it seems that college sports finances will deteriorate in the future.
Andrew Zimbalist, Unpaid Professionals: Commercialism and Conflict in Big-Time College Sports, Ch. 8, “The NCAA: Managing the System”
NCAA has two categories of infractions: secondary and majoro Major: pattern of willful disregard of regulations or a school is given a distinct
competitive advantage, minimum penalty of 2 year probation, one year ban on TV, one year ban on recruiting, one year suspension without pay for involved coaches and staff
After 1985, slowly taken off the books and haven’t been applied 15 investigators look into infractions; as many as 1/3 of the investigators can turn over each
year.o Lack of manpower means that violations of the rules can go unseen.o It allows the schools to regulate and investigate themselves.
Often slaps on the wrist are given as compared to real penalties, and even then, they are often too small to be real deterrents.
Frequency of applying suspensions from postseason play or TV is dropping rapidly.o The lengths of suspensions are also falling.o Argument was that TV suspensions hurt the bad teams’ opponents.
But could have allowed teams to be on TV without getting revenue from it. Likelihood of being investigated is positively correlated with variability of a school’s
performance. No subpoena power means that it’s hard to get hard evidence. The top executives of the NCAA make a lot of money, more than most university presidents.
o Other perks include golf club memberships, use of cars, flying first class, etc. Law v. NCAA (1995) found that restrictive earnings legislation was a violation of antitrust laws,
could not limit assistant coach payo Class action suit of at least 1900 assistant coacheso Damages of $22.3 million were found and tripled to $67 million because it was an
antitrust case.o Supreme Court upheld this decision in 1998 and called into question many NCAA rules,
including limits of scholarships per sport, the no-job rule, etc
James Heilburn and Charles M. Gray, The Economics of Art and Culture (2nd Edition), Ch. 1, 10, 11, 12 (by Frances Yun)Chapter 1
The “art and culture” which this book covers comprises of: live performing arts of theater, opera, symphony concerts, and dance, plus the fine arts of painting and sculpture and the associated institutions of art museums, galleries, and dealers.
This is because all these performing arts categories are live and share a common production technique of striving to be repeated in exactly the same way as often as might be desirable to satisfy a large audience.
In 1997, consumers spent almost $10 billion on admissions to the live performing arts
Typically, earned income from admissions and performance fees account for only half to two thirds of the total income; the rest comes from governmental assistance/subsidies and charitable contributions.
In 1997, direct governmental assistance estimated ~$2 billion
Arts sector as measured against the US GDP amounts to only 0.218 percent
We study the arts not because it is important to the economy, but because it is vital to our culture and self-image
Chapter 10: Economics of art museums
All museums face persistent questions of how to allocate resources among their multiple functions, how to manage their investment portfolios, and how to pay for it all.
Museum managers wrestle constantly with what prices to charge for gallery admission, given that their missions may be incompatible with excluding anyone by imposing an admission fee.
Principal business are collecting and displaying art; other functions include conservation, research, and education
Conservation accounts for ~3% of operating budget; due to considerable cost for the trained conservator, only the largest art museums do it themselves
Educational programs account for ~6% of operating budget; are composed of public lectures, art appreciation courses, programs in cooperation with local schools, teacher training programs, and courses for academic credit
Education is one of museum’s civic responsibilities. Also, helps to retain or expand subsidy support from local government
Research consists of trying to determine the origin, authorship, and character of each object in the collection
Development, including membership, accounts for ~8% of operating outlays. These are the costs of obtaining financial support for a not-for-profit organization.
In 1997, ~35% of adults visit an art museum at least annually
Participation rates in arts rise dramatically with increases in individual income, occupational status, and educational attainment. Education is a particularly strong explanatory variable
Profile of Museum visitors:
Rank higher than average on socioeconomic measures, especially performing arts attenders; museum-goers are somewhat closer to average
Museums as a decreasing cost industry:
Basic operating costs: heating, lighting, maintenance, insurance, office staff, security, fixed sum that do not vary with the number of visitors per day. In this case, cost per visitor falls as the number of visitor increases.
Marginal costs: additional cost per person for additional security, information, and cleaning.
If museum charges at marginal cost, as the welfare rule states, it would set a price below cost and incur an operating deficit argument for why museums should be provided government subsidies
In actuality, museum sets a price greater than marginal cost.
There is an additional cost to museum visitors in case of congestion/crowding: reduction in pleasure can be treated as an increase in marginal and average cost; this would justify higher charges for blockbuster exhibits, with the higher fees reducing congestion to an optimal level.
Entrance fees and equity considerations:
Historically, most art museums have charged visitors little or nothing not because they understood the welfare rule, but because they believed it was their mission to make great art available to the masses, and they feared that substantial entrance fees would prevent the poor from partaking
Imposing charges does not greatly reduce attendance, but holding the price down does not greatly increase it either
Managing a museum’s collection:
Many museums have a large stock of capital stored in basement. Should they purchase more high quality works or build new gallery space for their other works?
In economic terms, deciding whether to purchase additional works is a matter of comparing at the margin the benefits to be obtained by investing an additional dollar in building gallery space as compared with the benefit of investing that dollar in additional works of art and then spending the money where the benefit per dollar is greatest.
