The Economics of Sport

Why study the economics of professional sports? Why study the economics of the revenue-generating amateur sports such as the Olympics and intercollegiate sports in the USA? The answer ‘Because these sports represent a substantial share of the gross national product’ is simply wrong. The spectator sports industry for both professional and amateur sports is a trivial component of all national economies. In the USA its revenues are dwarfed by mundane industries such as meatpacking. The total revenue in professional sports is about 12 per cent of the total revenue in meatpacking. Two correct answers to the question are that the sports industry raises fascinating economic questions and that sports have been a high-profile component of all societies for more than 4,000 years. The Greeks and the Romans made sport a central part of their society. They built their cities with sports facilities as the centerpieces. Mayan civilization in Central America also emphasized sport. The public enthusiasm for spectator sports continues unabated in modern times. There are courses in the economics of sports rather than the economics of meatpacking because sport is a rich area for economic analysis and because societies care a great deal about sports. Beginning in the 1950s, economists have published hundreds of papers on the sports industry. The economics of sport is now a significant branch of economics.

This chapter attempts to explain the importance of the objectives of club owners and league organizations. In North America economists generally assumed that both bodies attempt to maximize profit (see profit maximization), the normal assumption for other industries. In Europe more stress has been placed on utility maximization in which winning games is given pre-eminence. To some extent owners may choose between these objectives because they have a degree of monopoly power.

What determines the demand for tickets to a single sporting event? Given that demand, how are ticket prices determined? What determines the gradient in prices as the quality of the seats rises? How does the opportunity to sell ancillary goods at a sporting event — such as food, drinks, parking and souvenirs — affect the prices of tickets? Is an unrestricted market for resale tickets (called scalping in the USA and ticket touting in the UK) beneficial or harmful? How is a season ticket similar to a call option on the stock market? Why would a fan prefer a season ticket to buying tickets to individual games? Why would a team owner prefer selling season tickets to selling individual game tickets? What determines the demand for and pricing of season tickets? Starting with the assumption that the owner’s objective is to maximize profits, the main goal of this chapter is to answer these questions with simple microeconomics tools. Whether owners indeed try to maximize profits was discussed in Chapter 2.

Labor markets are central to the understanding of sporting activity. It is product demand that determines the demand for labor. The chapter begins by outlining the perfectly competitive model of the demand for labor, but emphasizes the fact that the market for athletes is more complex than this model implies. Contracts need to be specified in such a way that they induce maximum effort from the players with elements of both bonuses and long-term contracts. The market for sports stars is then monopsonistic, given a shortage of players with star quality and restrictions on mobility of players. Conditions of bilateral monopoly may apply with the probability of the wage diverging from the marginal revenue product. The reader should by the end of the chapter have some understanding of the nature of the player contract and how to ascertain the economic value of individual performance, which may be influenced in team sports by the dispersion of pay within a team. Historically, the reserve clause in North America and the retain and transfer system in Europe were the main mechanisms for achieving an acceptable degree of competitive balance, but have been weakened through key legal judgments such as in the Bosman case. Some economists have argued that they were in fact bound to fail, through the implications of the invariance thesis of the Coase theorem, and the actual impact of such restrictions is a matter of some debate. Other controversial issues are whether more equal gate-sharing will increase competitive balance and what are the likely results of the implementation of salary caps. Reference back to Chapter 2 suggests that these policies will be influenced by the goals of the club owners.

This chapter examines the possibility that in sports, despite being over-represented relative to their population share, members of minority groups may still be discriminated against. The chapter defines what is meant by discrimination and considers how it may be measured, noting that it is easier to measure player productivity in sport than is generally the case for workers in other industries. Further, it is necessary to consider which sources of discrimination are likely to be of significance in sports — employer, co-worker or customer — and what forms it may take (hiring, salaries, or position in the team). The role of antidiscrimination legislation is considered in relation to college sports where gender participation rates have been a matter of particular concern in the USA.

