• Founded in 1876 (oldest league in the US), MLB’s National League (NL) had 2 basic principles:
• 1. Clubs had the exclusive right to their home territory.
• This gave teams monopoly power in their host cities.
• 2. Areserve system where players were bound to their club as long as the club wanted them.
• This gave teams monopsony power over its players.
• Leagues today continue to exert market power.
• Eliminating competition may be good for the teams, but it’s not good for consumers.
• Fewer teams in fewer cities results in fewer games and higher prices for fans.
• If sports were a competitive industry, there would be more teams and lower ticket prices.
• Acompetitive firm produces output where P = MR = MC and charges P = MC.
• Amonopoly produces output where MR = MC and charges P > MC.
• Charge more (Pm>Pc)
• Produce less (Qm MC
• Consumer surplus =APmE
• Producer surplus = PmEQmC
• QmEQc is surplus no one gets – it’s the deadweight loss
• Leagues could reduce deadweight loss by practicing price discrimination – charging different prices to
different consumers based on their willingness-to-pay.
• Consider the Toronto Blue Jays (whose average ticket price is ~$110 btw).
• If they knew exactly what every ticket buyer would be willing to pay, they could charge every ticket buyer
This would be first degree (perfect) price discrimination.
The jays would capture all the available surplus There would be no dead weight loss
However, no consumer surplus
If the Jays can perfectly price discriminate then MR curve coincides with their
Demand curve. There for (P= MR)
• With first degree price
• discrimination, the Jays
• capture all surplus in the
• market – the entire green
If the Jays don’t know every consumer’s willingness-to-pay, they do know that the demand curve slopes
• They could practice second degree price discrimination – charge different prices based on the quantity
• Team knows less than before
• Knows demand slopes down
• If it doesn’t discriminate
• Charges P1 per ticket
• Consumer buys Q1 for P1
• If it discriminates
• Pa for 1st ticket batch
• P1 for 2nd ticket batch
• Pb for 3rd ticket batch
• Team captures some consumer surplus with
• Group sales or season tickets
• Consumers get yellow triangles
• If the Jays are only able to distinguish that certain groups have different willingnesses-to-pay, they can
resort to third degree price discrimination – charge different prices for different segments of the market.
• Say they know that students have less disposable income than middle-agers and are more sensitive to price
(students’demand is less and more elastic).
• Put students on the left side
• They have lower demand than adults
• MC is the same
• QS < QAand PS < PA
Personal Seat Licences
• Personal seat licences (PSLs) are another way teams can extract consumer surplus.
• APSL gives a consumer, for a fixed fee, the right to buy season tickets for a given period of time.
• If you have a PSL, you have to buy tickets or you lose your PSL.
• First used by the NFL’s Carolina Panthers to help fund the building of their Bank ofAmerica Stadium.
• Use of PSLs increasing.
On the surface, selling PSLs doesn’t make much economic sense.
à It doesn’t change consumers willingness to pay à To offset the higher cost to consumers of buying tickets, the team would have to increase the benefits
consumers receive or charge a lower price for tickets
PSLwould not increase revenues but they would change the way revenues were collected
U.S tax laws allow teams to deduct PSLrevenues from their taxable income
• Using PSLs allows teams to claim the deadweight loss that results from monopoly.
• Dallas Cowboys’PSLs sell for up to $150,000; other teams start around the $11000 mark (you can pay it in
What’s Right with Monopoly
• It’s not always that easy to identify a monopoly.
• Consider the Boston Bruins.
• Since Boston only has one professional hockey team, we would logically conclude that the Bruins are a
• The Bruins, however, could argue that they operate in a very competitive market.
• They could argue that they have to compete for attention with the Celtics, Red Sox, Patriots, college hockey
teams, other college sports…
If they can’t convince you that they’re in a competitive market, they might be able to convince you that they’re a
à Natural monopoly arise when large firms operate more efficiently than smaller ones (lower average total
cost (ATC) if one firm than if more than one firm)
Large efficient size usually results when firms face large start-up costs & low marginal costs
• The Bruins’payroll in a given season is a fixed cost – it doesn’t depend on the number of tickets sold.
• Likewise for arena costs that don’t depend on attendance.
• The MC of accommodating an additional fan is very small, so costs don’t rise much beyond fixed costs
until the arena is sold out.
• We can approximate average total costs, ATC, as:
• As the nu