Deaccessioning: selling an object out the museum’s permanent collection; almost always leads to controversy
Misallocation of resources: some of the rejects in larger museums are superior in quality to ones displayed in smaller museums
Long-term renting is an option
To overcome prohibitive cost of adding to museum’s collection, can also have joint purchases under an agreement that provides for the regular circulation of objects
About 1,200 special exhibitions/tours per year
Investment and endowment makes up ~20% of total income due to support from wealthy donors; museums are heavily dependent on these contributed funds.
Government grants and donations by individuals, corporations, and foundations have fell over the years.
Chapter 11: Should the government subsidize the arts?
Two principal grounds for justifying government subsidies or other forms of intervention:
One, markets are not competitive or display other imperfections. Efficiency arguments that lead to an inefficient allocation of resources, which it is the task of the intervention to correct.
Second, belief that the existing distribution of income is unsatisfactory. Judgments necessarily based on ethical conviction. Equity argument: Subsidies are called for not because markets are working inefficiently, but because it is alleged that some participants lack the income to buy a minimum fair share.
Why should arts not be treated as a regular perfectly competitive market?
Possible answer is that market failure exists due to monopoly, externalities, public goods, declining cost industries, or lack of information.
Monopoly
Monopolist restricts output and earns extra profits by raising prices above marginal cost level that would prevail under competition. Because output prematurely, some consumers are denied goods for which they would pay more than the marginal cost.
Art institutions frequently operate as monopolists within their local market: rarely is there more than one art museum, etc. within a US city
This is not usually treated as a source of market failure, however, because art institutions are not-for-profit and they charge higher prices not because they are trying to maximize profits, but because they operate under conditions of decreasing cost
Externalities
Externalities exist when activities of an individual affect other individuals in ways for which no compensation is paid
Because market ignores positive externalities, it may produce suboptimal levels of output
Subsidies can solve this
Possible collective/external benefits of the arts:
Legacy to future generations: preserving art and culture is a legacy to future generations
National identity and prestige: international recognition received by artists and performers of their own countries
Benefits to local economy: spillover benefits to other producers in the local economy by attracting out-of-town consumers who spend in other shops, and induce new firms to locate there instead of somewhere else
However, no reason why a national government should wish to subsidize arts activity in order to attract tourists to one city rather than another
Contribution to a liberal education: importance of collective benefits from education
Social improvement of arts participants: participation in the arts may make us better human beings by exercising our sensibilities or by exposing us to the highest and best achievements of our fellows
Encouraging artistic innovation: innovation is a major source of economic progress
However, artistic experimentation is costly and subject to failure
External benefits as public goods: arts are subject to joint consumption, but not to exclusion (once the good exists, there is no way of preventing someone else from benefiting from it)
Overall acceptance of public benefits accruing from the arts
Lack of information about products and services: because art is an acquired taste, a number of consumers will be deprived of potential utility because of their ignorance; also, because demand is held back, art enterprises will be prevented from growing, as well as achieving the economies of scale they are capable of
Politicians are willing to support the arts even though they acknowledge that the resulting activity exceeds what consumers would demand if left to their own devices. Because arts are viewed as merit goods, the government is more involved.
Merit goods: goods in which a majority have agreed to be so worthy of consumption that they deserve to be subsidized. Also, goods that have the unique quality of being better for people than they realize. Arts are “better” for people because the ignorance of arts is keeping many people from experiences that they would greatly enjoy if they only knew about them.
Case against public subsidizes: van de Haag states that there is: no good sociopolitical reason for government to compel taxpayers to subsidize government selected arts, to do so compels all classes to subsidize the middle class, to do so is more apt to harm than to help in the creation of actual, valuable art
Stating that there is no relevant external benefits to national cohesion, history, culture, or consciousness ignores strong national traditions in the arts
Fanciful suggestion that government funding has actually done more harm than good, since Congress does not decide individual artists, this responsibility is left to professionals of public agencies to review
In actuality, net redistributional effect of art subsidies is to take from the well-to-do and give to the relatively poor; middle class breaks even
Chapter 12: Public and/or private support for the arts in the United States, Australia, Canada, and Western Europe
In Western Europe, Canada, and Australia, additional funding comes largely from the government, whereas the private sector contributes very little
In United States, just the opposite: additional support comes mainly from the private sector
Until early 1960’s, US governments offered virtually no continuous, direct financial support either to artists or to arts institutions
Before WWII, high art and culture in the US were dominated by European practitioners and traditions
After WWII, Americans became increasingly self-conscious about their country’s cultural standing. Ford Foundation thus took up the banner of culture when it began a massive program of grants to support US orchestras.
Incentive to donate works of art that had appreciated in value became even stronger than the incentive to make gifts of cash: by claiming a deduction at market value, donor could often save in taxes far more than the work of art had actually cost.
This provision that allowed gains on appreciated works of art to escape taxation was widely regarded as inequitable and effectively removed in 1986, but was restored by President Clinton.
Corporate and individual contributions are encouraged by gaining ability to deduct charitable contributions as an expense up to an amount equal to 10% of taxable income.
