The economics of sports michael leeds pdf

The economics of sporTs

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The economics of sporTs

F i f t h E d i t i o n

Michael A. Leeds Temple University

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Peter von Allmen Skidmore College

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Library of Congress Cataloging-in-Publication Data Leeds, Michael (Michael A.) The economics of sports/Michael A. Leeds, Peter von Allmen.— 5th ed. p. cm. ISBN-13: 978-0-13-302292-6 ISBN-10: 0-13-302292-7 1. Sports—Economic aspects. I. Allmen, Peter von. II. Title. GV716.L44 2013 338.4’3796—dc23

2012032292

ISBN-10: 0-13-302292-7 ISBN-13: 978-0-13-302292-6

10 9 8 7 6 5 4 3 2 1

For Daniel, Melanie, Dan, Tom, and Eric, who make everyday a treasure.

BRIEF CONTENTS

Preface xvii

Part 1 Introduction and review of Economic Concepts 1

Chapter 1 Economics and Sports 3

Chapter 2 Review of the Economist’s Arsenal 13

Part 2 the Industrial Organization of Sports 61 Chapter 3 Sports Franchises as Profit-Maximizing Firms 63

Chapter 4 Monopoly and Antitrust 111

Chapter 5 Competitive Balance 151

Part 3 Public Finance and Sports 181 Chapter 6 The Public Finance of Sports: Who Benefits

and How? 183

Chapter 7 The Public Finance of Sports: Who Pays and Why? 219

Part 4 the Labor Economics of Sports 249 Chapter 8 An Introduction to Labor Markets in Professional

Sports 251

Chapter 9 Labor Market Imperfections 289

Chapter 10 Discrimination 323

Part 5 Sports in the Not-for-Profit Sector 357 Chapter 11 The Economics of Amateurism and College

Sports 359

Works Cited 399

Photo Credits 423

Index 425

viii

CONTENTS

Preface xvii

Part 1 Introduction and review of Economic Concepts 1

Chapter 1 ECONOmICS aNd SPOrtS 3 Introduction 3

1.1 The Organization of the Text 4

Special Features and Additional Resources 5

1.2 Babe Ruth and Comparative Advantage 6

Opportunity Costs 6

Absolute and Comparative Advantage 7 ■ Biographical Sketch: Babe Didrikson Zaharias 9

Summary 11  •  Discussion Questions 11 •  Problems 12

Chapter 2 rEvIEw OF thE ECONOmISt’S arSENaL 13 Introduction 13

Learning Objectives 13

2.1  The Supply and Demand Model 14

Demand, Supply, and Equilibrium 14

Changes in Supply and Demand 17

2.2 Producing Output and the Production Function 27

A Note on the Definition of Output 27

The Production Function 27

Price Ceilings and the Economics of Scalping 30

2.3   Market Structures: From Perfect Competition to  Monopoly 32

Perfect Competition 32

Monopoly and Other Imperfectly Competitive Market Structures 34

The Impact of an Increase in Costs 37

2.4  The Rise of Professional Sports 39 ■ Biographical Sketch: Silvio Berlusconi 41

Summary 43  •  Discussion Questions 44 •  Problems 44

ix

x Contents

Appendix 2a UtILIty FUNCtIONS, INdIFFErENCE CUrvES, aNd BUdgEt CONStraINtS 45 2A.1  Constrained Maximization 45

2A.2   Using Indifference Curves and Budget Constraints:  The Rise of Soccer and Baseball 52

Appendix 2B rEgrESSION aNaLySIS IN BrIEF 54 Multiple Regression and Dummy Variables 59

