FIRST YEAR PRINCIPLES 1/14/2013 6:32:00 AM
Opportunity Cost & Comparative Advantage
Babe Ruth comparative advantage in hitting, got him to specialize
Supply and Demand equilibrium.
2006 Wayne Gretzky card sold for $18000
2011 George vezina hockey card sold $100000
Demand: Increase In price of hockey cards decreases your
purchasing power, this is called the (Income Effect)
Supply: Price change moves supply up or down anything else’s
shifts the whole curve.
Tickets: are considered a normal good, price and income affect
what and where you purchase. Another factor is how the team is
doing. Uncertainty of the outcome of game. Superstar player
accusation. Who are you playing. Is the game meaningful. The
weather. Time of the match. Giveaways.
Ticket Scalping: Illegal but it happens, saying that you cant pay
past the ceiling, but there is a black market which sells them more.
Cant sell for more then the value on the printed ticket price but
knows the tickets are worth more if the game is sold out and they
will sell at the real value of the ticket’s
Why seasons tickets are cheaper.
The team starts earning revenue and starts collecting interest right
When consumers make choices we allocate our income to maximize
our level of satisfaction=utility.
If we had perfect information and knowledge, theses choices would
be straight forward. But we don’t.
We make choices under uncertainty.
Sports is filled with uncertainty eg don’t know how the rookies will
perform. Will their star player get injured. Fans don’t know If their
team will make the playoffs. What the weather will be.
o Its to early to know if they make the playoffs when the game
arrives.(he’ll enjoy the game more if the game has
implications for the team in the post season.) tony will derive greater utility from a meaningful game that could affect the
teams standing in the playoffs .
o A ticket to a game that the jays need to win is worth more to
tony than one where it doesn’t matter if they loose. Tony now
has to make a decision faced with uncertainty about how
meaningful that last game will be.
o If Tony Is happy with that level of E(U), he will buy the
tickets. And vice versa.
o Teams offer incentive to get you to buy tickets ie. Lower
seasons ticket prices.
Importance of Leagues.
Pro baseball – 7 years before MLB
Pro football – 44 years before NFL
Teams played each other on a ad hoc basis
Most games were between teams in the same city
Once transportation improved, teams could play teams form other
o All called Barnstorming
Barnstorming popular but couldn’t guarantee the other team would
Couldn’t guarantee the size of the crowd.
Earnings tied to winning.
To fans, the league is just a collection of teams who play each
Economically, leagues behave cooperatively
o Made teams succeed at the expense of other teams.
o Success also depends on the success of other teams +
leagues as an institution.
The Functions Of Leagues
1. Setting the rules.
o One of the more important functions.
o Teams have to agree to play the game.
o Having precise rules and enforcing them actually helps sports
to spread. Eg. Baseball only spread after the “knickerbocker Rules
- 1845” The rules were adopted in the 19 century
Set of 20 rules considered the basis for todays
o Rules for behavior are also important.
Eg. Players cant bet on the game and the use of
performance enhancing drugs, is banned.
o Rules can change to enhance the popularity of sports.
Eg. 3-pt score in basketball, reducing the size of goalie
Theses allow for higher scores (Americans like high
2. Limiting Entry.
o Too many teams hurt competition and fan interest.
o To few teams leave room for competing leagues to arise.
o What determines league size:
When a new team enters there are benefits and cost to
Benefit- admission fees from new teams, additional fan
base and addition media outlets.
any shared revenue spread over more teams. Reduces
the teams ability to threaten to move when they are
negotiating with their current home cities.
o If revenue decrease with the addition of more team your
marginal revenue curve would slope downward.
Expected because the most profitable cities are added
first, with the smaller less profitable cities added
o If costs increase with the addition of one more team your
marginal cost curve would slope upward.
o Equilibrium number of teams where MR=MC
o Leagues limit on where teams can enter
Eg. All the major cities have teams in just about every
sport. o Adding teams to a market diminishes existing teams
o Adding teams means more substitutes and the demand curve
for the existing teams becomes more elastic.
o If teams are making positive economic profit (greater than 0),
new firms will want to enter.
The threat of entry puts downward pressure on prices
Gives existing teams incentive to keep out new teams.
o If potential owners cant join a league, They have an incentive
to start a new league.
Success of new league is uncertain since all the good
markets are used up by the existing league.
Eg. WHA 1972-1979
o Neal (1964) sees leagues as multiplant monopolies.
Part of the excitement of a single game comes from
how the outcome relate to league standing which
involves all teams in the league.
o Leagues coordinate the number of games and prices.
o Leagues negotiate major tv contracts
Allows for the most popular games to be aired.
Prevents teams form competing from broadcast rights
by dropping prices to acquire rights.
o Restricting number and location of teams gives owners the
guaranteed source of ticket and media source of revenue + a
restricted market for apparel sales.
o individual teams would only advertise In their home markets.
Little incentive to pay for ads that would also benefit
Teams would want to free ride.
o Leagues take a multilevel approach to marketing.
Teams contribute to joint ads running t the league level.
Leagues work to create a specific image to increase
demand for the sport as a whole.
o Marketing at the league level is something of a public good: Its non rival –one team benefiting from league
advertising doesn’t diminish the benefits enjoyed by
Its non – excludable : one team cant prevent another
team from benefiting from league advertising.
Profit: total revenue – total cost
o Leagues differ in the level of profitability.
NFL most profitable.
NHL least profitable.
o NFL team profits are the most evenly distributed.
o Yankees are the least profitable MLB team.
o While profit=TR-TC, profit is also closely relates to a teams
o Operating income = difference between the teams revenue
and the cost of its day to day operations.
Excludes cost that are not related to daily operations,
ex. Interest payments on loans, stadium depreciation.
o NFL teams have higher operating incomes than other teams,
but that doesn’t mean that operating incomes are always
related to highest market values = the price a buyer would
pay to purchase the team.
Eg. Dallas cowboys – market value is $2 billion, the
operating income of $9-10 million.
Yankees (most valuable baseball franchise) Market
value is $1.85 Billion operating incomes -$3 million
TML ( most valuable NHL team) market value $1 billion