James Heilburn and Charles M. Gray, The Economics of Art and Culture (2nd Edition), Ch. 13, 14 (by Ryan Schell)Chapter 13: Direct Public Support for the ArtsNational Endowment of the Arts (NEA): Largest source of contributed support to arts programs. Between 1970 and 1980, NEA funding increased eightfold. Between 1970 and 1990, state funding surpassed the NEAs. The Reagan administration stalled the growth of NEA funds during the 80s.
State Government Support: State spending on the arts increased rapidly in the 70s and 80s because the states figured out that art is a ‘good thin’. State funding fell after the 80s due to increased demand for other, more necessary, services and no increases in federal assistance funding.
Interstate Variation in Appropriations for the Arts: The most supportive state, Hawaii [$7.84/capita] spends 42 times as much per capita as the least supportive state, Louisiana [$0.20/capita]. This interstate variation remains largely unexplained. “Interstate variation is highly idiosyncratic”.
The Division of Functions Between Levels of Government: Principle of Fiscal Equivalence: the level of government whose geographic area most nearly coincides with the area over which the benefits of service extend should carry out each function. Arts provide some benefit to citizens of the entire country, which justifies federal subsidies. However, arts attractions also stimulate local economies, which justifies local spending as well.
Structure of the NEA: 26 Council Members (6 year terms). Full time staff brings in outside panelists to protect against creating a “national culture.” Grants are made at the approval of the Council to non-profit arts organizations, public agencies, and individual artists. Largest single program is Music, followed closely by media arts (television and film), museums, and theater. State programs account for $26 million of the total $138 million allocated every year.
NEA Program in Detail: Support of Theater: In 1990, 306 grants issued for a total of $10.6 million. $7.8 million went to professional theater companies. Fellowships to individual artists were $804,000. Matching Grants: Recipient programs must put up at least $1 for every $1 it receives from the NEA. Came out of fear that excessive funding would lead to government control of arts, and that government aide would supplant private funding. Matching grants stimulate support from non-government sources.
Should Subsidies Go to the Buyer, or the Seller? An alternative to supplier funding could be consumer funding (demand-side subsidies). States could offer free show vouchers to people, and reimburse the performance companies for the price. Vouchers produce more consumer utility than subsidies designed to lower the price of tickets (in theory) because the vouchers are acceptable at more venues, and could be distributed exclusively to people with low income instead of benefiting richer people who would go to the show regardless of price. Vouchers aren’t used very often because they require a means test to see if the recipient has low income, and companies would rather know that funding is earmarked just for them instead of being available to anyone.
Patterns of State Aid / Local Art Agencies: State art agencies operate similarly to the NEA. They rarely (1%) give money directly to artists. Unlike the NEA, states do offer general operating support grants (39% of all grants awarded). There are ~ 2,500 local art agencies (LAAs). Many of them are independent, private, not-for-profit organizations. Their function is not always the same as the NEA and state gov’ts: they organize festivals, provide exhibition space, provide housing for creative events, ensure that the full spectrum of the community’s cultural diversity is reflected in its artistic opportunities.
Supporting Major Cultural Institutions: In larger cities, the city often owns the major performing arts facilities. Los Angeles, Chicago, Dallas all own portions of all of their major artistic facilities.
Issues in Public Policy: Aide to established organization versus geographic distribution: Very difficult to focus subsidies narrowly on the most deserving. Large, ‘primary’, institutions always lobby for more support because they offer the best products, but states normally have to distribute money geographically in order to get legislation granted for support in the first place. Elitism vs. Populism: accused movement towards populism in the 70s that threatened the ‘elite’ theaters, opera, and dance facilities in urban centers. The free market makes it clear that the vast majority of people like popular art, not high art, so why does the state still allocate most money to high art. Unanswered.Grants to Institutions versus grants to individual artists: Donors have more confidence giving to established organizations rather than individual artists. Grants to individuals are also politically risky.
Chapter 14: The Arts as a Profession: Education, Training, and EmploymentA Statistical Description of Artists: 1.6 Million artists in 1989. Highest rates of unemployment (~7%) are found among actors and directors. Median earnings of all artists were only about 64 percent of the earnings of all professional workers. Dancers and musicians earn about a third of what professional workers make. In general, as education increases, wage increases. The median earnings of artists with a college degree are no higher than the earnings of all professional workers who have only a high school diploma.
International Comparisons: Actors and directors represent the highest group of artists in Canada, U.S, and Norway. Reflects popularity of movies, television, and theater, and high income of superstars. Salary spread among artists is much greater in the U.S. than other two nations. Higher US variation could be caused by greater reliance on market mechanisms to finance the arts.
Labor Markets in the ArtsIn the labor market, price = wage paid to artist, quantity = number of artists employed. Standard supply and demand relationships apply (high demand or low supply higher price, vice versa).
Assumptions of demand in a “perfect market”: 1. Employers have complete and accurate knowledge of labor availability, labor productivity, etc. 2. Employers are rational profit maximizers. 3. No single employer is sufficiently large to influence wages. 4. Employers do not collude to influence the market. 5. Artists in are perfect substitutes for each other. Assumptions of supply in a perfect market: 1. Artists have perfect knowledge of market conditions. 2. Artists respond rationally to differences in wages and other benefits. 3. Artists are perfectly mobile between jobs and among geographic regions. 4. There are no unions to restrict job supply.