Part 2 the Industrial Organization of Sports 61

Chapter 3 SPOrtS FraNChISES aS PrOFIt-maxImIzINg FIrmS 63 Introduction 63

Learning Objectives 64

3.1  Maximizing Profits or Maximizing Wins? 65

Maximizing Profit 66

Maximizing Wins 67

3.2  A Closer Look at Revenues, and Costs 68

A Detailed Look at Revenue 71

The Distributional Effects of Revenue Sharing 82

Cost 84

Opportunity Cost and Team Movement 85

3.3  Taxes, Profit, and Owner Behavior 86

Finding Profit in Losses 86

Operating Income, Taxes, and Profit 88

Vertical Integration 88

3.4 The Importance of Leagues 90

The Origin of Leagues in American Sports 91

Setting the Rules 92

Limiting Entry 94

Limited Entry as Cooperative Behavior 98

Advertising 98 ■ SportS and the law: The Limits of Leagues 101

3.5  Soccer’s Alternative Business Model 102

Profit-Maximization in Soccer 103

The Impact of Promotion and Relegation 104

The Financial Dangers of an Open System 106

The Single-Entity Ownership Model 106

Contents xi

■ Biographical Sketch: Bill Veeck 107 Summary 108  •  Discussion Questions 109 •  Problems 109

Chapter 4 mONOPOLy aNd aNtItrUSt 111 Introduction 111

Learning Objectives 112

4.1  What’s Wrong with Monopoly? 112

Monopolists and Deadweight Loss 112

Do Monopolies Always Charge Monopoly Prices? 115

Promotion, Relegation, and Monopoly Power 116

4.2  Strategic Pricing and Price Discrimination 117

Variable and Dynamic Ticket Pricing 117

Bundling 120

Price Discrimination and Two-part Pricing 121

Monopoly Stood on Its Head: A Brief Introduction to Monopsony 124

4.3  What’s Right with Monopoly? 125

4.4 Barriers to Entry that Leagues Create 127 ■ SportS and the law: Franchise Location 128

4.5   Society’s Response to Monopoly and Monopsony:  Antitrust Laws 129

An Important Anomaly: Baseball’s Antitrust Exemption 130

Leagues That Lack an Antitrust Exemption 134

Limited Exemptions: The NFL and Television 135

4.6  The NCAA: An Incidental Cartel 136

4.7   Prisoner’s Dilemma: How Rational Actions Lead to Irrational  Outcomes 139

■ Biographical Sketch: Alvin “Pete” Rozelle 142 Summary 144  •  Discussion Questions 145 •  Problems 145

Appendix 4a OvErvIEw OF BaSIC gamE thEOry 146 An Alternative Application of Game Theory 147

Chapter 5 COmPEtItIvE BaLaNCE 151 Introduction 151

Learning Objectives 152

5.1  Why Fans and Owners Want Competitive Balance 152

The Fans’ Perspective 152

xii Contents

The Owners’ Perspective 153

The Effect of Market Size 154

The Influence of Diminishing Returns 156

A Brief History of Competitive Balance 157

5.2  Measuring Competitive Balance 158

Within-Season Variation 158

Between-Season Variation 162

Illustrating Competitive Imbalance 164

5.3  Attempts to Alter Competitive Balance 167

The Invariance Principle 167

Revenue Sharing 169

Salary Caps and Luxury Taxes 171

The Reverse-Order Entry Draft 173

Schedule Adjustments in the NFL 176

Promotion and Relegation 176 ■ Biographical Sketch: Bud Selig 177

Summary 178  •  Discussion Questions 179 •  Problems 179

Part 3 Public Finance and Sports 181

Chapter 6 thE PUBLIC FINaNCE OF SPOrtS: whO BENEFItS aNd hOw? 183 Introduction 183

Learning Objectives 184

6.1  How Teams Benefit from New Facilities 184

Facilities, Attendance, and Profits 185

6.2  How Fans Benefit from a New Facility 187

The Size and Shape of Baseball and Football Stadiums 188

The Size and Shape of Basketball and Hockey Arenas 194

Do New Facilities Create Better Teams? 196

Teams as Public Goods 197

6.3  How Cities Benefit from Teams, Facilities, and Events 199

Positive and Negative Externalities 200

Facilities, Spending, and Tax Revenue 203

Location, Location, Location 211

The Impact of Special Events 212

Contents xiii

■ Biographical Sketch: Al Davis 215 Summary 217  •  Discussion Questions 217 •  Problems 217

