The Economics of

Professional
Sports
Sharp, Register and Grimes
Chapter 9
What is the most subsidized
industry in all of America?
From 1990 to 2000, 10 new NFL
stadiums opened at a total cost of $2.677
billion (in inflation-adjusted 2000
estimated dollars), with taxpayers
financing 77%, or $2.057 billion dollars.
And these numbers do not include tens of
millions of dollars more in stadium
renovations. During the 2001 and 2002
seasons, an estimated $2.1 billion will be
spent on six new NFL stadiums, with
taxpayers picking up about $1.2 billion, or
57% of the costs.
Question 1
What does it mean for an industry to
be subsidized?
In what kind of market structure are
industries subsidized? Perfect
competition? Explain.
The Professional Sports
Business
Multibillion-dollar business that
provides entertainment to millions
of fans each year
Unlike most other business in two
ways:
1. The organizational structure of the
professional team sports industry
2. The unique relationship between
the sports clubs and the players
Organizational Structure
Individual teams or clubs are owned
and operated for profit by private
individuals or partnerships
Team owners are entrepreneurs who
hire and fire the managers, coaches,
and players; rent or build the
stadium; and sell the tickets and
broadcast rights to games.
The Role of Competition
Sprts clubs cannot operate
independently but must cooperate
with one another in order to sell their
entertainment services to the public

Question 2:
What does it mean for firms to cooperate
with each other?
Is this different than any market structure
we have seen before?
Do firms usually cooperate with each
other?
Can you imagine if this is a good or bad
thing generally? What if Honda, Subaru,
and Toyota cooperated with each other?
What would be the outcome for
consumers?
Sports Leagues:
formal organizations of individual
clubs
American League/National
League/Major League Baseball
National Basketball Association
National Football Association
National Hockey League

What is the role of the league?
Teams that are members of a
professional sports league are
contractually obligated to one
another.
The league determines: the schedule
of games; makes and enforces game
rules; sets the guidelines for hiring
new players; determines when a new
team will be admitted to the league
and allowed to compete with its
members
Teams and Players
Unique relationship
Productivity is visible and easily
measured
Question 3
What is productivity?
What is the usual relationship
between productivity and a workers
wages?
Is this relationship the same for
professional sport players?
Professional Sport Salaries:
Whoa!
Huge salaries
Large differences in salaries between
players
Rules imposed by each of the major
sports leagues to promote
competition on the playing field
contribute to the seemingly
inconsistent economics of players
salaries
Choosing a player/choosing a
club
Question: How will you decide what
company to work for?
Question: How does a professional
sports player decide which team to
play for?
How are these decisions different?
Should they be different? Why?
Competition and employment
Competition on the field would diminish if
any club had the ability to hoard the best
athletic talent.
League rules are designed to ensure that
each club has the opportunity to employ
and retain quality players
Leagues establish the procedures whereby
member clubs acquire the property
rights to contract with specific players.
Because specific clubs may hold the
exclusive right to contract with a player,
athletes are not always free to work for
the highest bidder.
Imperfect Markets
Question: How has the behavior of
the professional sports clubs that
weve been discussion compared to
the types of firms we discussed
under the perfect competition
scenario?
Are professional sports clubs
competitive with each other? Why or
why not?
What would happen if they were
perfectly competitive?
More on Imperfect Markets
Imperfect Product Market: when
buyers and sellers engage in the
exchange of final goods and services
Imperfect Resource Market: when
buyers and sellers engage in the
exchange of factors of production
like capital and labor
The Product Market
The essence of sports is competition
Essential for the professional sports
clubs for this competition to be in the
playing field and not in the
marketplace

Why?
What if sports clubs competed in
perfectly competitive markets?
More successful clubs would sell more
tickets and team merchandise
Earn higher profits
Have the ability to attract the best players
with higher salaries
Over time, these clubs would become so
much stronger than the less successful
teams that competition on the playing
field would deteriorate and become boring
for spectators
If spectators dont come, then everyone
loses
If you build it, they will come
To remain in business and earn
profits for their owners, professional
sports clubs must avoid the above
scenario. How?
Coordination of economic decisions
through league rules and guildelines.

Question: What is a Cartel?
Are professional sports leagues like
cartels?
If so, why are cartels o.k. in this
situation and not in others?
Cartel: Definition
A group of firms that formally agree
to coordinate their production and
pricing decisions in a manner that
maximizes joint profits
A cartel can be viewed as a group of
firms behaving as if they were one
firma shared monopoly
What if
What if Toyota, Honda, and Subaru
created a cartel?
How is this different (or is it?) than
professional sports leagues?