The above diagram represents the supply curve for the market, and how it sets quantity and wages for the demand for a single organization. The market sets wages for individual organizations.
Demand for Artists: Artists can command salary to the extent that some audience or clientele exists for their work. The demand for artists is derived from the demand for performances / artworks. Supply of Artists: Higher expected earnings entice additional art labor into the market.
Some Realities of the Market for Artists: Artists violate several assumptions about the labor market. First, they all vary in talent, style, and media. Second, the value of their products is difficult to agree upon, violating the perfect information assumption. Third, many actors and directors are members of unions that restrict the job supply. Marginal products are also difficult to determine (ex. how much value does an additional violin add to a symphony orchestra?)
Unions and the Performing Arts: Best known unions: Actors’ Equity and the American Federation of Musicians. Represented above is the supply of market for theaters where demand is perfectly inelastic (example: a theater sets the ticket price for an entire season). Contracts with most of America’s best symphony orchestra stipulate a maximum number of musicians that will be employed to maintain the group’s ‘sound’. These contracts also guarantee an annual wage. The union wages are very attractive, and the positions attract lots of candidates. The ‘superstars’ of the performing arts are not perfect
substitutes for each other, unlike most other members of orchestras. Instead of having one superstar per orchestra, the groups line up a number of prominent soloists for each season. The Visual Arts: most artists often create speculative works. They may not make money on them now, but they build up an “inventory investment” in hopes that their paintings will be sold after promotional and pricing techniques are exercised. Wage = selling price – cost of materials.
Becoming an Artist: Investment in Human CapitalMost people, given the choice between two jobs, pick the one with higher wage. An artist will incur the cost of training if he thinks his return will be sufficiently enhanced.
Ft = [∆Wt+1] / [1 + r]
Ft is the fee that the student would be willing to pay for the class if ∆Wt+1 is the increment in the wage that the artist will realize as a result of the class. ‘r’ is the market interest rate. The return must at least equal the cost of investment for the artist to enter into the training that is necessary to be a professional artist.
James Heilburn and Charles M. Gray, The Economics of Art and Culture (2nd Edition), Ch. 15, 16 (by Jade Clark)
Richard E. Caves, Creative Industries: Contacts between Arts and Commerce, Ch. 4, 14, 15 (by Sumorwuo Zaza)
The imperative art for art’s sake implies that artists will choosse low-paid creative work over better-paid humdrum labor.
Artists’ Success: SuperstardomAssume that artists differ in quality in the eyes of fans, and all who might attend rock concerts
agree on who is best, second best, et. (the A list/B list property). Assume that this is quantified.
To attend this concert fans pay a certain cost: the monetary ticket price and opportunity cost of other activities.
The higher the artist’s quality, the more utility fans get. Additionally, lower-quality performers are poor substitutes for stars.
The artist incurs a cost of performing. The superstar’s economic choice: price tickets the same as competing artists, or charge a much
higher price to attract an average sized audience. The superstar will pick a price that gets a higher ticket price and larger than average
attendance.Superstars are valued higher than emerging artistsThings that affect the scope of superstardom
The ease of bringing the superstar’s performance to ever larger audiencesThe superstar effect is limited if the star’s cost of performing increases with the
audience size or number of performancesTime dimension
Some superstars have skills that fade over timeSome superstars suffer from declining creativity over time
In history, the cost to a superstar to reach a large audience was higher than it is today. These costs have been ameliorated by innovations in communication and travel.
Measuring the effect of talent on stardom is difficult because fans may simply like an artist because other people like him/her
However, small differences in talent among superstars account for significant gains in revenue. Artists Incomes and Distribution
Artists who make art for arts sake need monetary help from family members to cover the gap between what their art pulls in and living expenses
CostMany of the costs incurred by creative enterprises are fixed and sunk.To help cover this costs, sellers of creative goods practice price discrimination. Club membership helps to eliminate the free rider problem; only those who pay can benefit
from the good or service. The Cost Disease:
In the long run, people’s real incomes rise because of innovations that raise the quality of goods and services, and productivity gains decrease the costs of producing them. However, wages also rise, which increases the cost of production, cutting against the cost savings that come from technical progress. The performing arts are the losers in this situation because the labor hours needed to make a creative piece are the same as they were 80 years ago. The amount of time needed to perform a Beethoven piece in the past is the same amount of time needed to perform it now.
Richard E. Caves, Creative Industries: Contacts between Arts and Commerce, Ch. 16 (by Katie Ericksen)Chapter 16 – Cost Disease and its Analgesics
The cost disease is a consequence of the performing arts’ lack of access to productivity gainsThe fixed cost problem – much of the typical performing arts project’s cost is fixed
The cost disease problem thereby makes it difficult to cover fixed costsEffects on Real Costs and Quantities of Creative Product
Will the cost disease shrink the creative sector?It can – “if the negative effect of rising relative costs and prices is not offset by the positive effects
of rising incomes and income-elastic preferences.”Broadway and Regional Theatre
The number of new productions per season has declined 1920s- 48; 1960s – 15; 1980s – 7.Stage plays cost a fixed amount to rehearse plus the variable cost of running each week.Because of the cost disease, both costs are increased while the public’s willingness to pay remains
constant, so fewer plays are produced. The run time of plays has increased over time – plays pre-Civil war only ran for a week or two,
now plays sometimes run a couple years.This is because it takes longer for plays to recoup their costs
Substitute Creative Products
With the rise of DVDS, reprints of Picassos, and CDs customers are offered “a lesser experience at a much lower price” (258).