Chapter 7 thE PUBLIC FINaNCE OF SPOrtS: whO PayS aNd why? 219 Introduction 220

Learning Objectives 220

7.1  How Cities Came to Fund Stadiums 220

Teams on the Move 221

The Three Eras of Stadium Construction 222 ■ SportS and the law: Who Can Move? 223

7.2  How Teams Exploit Monopoly Power 224

Leagues, Cities, and Market Power 225

The Winner’s Curse 229

7.3 Stadium Location and Costs 230

How Exchange Rates Affect Costs 231

Why Most Stadiums Are Not in the Center of Town 232

7.4 Stadium Costs and Financing 234

7.5 Paying for Stadiums 237

Who Pays a Sales Tax? 240

Incremental Financing 242

Taxes That Spread the Burden 243

The Benefits of Debt 243 ■ Biographical Sketch: Williard “Mitt” Romney 246

Summary 247  •  Discussion Questions 248 •  Problems 248

Part 4 the Labor Economics of Sports 249

Chapter 8 aN INtrOdUCtION tO LaBOr markEtS IN PrOFESSIONaL SPOrtS 251 Introduction 251

Learning Objectives 253

8.1  An Overview of Labor Supply and Labor Demand 253

Labor Supply 254

Labor Demand 256

Labor Market Equilibrium 261

8.2 The Economics of Tournaments and Superstars 265

xiv Contents

8.3   Tournaments, Cheating, and the Distribution of  Income 269

More Potential Pitfalls of High Rewards: The Case of NASCAR 270

Too Much of a Good Thing 272

Performance-Enhancing Drugs 273

The Distribution of Income 277 ■ Biographical Sketch: Scott Boras 278

Summary 280  •  Discussion Questions 280 •  Problems 281

Appendix 8a thE LaBOr–LEISUrE ChOICE mOdEL OF INdIFFErENCE CUrvES 282

The Labor–Leisure Model When Hours Are Fixed 286

Chapter 9 LaBOr markEt ImPErFECtIONS 289 Introduction 289

Learning Objectives 290

9.1  The Monopsony Power of Sports Leagues 290

The Economics of Monopsony 290

The Reserve Clause 292

9.2  Unions in Professional Sports 293

A Brief Introduction to the Economics of Unions 294

■ SportS and the law: McNeil v. The National Football League 299

Salary Arbitration 302

Measuring Monopsony Power 303

Salary Caps 304

Luxury or Competitive Balance Taxes 308

The Impact of Rival Leagues 309

9.3   Labor Conflict and Compromise in Collective  Bargaining 311

Comparing the 2011 NBA and NFL Negotiations 315

Professional Tennis Associations 318 ■ Biographical Sketch: Marvin Miller 320

Summary 321  •  Discussion Questions 322 •  Problems 322

Contents xv

Chapter 10 dISCrImINatION 323 Introduction 323

Learning Objectives 324

10.1  Becker’s Theory of Labor Discrimination 326

10.2   Different Forms of Discrimination in Professional  Sports 327

Employer Discrimination 327

Does Anyone Win with Employer Discrimination? 332

Employee Discrimination 337

Consumer Discrimination 340

Discrimination by National Origin in European Soccer 342

Positional Discrimination or Hiring Discrimination 344

Gender Equity—A Special Case? 348

10.3  Title IX and Discrimination in College Sports 349 ■ Biographical Sketch: Branch Rickey 352

Summary 354  •  Discussion Questions 354 •  Problems 355

Part 5 Sports in the Not-for-Profit Sector 357

Chapter 11 thE ECONOmICS OF amatEUrISm aNd COLLEgE SPOrtS 359 Introduction 359

Learning Objectives 360

11.1  The Troublesome Concept of Amateurism 360

A Brief History of Amateurism and the Olympic Ideal 360

11.2  The Costs and Benefits of College Athletics 366

The Revenue from Intercollegiate Athletics 366

The Revenue from Bowl Games 369

The Cost of Intercollegiate Athletics 373

Do Colleges Profit from Athletics? 375

Spillovers from Athletics to the University 376

11.3  The Role of the NCAA 380

The NCAA as a Regulatory Agency 380

The NCAA as a Club 382

xvi Contents

The NCAA as a Cartel 383

Academic Standards: A Basis of Academic Integrity or Monopoly Power? 387

11.4  The Returns to the Athlete 389

Pay for Play: The Grant-in-Aid 389

Measuring the Net Value of Athletes to Colleges 391

College as an Investment for the Student-Athlete 391 ■ Biographical Sketch: Anita Defrantz 396