Antitrust laws
Antitrust laws make it illegal, in most
cases, for firms to monopolize an
industry through the formation of a
cartel
Why?
1922, the U.S. Supreme Court ruled
that major league baseball did not
meet the legal definition of interstate
commerce and was therefore not
subject to the restrictions of
antitrust.
For a cartel to be successful it
needs:
First: The cartel members must be
responsible for most of the output
produced in their market
(the greater the proportion of total
market output generated by the
cartel members as a group, the
greater the cartels degree of
monopoly power)
Why would this be true?
What is monopoly power
Monopoly Power
The degree to which a firm (or firms
in the case of a cartel) can be a
price maker
This translates directly into the
amount of profits a firm (or firms)
can get in an industry
In general, the more monopoly
power, the higher the profits
So how does the cartel work?
Basically firms coordinate their
behavior in order to act like a
monopolylimit Q and increase P
then split the high profits.
If they competed, their prices would
fall and corresponding profits would
fall
So, its in their best interest to
coordinate
More requirements for cartels
Second: The cartel must be able to
prevent new competitors from entering
the market, or be able to integrate new
competitors into the cartel

How do the major sports leagues do this?
Do you know an example when they have
eliminated competition? Controlled
contracts of star players? Restricted the
ability to start new rival leagues to
compete for fans attention?
More requirements for cartels
Third: cartel members must produce
fairly homogeneous outputs

Why? Why would producing the
same or similar goods enhance
coordination between the clubs? Or
between coordinating firms?
More more more!
Cartels must be able to divide the
market into territories controlled by
each member and to establish
production quotas
Cartel members must agree on how
their combined monopoly power will
be shared among themselves
How do professional sports clubs do
this?
More
Fifth: a cartel must have the power to
prevent cheating by other members.
In many cartel situations, an incentive to
cheat on the agreement exists for member
firms
Some firms may find it profitable to break
production quotas or enter another
members sales territory in an effort to
capture more than the agreed upon share
of the monopoly

The Tragedy of the Commons:
A Cartel Parable
Firms in a cartel have an incentive to
cheat
This whittles away at the profits
Unless the cartel is formed in a legally
sanctioned way, there is no way to
police the cheating
Coordinating Behavior
Joint marketing and revenue sharing
Revenue comes from three major
sources: ticket and concession sales,
merchandising rights for team
souvenirs and novelties, and radio
and tv broadcasting rights
Each league has specific rules for
dividing the revenue generated
through ticket sales between a host
team and the visiting team
Pricing and Output for Broadcast
Rights
Leagues have been most successful
in jointly selling their entertainment
services
Each league sells the national tv and
radio broadcast rights to all the
games played by its members as
package deals to the highest bidder
Revenue is then divided among the
member clubs see table 9.1 and
figure 9.1

The Number and Location of
Teams
Incentive to restrict the number of
new members
Why?
Creates an incentive to relocate to
new markets
Shortage of teams?
The Stadium Controversy
Billions of local tax dollars spent on
the construction of new stadiums and
sports arenas
$4 out of every $5 spent came from
public sources
Why?
The Resource Market
The employment of players
Monopsony: a market with only one
buyer or one employer
Why monopsony?
Players legally locked into their
drafted position
Highly and specifically skilled
Players have little bargaining power
Free Agency
Labor Unions

Do professional athletes earn their
pay?

Questions
Explain why professional sports teams
must cooperate with one another in order
to produce competitive games for fans.
What is a cartel? What industry
characteristics are necessary for the
successful formation and operation of a
cartel?
Professional baseball enjoys a special legal
exemption in the US. What is this
exemption, and why does it exist? Does it
apply to other sports leagues?
More Questions
Explain how professional sports leagues maximize
joint profits through coordinated behavior in the
product market. Will each team earn the same
amount of profit under a cartel agreement as it
would if market competition prevailed?
Why does a cartels marginal revenue curve lie
below its demand curve? Explain with a numerical
example and a graph.
Why do taxpayers continue to support the public
financing of new stadiums and arenas for
professional sports teams? Are new stadiums and
arenas good investments for a metropolitan
area? Why or why not?
Even More Questions!
Discuss the economic pressures and
incentives for professional sports teams to
relocate. Are professional sports teams an
important tool for a citys economic
development? Why or why not?
What is a monopsony? What conditions
give rise to a monopsony:? How can
professional sports teams be considered
monopsonies?
What is free agency? How has it eroded
the monopsonistic power of professional
team sports?
More Questions!
For many years professional football players have
earned on average less than half of what
professional baseball players earn. Using
economic reasoning, how can this fact be
explained?
Why do team owners rigorously regulate the
number of teams in their league? Under what
circumstances would team owners vote for an
expansion in the number of teams? When would
they vote for a reduction of the number of
teams?
Are professional sports players worth their
multimillion dollar salaries? Explain.