People substitute towards these cheaper forms of creative consumption which have benefited from productivity gains
These substitutes were also problematic because they drew people away from theatre and into movies (because actors could make more money in movies).
Cost Squeeze on BroadwayNPOs have defied the cost squeeze and expanded.
Cost Squeeze and the Symphony OrchestraOrchestras make use of the NPO form – they have donors supporting them , or act as cooperatives
of amateur musicians.Musicians in symphony orchestras often take up arms and demand better pay by striking – this had
led to a higher base pay and the commitment to pay for the full year (not just the concert season)
US symphony orchestras sometimes have recording contracts as an important source of revenueThis has decreased as classical record demand falls and the existing stock of hiqh-quality classical
music recordings grows.
David Galenson, “The Impact of Economics and Technological Change on the Careers of American Men Tennis Players, 1960 -1991,” Journal of Sports History, 1993 (by Katie Ericksen)The 1st regime in tennis was amateur tennis
There were very few financial rewards in tennis, so the players were young (generally under 23)There were fewer full-time players because of the lack of financial rewards – people retired youngThis meant that players could rise to the national ranks at very young ages
The 2nd regime of tennis began with the arrival of Open tennis in 1968.Open tennis had prize money, which meant that players could play longer careersThis led to a rise in the age of nationally ranked playersThose at the top of the rankings reached them at older agesPlayers over age 40 grew obsolete in the national rankings
However, in the late 80s and early 90s, younger players again gained importance in competitive tennisIn the 1970s and 80s new composite rackets were developed which made it possible “to hit harder
with less effort, and therefore increased the rewards for offensive tennis” (139).These rackets led to the appearance of a new tennis style in the 1970sThe pace of the game picked up – players with fast reflexes and good speed fare wellThis increased pace of play may cause older players to become obsolete and retire younger
Richard E. Caves, Creative Industries: Contacts between Arts and Commerce, Ch. 3 (by Ryan Schell)Chapter 3: Artist and Gatekeeper: Trade Books, Popular Records, and Classical MusicAuthor, Agent, and Publisher – Trade book authors employ agents as intermediaries, to match author with publisher and bargain the best terms. The agent deals proximately with an editor.
Agent as Intermediary – The author simply prepares a manuscript and presses it into the hands of a gatekeeper, either a publishing house editor or an agent. The odds of the manuscript getting accepted are about one in 10,000. It is inefficient for publishers to go through every manuscript; this is where the agent comes in. Agents reduce the publishers recruitment costs because they only submit works that have higher chances of being worthwhile publications. As the author becomes popular with publishers, the agent’s talent becomes less valuable. Royalities to Authors – publishers may try to increase marginal profit by cutting the royalty they offer to authors. This could be detrimental to profits because a lower royalty (ex. cutting from to 5% from a previous 10%) would attract lower quality authors. Author Lock-Ins – Success of the author’s first book often creates higher demand for their second book, and success of the second book increases demand for their first. Publishers try to internalize these profits with contractual first refusal of the author’s next manuscript (i.e. they get first rights to publish his next piece). In return, the publisher normally publicizes the first book more heavily than normal. This could hurt the author because it reduces his bargaining power for the next book. Normally, authors would demand a compensation fund for being locked in. Victorian novelist, George Eliot was the first major writer to receive a royalty contract (in 1860 for The Mill on the Floss). This was a result of the growth of large publishing houses.
Editor and Publisher – Editor plays an entrepreneurial role inside the firm, starting with the decision to accept a manuscript. The editor assumes the role of advocate, supplying impetus and staking her own reputation on her conviction of a manuscript’s commercial worth. The mobility of editors among publishing houses is high and increased by the goodwill asset built up between editor and author, which allows a publisher to bid for an editor’s services with the hope that her authors will follow her to the publishing house. There is a great deal of reciprocity between firms and among editors (one third of editors reported having had projects referred to them by other publishers). Dealings Between Artist and Record Company - Young pop musicians start off performing at local clubs, schools, and the like. Some bands recruit personal managers to help with their creative development and business management. Managers often get 15-20% share of net earnings, and continuing shares of royalties from any records made under previous contracts. Labels may receive three to four hundred tapes a week, so only those backed by a competent certifier are likely to get attention. Terms of Recording Contracts – artist provides creative inputs, and labels produce and distribute the album and promote the album to broadcasters and record buyers. The musician and label seek to promote an extended career and gain a long-lived earnings stream. About 80% of albums fail to cover their costs.
Royalties – like visual artists and authors, royalty contracts based on sales revenue dominate.