Summary 397  •  Discussion Questions 398 •  Problems 398

Works Cited 399

Photo Credits 423

Index 425

PREFACE

As The Economics of Sports reaches its fifth edition, it is interesting for us to reflect back on the almost fifteen years since we began work on the first edition. When the first edition was published, the field was relatively new but rapidly growing. Undergraduate sports economics courses were popular, but not widely offered. Today, sports economics stands as a vital subdiscipline within applied micro- economics, with new and exciting research being produced by economists from around the world. Along with the increased research, the number of sports eco- nomics courses has grown as well. Throughout this process of growth and change, sports economics continues to serve as both a mirror and a lens, reflecting our broader culture and values, while at the same time bringing into focus such fun- damental issues as fairness and the legitimacy of free markets. With the passing of each season, new events unfold in professional and amateur sports that deserve analysis and explanation. Finally, in the context of this book, sports economics remains a vital and interesting area of study for students of economics. Sports provides a seemingly endless set of examples from every area of microeconomics, giving students the opportunity to study public finance, industrial organization, and labor markets in a context that holds student interest like no other industry.

Over the many years that we have worked on this project, we have enjoyed continuous help and support from students and colleagues at colleges and univer- sities across the United States and around the world. Our colleagues continue to offer encouragement, share classroom experiences, and suggest new and different coverage as the industry evolves. For all of this support and help, we are most grateful. And as we have said many times, we hope that our own enthusiasm, as well as the enthusiasm others have shared with us, is reflected in the text.

In recent years, many outstanding books that concentrate on specific sports or particular aspects of the economics of sports have been published. This text stands apart from the others in that it has the instruction of economic concepts as its central focus. We hope you find it useful and interesting.

new to thiS edition

The fifth edition represents our most comprehensive revision and update of the text since the first edition appeared in 2001. In doing so, we have retained the fea- tures from previous editions that made learning about sports economics meaning- ful as well as enjoyable, while at the same time incorporating many recent events in the sports industry and the broader economy.

• We have introduced a new feature for the fifth edition: Sports and the Law. Though we discuss the important decisions that have shaped the sports industry throughout the text, we’ve chosen four specific cases that particu- larly highlight the profound impact of the law in this industry. You will find these features in Chapters 3, 4, 7, and 9.

xvii

xviii Preface

• Chapter 2 now contains a full review of production theory in the context of team rosters as well as a review of the relationship between marginal prod- uct and marginal cost.

• Chapter 3 has been rearranged to highlight the differences between profit- maximization and win maximization as owner strategies. It also places greater emphasis on the role of the theory of clubs as an explanation for the recent turmoil in intercollegiate athletic conferences.

• We have supplemented our presentation of advanced profit-maximizing strategies with a discussion of dynamic ticket pricing, including a compari- son to variable ticket pricing and ticket bundling.

• The most significant change for this edition is the reorganization of Chapters 6 and 7. Chapter 6 now covers the benefits of public support for stadiums and events such as the Olympics to owners, fans, and cities. Chapter 7 covers the economics of financing these facilities and events. While much of the discus- sion that users liked from previous editions has been retained, the new orga- nization should lead to improved student understanding.

• Chapter 9 has been revised to provide a comprehensive explanation of the process and outcomes of the new collective bargaining agreements in the NBA and NFL.

• We have integrated Chapter 11 more fully into the rest of the book by emphasizing such concepts as profit-maximization and spillovers that appear elsewhere. This allows us to show more clearly how athletic depart- ments resemble—and do not resemble—professional sports teams.