THE ECONOMIC SIDE OF SPORTS

The Economic Aspect of Sports

The Economic Aspect of Sports

Introduction

Professional sports in the United States are multibillion dollar businesses. While most of us are sports fans, we may not be fans of sports business. Indeed, often we are outraged when the business side of sports intrudes on our enjoyment of the on-field competition. But, in my experience, you can't always understand what goes on with your favorite team or sport if you don't understand this business side. This course applies the principles of economics to evaluate professional and amateur sports, including topics like league structure, team decision-making, labor-relations, incentive structures, free agency, salary caps, and stadium financing and the role of public policy. (Berument, et. al. 2003) Economic factors affect the behavior of participants in sport markets—owners, managers, players, and the media—just as they affect the behavior of individuals in other markets. Basic economic principles and formal economic models help make sense of many issues in the world of sports. In addition, the sports world is full of evidence which helps illustrate economics in action and provides a wealth of information for testing economic theories. The objective of this course is to offer a deeper understanding of both.

Background

The sports industry is now estimated to be worth $500 billion worldwide, but the bulk of recent growth - and the most exciting prospects for the future - belong to a new and ambitious generation of rapidly developing markets. An observation that always receives a fair amount of attention in the popular press is that promoters sometimes underprice tickets. The interest here is not in those instances where underpricing occurs because of sudden and unpredictable changes in demand. Rather the interest is on those situations where tickets are systematically and deliberately underpriced. An argument commonly found in the popular press is that underpricing guaranties a sellout, and hence generates a certain amount of prestige that acts as a kind of explicit validation of the worthiness of attendance.

Brokers have developed fairly sophisticated secondary markets for tickets. Much like a loose-knit exchange, they buy, swap and sell tickets to turn out a profit. Brokers get their tickets from several sources. They may own their own season tickets, they may also have longstanding relationships with some recipients of the tickets that are withheld, they hire teams of people with credit cards to buy tickets over the phone, or they may send people to stand in line and buy directly at the ticket booth (a practice called digging). At the same time, brokers constantly run advertisements in newspapers to buy tickets at prices varying between the face value and the resale price. Brokers may resell between 5 to 10 percent of the tickets to a popular show. Usually they traffic in the best seats in the premises for the most popular events. For these reasons, they are mostly interested in weekend as well as holiday season performances. According to Hotchkiss, et. al. 2003. “the nationwide practice of marking up and reselling tickets for plays, ...