The artist can commit to producing an album that the label might find acceptable to release, but of course cannot predict or guarantee the public’s response. Label’s Commitments – label holds an option to distribute records over a period of time, and commits to pay royalties based on future revenues. For each album, the label provides an advance to the artist that at least covers the cost of producing the album. Promotion – Artist may have little control over the promotion outlays chosen by the label. The higher the royalty rate, the less of a promotion-induced extra dollar revenue lands in the company’s pocket. Issues with Low Royalties – the royalty contract seemingly induces the artist to under invest in studio time and resources, because the company pockets a large share of the additional revenue once the advanced recording costs are earned back. Nonetheless, recording executives commonly complain of artists who take up far more studio time than necessary. This may make sense economically because the artist receives no royalties if the album fails, and the cost falls entirely on the label.
Governance of Contracts – common problem is that labels incentives to invest in their artist decreases as the contract’s expiration date approaches.
Music Videos - Not normally included in the contract initially, and involve renegotiation. The video generates a royalty stream for both artist and label. Concert Tours – Concerts on the road bring in substantial revenue streams. New and unknown groups can benefit greatly from opening for established groups at concerts; indeed they might willingly pay for the privilege and have been known to do so. To make money in the US in the 1960s, British artists had to invest in many money-losing tours of the US.
Local Promoters – profit-sharing contracts between performers and local venues often exist. Enforcement of contracts in the creative industries depends heavily on the power of repeated interactions among parties who value their reputations for cooperative behavior.
Agents and Job-Matching – Most creative activities have to solve some job-matching problem, which is normally performed by agents. Agents will also tend to represent the artists because they place higher value on such auxiliary services as making sure venues make their obligated payments.
Whose Side Are You On? – Agents normally represent sellers. In publishing, this happens because publishers cannot divide up the stream of manuscript submissions and share their assessments with each other, while an agent who finds a good manuscript knows which publisher will find it most attractive. Matching is a Two-Sided Process – publishers need to find out about writers, and writers about publishers. Author’s qualities are more costly to expose. A publisher loses heavily if a celebrity author’s book flops, but the celebrity might be nearly indifferent about which of several mainline trade publishers publishes the book. Authors are always more numerous than publishers. How Many Agents? – How many parties will each agent represent, and how many agents serve the market? Wherever the agent’s role centers on costly pooling of heterogeneous information, the agent’s capacity to absorb and exchange information is limited, and with it the number of clients each agent can represent. The organization of agency relationships is also driven by problems in governing the deal between the agent and the party represented.
Harold L. Vogel, Entertainment Industry Economics: A Guide for Financial Analysis (5th Edition), Ch. 1 (32 pgs) (by Ryan Schell)Chapter 1: Economic Perspective
1.1 Time ConceptsLeisure – time not spent at work.Entertainment – that which produces a pleasurable and satisfying experience. Subordinate to that of recreation. Specifically defined through its direct and primarily psychological and emotional effects. Time – Scarce resource. Scarcity of time manifests itself in the form of foregone earnings. Cost of time varies considerably among commodities and at different periods.
Leisure time has been trending steadily higher since the Industrial Revolution. Now, the average workweek has scarcely changed for the manufacturing sector and has stopped declining in the services sector.
Work Week: Instead of reducing the workweek in the U.S., like many other major countries, we’ve instead experienced a greater diversity in our work schedule. More people worked under 35 hours and over 49 hours in 1985 than in 1973.
“Even though the average work week has not changed dramatically in the U.S. over the last several decades, a growing group of Americans are clearly and strongly pressed for time.”There has been a trend to prepackage leisure time into more long holiday weekends and extra vacation days rather than reducing the minutes worked each and every week.
1.2 Supply and Demand FactorsProductivity - More leisure time availability is a function of the rising trend in output per person-hour. Thus, long-term growth in leisure-time-related industries depends on the rate of technological development throughout the economy. Overall productivity between ’73 and ’90 rose at an average annual rate of approximately 1.2% instead of the 2.8% between ’60 and ’73. However, after ’90, the growth rate bounced back to 2.0%. Demand for Leisure – demand for leisure time can be treated, economically, as a commodity similar to gold or wheat. Consumers typically tend to substitute less expensive goods and services for more expensive ones.
Behavior as Wages Increase - A high wage may induce a worker to increase his leisure. However, a higher wage rate makes leisure time more expensive in terms of forgone goods and services, so the individual may decide to purchase less leisure. The net effect depends on the income and substitution effects. Normally, the income effect is stronger than the substitution effect. S-shaped Labor Supply Curve - Eventually, as wages get much higher, the substitution effect outweighs the income effect, and people choose to work less (S-shaped). Not always true in real-life situations.
Expected Utility Comparisons – Hard to compare degrees of satisfaction derived from different goods, so economists use the concept of ‘utility’. Utility = measure of the desirability of a commodity from the psychological viewpoint of the consumer. Rational humans try to maximize utility, which ends up being a maximization of expected utility because they decide between future events. Demographics and Debts – demand for leisure goods and services can depend significantly on changes in relative growth of different age cohorts. Demographic shifts most important to entertainment industry prospects: 1. Projected increase of 18-34 year olds in early 2000s. 2. Projected rapid growth in large group of 35-64 year olds. Aggregate spending on entertainment is concentrated in the middle-age groups, which are when income usually peaks even though free time may be relatively scarce. Barriers to Entry – Supply of entertainment depends on how readily businesses can enter and contest the existing market. Barriers to Entry: [1. Capital 2. Know-how 3. Regulations 4. Price Competition]. Government regulations often present additional hurdles for new entrants to surmount. 1.3 Primary PrinciplesMarginal Matters – See figure below. Since most popular entertainment products feature one-of-a-king talent, they behave like monopolistic competitors. Therefore, they set quantity where marginal revenue = marginal cost, then go up to the demand curve to set price.