The issue of access to broadcasts of major sporting events is a major policy concern. In Europe concern over access has led to a prohibition on any single broadcaster having a monopolyon the broadcasting of key sporting events. Both in North America and Europe the income from broadcasting has grown dramatically and is now as significant as gate revenue in the total income of major clubs. However, over-exposure of games on television may reduce paid attendance. There is considerable controversy over whether television has overall positive or negative effects on revenue across all clubs as opposed to the leading clubs in a sport. A related concern is broadcasters changing the nature of the game to make it more attractive to their viewers to the detriment of the live spectators. In addition there is a danger of competitive imbalance if individual clubs are allowed to negotiate their own television deals rather than have the league negotiate on behalf of all the members’ clubs. This has led to clashes with the competition authorities, particularly in Europe where there is no protection offered by an equivalent of the 1961 US Sports Broadcasting Act. There have been a number of high profile cases such as the Monopolies and Mergers Commission’s blocking of BSkyB’s attempt to take over Manchester United and the Restrictive Practices Court’s decision to allow the collective selling of television rights by the English Premier League.

Sporting events are profitable if total revenue exceeds total cost. Total revenue includes income from advertising, parking, concessions, the sale of luxury seating, the sale of tickets, broadcasting revenue, and public subsidies. As discussed in Chapter 3, competitive or exciting events attract more fans. The pay off from having competitors of similar strength differentiates sports from all other businesses.

Many community leaders believe that sports events such as the Olympics, the World Cup tournament, or a season of games played by a home team generate substantial economic development. Sometimes the benefits are thought to extend to a region and sometimes to a smaller area such as a downtown (town centre). Community leaders often claim that sports activities can turn around run-down areas as well as transform a city’s image. These claims have a common sense appeal given the spending that takes place when millions of fans attend matches. As a result, numerous cities and countries have used taxes to build facilities for teams or to attract events such as the Olympics and the World Cup.

Each team’s facility is a ‘stage’ on which its home matches are presented. If owned by the team, the stadium or arena is its largest physical capital asset. That ownership, or else a contract for the use of a publicly-owned stadium, allows the team to sell tickets, broadcast rights and Internet rights. Teams have an obvious economic interest in convincing the public authorities to pay for the stadium. To justify the public subsidy teams claim that the benefits generated by their presence extend beyond the fans that watch or listen to a game. Many economists claim that the benefits produced by teams are almost entirely private in nature and limited to the team’s fans. The chapter explores these claims and develops a framework to determine the optimal portion of public sector support for a sports facility. Next, the chapter considers the benefits and costs of different financial instruments and strategies to pay for any public subsidy of stadiums and arenas. The model of optimal cost-sharing between the public and private sectors and least cost payment mechanism are then compared with recent contracts for building new facilities.

There are important differences between team sports and nonteam sports. In team sports the team owner assembles a team of players with complementary skills by offering long-term contracts. Also, a league promotes league-wide profit maximization. In individual sports the promoter of an individual event needs to attract individual athletes through prize and/or appearance money. Competition may involve seeding to improve the likelihood of the best players remaining in the competition. The prize money may be spread widely to ensure that a good field is attracted or the promoter may use appearance money to ensure the presence of star players.In product markets for individual sports, such as golf, some interesting economic questions are why membership fees predominate over per-use fees and what determines the structure of auction sales of race horses.

On any financial measure college sports programs in the USA dwarf college sports programs in all other countries combined. Even if the figures for the developmental professional sports programs in other countries for the 18-22-year-old age group were added to the non-US collegiate sports total, the USA figures would still dwarf those in other countries. In overall attendance and ticket revenues college sports in the USA is close to any of the four major US professional leagues. Because there is little media coverage of US college sports in other countries most people outside of the USA do not realize its scale. Conversely, most Americans have no idea that there is nothing like it any- where else.

Governments intervene in the provision of a whole range of sporting activities stretching from grass-roots participation to international sporting events. This chapter attempts to explain why. In the case of participant sports it is believed that such activities are merit goods for which there are efficiency and equity considerations. Governments therefore attempt to prevent under-provision. In the case of international sporting success there is an element of public goods with a similar potential problem of under-provision. Governments, both local and national, provide subsidies in the form of aid for mounting bids or constructing stadiums in order to host international sporting events such as the Olympic Games and the World Cup. However, cost-benefit analyses of such events suggests that often the economic gains are much smaller than predicted.