As price-elasticity of demand decreases (i.e. becomes inelastic), the firm has the potential to reap much larger profits through marginal increases in price. EXAMPLE – Movie Making – Regardless of the demand for the movie, most costs of making it are sunk (unrecoverable costs). The cost of producing another film reel is negligible compared to the initial investment. Thus, it might be sensible for a distributor to spend a little more money on marketing in an attempt to shift the demand schedule into a more price-inelastic position.
Price Elasticity = p = [% change in quantity demanded] / [% change in unit price]
Price Discrimination – maximizes consumer surplus by charging each customer his willingness to pay for the product. Conditions that enable discrimination include: 1. Existence of monopoly power to regulate prices 2. Ability to segregate consumers with different elasticities of demand 3. Inability of original buyers to resell the goods or services
Public Good Characteristics – Goods that can be enjoyed by more than one person without reducing the amount available to any other person. Non-payers are ‘free riders’ because it is impossible to exclude them from enjoying the benefits. Examples: national defense, programs that reduce air pollution, etc. The marginal cost of adding on extra consumer is not measureable.
1.4 Personal-Consumption Expenditure RelationshipsClose relationship between demand for leisure and demand for recreational products and services. Recreation expenditures as a percentage of total personal consumption expenditures (PCEs) increased from 7.6% in 1990 to 8.7% in 2005. The spending on entertainment services has trended gradually higher as a percentage of all PCEs, whereas the percentage spent on clothing and food has declined. This increase in recreation expenditures is a result of a new, relatively lengthy business cycle, increased consumer borrowing ratios, demographic and household formation influences, and the proliferation of leisure-related goods and services utilizing new technologies. Since the ‘80s, there has been a shift towards spending on service goods like movies, live entertainment, lotteries, and amusement parks.
1.5 Industry Structures and SegmentsStructures – In the real world, the structure of most industries cannot be characterized as being perfectly competitive or monopolistic, but somewhere in between. One in-between structure is monopolistic competition (many sellers of somewhat differentiated products). Another is oligopoly (few sellers of products that are close substitutes).
Segments – Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is the best indicator of cash flow for a company. The entertainment industry generated about $290 billion in 2005. Annual growth was 7.2%. Cable television services prices have been rising well above average rates, while toys have been below average. Since around 1980, live entertainment had gained in comparison to spectator sports. Meanwhile, spending on movie tickets has fallen sharply as they are replaced with DVDs and movie channels on television.
1.6 Valuation VariablesThree main categories of valuation methods: Discounted cash flows, comparison methods, and option pricing models. Discounted Cash Flows – making valuation based on expected future profits. Net Present Value is the NPV.
Where r is the risk-adjusted required rate of return, CFt is the projected cash flow in period t, and n is the number of future periods over which the cash stream is received. Comparison Methods – Making valuations by comparing various financial ratios and characteristics of one company or industry to another. One popular ratio is Enterprise value (EV) to EBITDA. EV is
[total common shares outstanding * share price + debt – cash]. Options – Used for assets that are not traded frequently or have option-like characteristics. These products are valued using contingent claim valuation estimates (payoff matrices where goods only pay off under certain contingencies and assumed probability distributions).
Harold L. Vogel, Entertainment Industry Economics: A Guide for Financial Analysis (5th Edition), Ch. 12 AND 13 (by Jeffrey Ye)
Chapter 12 – SportsSports is entertainment, and tax-law considerations make up the core of many sports business decisions. Also only business where owners want control and labor wants the free market.
12.1 – Spice is nice
Modern sports organization first evolved in the middle of the nineteenth century. Leisure time grew with the middle class. Sports-spending has fluctuated but does not seem to have any correlation with regular business cycles. Growth in spending has also had little correlation with the rest of the economy, with Basket growing the fastest from 1980 and football the slowest.
Teams can report losses year after year because of amortized tax deductions but still maintain a high value.
Media rights have helped sports grow, especially the right to bargain as a cartel. Sports offer an attractive topic that attract valuable readers.
Betting on sports has also increased demand for information and media that may otherwise have limited interest.
12.2 Operating characteristics
Football – Most dependent on network-television money, revenue-sharing means that even bad teams make money.
Baseball and Basketball – Many more games played so local market size and admission sales have been much more important in determining revenue.
Labor issues – Player salary costs account for 60% of teams expenses.
Reserve clause upheld in case of Curt Flood in MLB but free agency approved in late 1975, as Messersmith Decision. Free agency in all sports has increased player salaries.
12.3 Tax accounting and valuation
Tax incentives are the major reason by people buy sports teams.
Properly valuing a team requires knowing:Demographic composition and potential size of the local marketDegree of competing professional sports activity as a determinant of ticketpricing and local-broadcast/cable-revenue potentialStadium ownership arrangements and real estate development potential, if anyPlayer-contract status and union-contract stipulationsPotential for network broadcast, regional cable, and international revenues
IRS treatments of deductions for player contracts and broadcast/cable rightsCurrent and forecasted interest ratesCash flow volatility (the lower the volatility, the higher the value)
12.4 Sports economics
Two economic features are central to the business of professional sports:the cartel structure of the leagues and the monopsonistic (single-buyer or employer) position of the teams vis-`a-vis their players.
Franchise owners have argued that their cartel agreements to block competition are needed to uphold franchise values.
A reserve clause is not necessary to ensure competitive balance and that the main effect of the reserve clause is that players receive salaries that are below their value to the team that employs them.
The Coase Theorem states that it does not make a difference if a player is a free agent owning therights to his or her services, or if a team owner has the right to hold the player’scontract (i.e., as in reserve clauses). In either case, the player should, in theory, end up playing for the team that places the highest value on the services.
A strong positive correlation between economic and athletic performance exists.
Restrictive labor market practices such as reserve clauses have been used by clubs to extract monopsony rents from player services.
Under free-agency, player compensation rates generally reflect marginal revenue production expectations.
The earnings distribution in individual sports is more skewed than in team sports.
Athletes and teams respond to incentives as predicted by general economic theory
Current major trends in sports economics:
More sharing of network-broadcast and cable revenues by professional baseball, basketball, and hockey teams
Emergence of large local and regional cable networks that support collegiate and individual athletic events
Greater emphasis on player mobility and player rights as reserve-clause control by owners is weakened
Significantly increased bargaining power of pay cable networks and pay-perview promoters relative to broadcast networks in obtaining distribution rights to major sporting events
Chapter 13 – Performing arts and culture
Many performing arts are non-profit and require heavy subsidization
Technology has helped mitigate rising costs.
13.1 Audiences and offerings
Tickets for live performances have become ever more expensive, limited number of spots have been determined by increasingly high income brackets.
Commercial Theatre
Popular since colonial times, current system is one where producers select a play, raise funds, and hire a director and cast, while theater owners generally handle box-office personnel and stagehands, advertising and sales functions, and sometimes musicians.
Broadway, the theater district in New York City, defines the industry. Peak ticket sales were in 1970’s. Returns in investing in popular, long-running shows can be very high.
Non-profit theaters around the country have helped to present a variety of plays have been the source of new productions.
Circus:
Generally considered one of the major arts in Europe, not US.
Circus companies seem to be best categorized as a permanent traveling form of commercial theater operating with a blend of the economic features seen in both theater and theme-park operations.
Not usually profitable
Orchestras:
Founding of New York Philharmonic started formal organizations, and in early years relied on donors by wealthy patrons.
Approx. 1,600 orchestras currently in US.
Opera:
Started with Metropolitan Opera Company, only 4 major opera companies in the country. Dance:
Only a few ballet companies, starting from 1960’s but more modern dance groups, financed by small groups of financial benefactors.
13.2 Funding sources and the economics dilemma
Problem is that it is impossible to raise productivity of live performances (take as long as they always have), while the value of time has gone up.
This productivity lag explains the rising costs of ticket prices to cover the “income gaps” but also limits the financial feasibility of artistic presentations to those that require less time and fewer performers.
Empirical studies indeed suggest that ticket prices for live performances have risen at rates consistently higher than the consumer price index.
Despite this, performing arts is part of society and part of what makes us human. Hence, the arts are funded through philanthropy and subsidy.
Funding for the National Endowment for the Arts and tax-exempt status with the IRS helps, but subsidies have a much longer tradition in Europe.
Although it can be argued that, on purely economic grounds, taxpayers’ financial support for money-losing arts programs enjoyed by an elite few is a waste of resources better spent elsewhere, justification of some government subsidy is usually made under the following assumptions:
Support for the arts opens opportunities for development of talented individuals from nonaffluent backgrounds.
Such support has educational benefit, exposing young people to cultural activities that they might not otherwise encounter.
Support encourages artistic innovation, which is a source of economic growth.Arts are public goods that, when provided to individuals, automatically become available to, and are of
collective benefit to, other members of the community.
13.3 The play’s the thing
Financial support for the arts is normally dedicated to the development of specific facilities or to the patronage of fixed dance, orchestral, and opera groups and usually, no direct financial return on investment is expected.
However, the funding of theater is more speculative and entrepreneurial and similar to the film industry. However, the opportunities are less lucrative for wealthy individuals than in other areas such as sports or oil, and so it is usually media conglomerates that invest now.
As in movie deals, variations from fairly standardized percentages are based on the relative bargaining power of the participants.
13.4 Economist Echoes
Demand is highly uncertain in the sense that no one knows in advance how consumers will value new products and services (nobody knows).
Creative workers, unlike those in jobs that are primarily functional and standardized, care greatly about what they produce (art for art’s sake).
Many creative ventures (e.g., Broadway musicals or films) require diverse skills and specialized workers with unpredictable vertically differentiated skills (motley crew).
