Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA and Social Issues, European Sport Management Quarterly, International Journal of Sport Management and Marketing, and Journal of Quantitative Analysis in Sports. On-line Sources: www.sportsbusinessnews.com provides good information and reactions to what is happening in sports from a business perspective. You can even elect to receive their “daily dose” of sports business news. www.thesportseconomist.com is a blog written by a group of the top economists in the field and consistently provides interesting economic analysis of current issues in sports.
◼ Solutions to Back-of-Chapter Problems 1.1 Use an appropriate economic theory to explain why LeBron James might employ someone to answer his fan mail even if he can read the letters and type the responses more quickly than the person he employs? Answer:
If LeBron were able to answer his fan mail more quickly than someone he hires; this would imply LeBron has an absolute advantage in answering fan mail. LeBron is still likely, however, to have a comparative advantage in playing basketball, and therefore he should specialize in playing basketball and hire someone else to answer his fan mail.
1.2 Is the following statement true or false? Explain your reasoning. “I am attending college on a full athletic scholarship, so the opportunity cost of attending college is zero for me.” Answer:
False. The student is also giving up his or her time. A prime example of this is players who leave college early to enter the pros. The opportunity cost of attending college for a top basketball player is the lost chance to play in the NBA.
1.3 From 1946 through 1967, the placekicker for the Cleveland Browns, Lou Groza, was successful on 54.9 percent of his field goal attempts. In 2021, the Browns’ kicker was Cody Parkey, who was successful on 84.6 percent of his attempts. Use the theory of comparative advantage to explain the massive improvement in the Browns’ kicking game. Answer:
While Groza was best known for his kicking, he also played offensive tackle for most of his career. In the modern game, players are able to specialize, thereby improving their skills. This can result in higher field goal percentages for more recent players like Cody Parkey.
1.4 The term “figure skating” refers to the shapes that skaters used to trace in the ice as part of skating competitions. In the 1970s, this aspect of the sport was deemphasized and eventually eliminated. Use the theory of comparative advantage to show why eliminating this part of the competition has led skaters to perform much more difficult and sophisticated jumps and spins. Answer: The elimination of tracing figures allows skaters to specialize in other techniques such as jumps and spins that most fans find more exciting. It also encourages more athletic skaters with a comparative advantage in these skills to enter the sport. 1.5 Rose Lavelle is widely considered one of the best midfielders in women’s soccer. She is also an effective attacker, scoring three goals in the 2019 Women’s World Cup. Based on the theory of comparative advantage, what position should Lavelle play? Answer: Based on the theory of comparative advantage Lavelle should play midfielder. Lavelle may have an absolute advantage in playing midfielder and attacker over many players but she clearly has the comparative advantage in midfielder. Therefore, specializing in midfield would yield a better team outcome.
Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA
1.6
Athletes in the US are more likely to specialize in a specific sport today at a much earlier age than a generation or two ago when it was much more likely for high school or college students to be multisport athletes. What economic factors could explain this shift?
Answer: One potential explanation for the phenomenon is due to comparative advantages and specialization. The earlier athletes can specialize, the more sport-specific training they will receive, which will likely make them more competitive in that sport, compared to multisport athletes who do not specialize until much later. On the other hand, early specialization is also often driven by incentives due to tournaments and superstars and can present significant negative externalities to young athletes.
1.7 In July 2021, the NCAA modified its policy on athletes profiting from their name, image, or likeness (NIL) allowing college athletes for the first time to earn money from endorsements, appearance fees, monetizing Instagram/Twitter/TikTok accounts, coaching, or selling autographs. Use the concept of opportunity cost to explain whether this change in policy is likely to encourage athletes to stay in college and complete their degrees. Answer: For a top student athlete, the opportunity cost of attending college is the lost chance to play in professional leagues. Such opportunity cost is effectively lowered when student athletes are allowed to profit from NIL. As a result, NCAA’s new policy will likely provide stronger incentives for student athletes to stay in college and complete their degrees.
Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA
Chapter 2 Review of the Economist’s Arsenal
◼ Outline Introduction Learning Objectives 2.1
The Supply and Demand Model Demand, Supply, and Equilibrium Changes in Supply and Demand Elasticity Explaining the Differences in Card Prices Supply, Demand, and Government Policies Price Ceilings and the Economics of Ticket Resale Markets
2.2 Output and the Production Function A Note on the Definition of Output The Production Function 2.3
Market Structures: From Perfect Competition to Monopoly Perfect Competition Monopoly and Other Imperfectly Competitive Market Structures The Impact of an Increase in Costs
2.4
The Rise of Professional Sports
Biographical Sketch: Mark Cuban Summary, Discussion Questions, Problems Appendix 2A: Utility Functions, Indifference Curves, and Budget Constraints 2A.1 Constrained Maximization 2A.2 Using Indifference Curves and Budget Constraints: The Rise of Soccer and Baseball Appendix 2B: Regression Analysis in Brief
◼ Teaching Tips and Additional Examples Chapter 2 contains a fairly extensive review of general economic principles which has been expanded in the latest edition. The amount of time that you will need to spend on this chapter depends on the backgrounds of the students in your class. If the majority of your students have had intermediate economics, you may want to skim the body of the chapter entirely and focus on the appendixes. Alternatively, you could briefly skim through the theory but present some of the examples in the chapter as a continuing introduction to the use of economics to explain the behavior of owners, players, and consumers in the sports industry. If your students have had only one semester of economics—or even no prior courses—you will need to devote some significant class time to this material, as it is used throughout the remainder of the text. Additionally, this course is usually taught as an “Applied Microeconomics” course, thus there is greater focus on intro to microeconomic principles. The opening discussion explaining the workings of the economist’s models is worth an overview for every type of student body. The appendix on regression is not essential, but recommended, as students will have a much greater appreciation for the models if they understand the regression-based analysis that is so prevalent in the literature.
Supply and Demand You can open with a general class discussion and ask the class to consider a typical competitive market with many buyers and sellers. Have the class list everything that would change how much buyers want to buy. First on the list should be the price of that product. This is the answer to the question “what changes quantity demanded?” and can be explained in more detail with the Law of Demand. Everything else on that list is the answer to the question “what changes demand”. Then try to place each specific answer into the following groups: o Change in taste o Change in related goods (substitutes and complements) o Change in income (normal goods and inferior goods) o Change in the number of buyers o Change in buyers’ expectations A similar discussion can follow about things that would change what sellers want to sell. Price would again be an obvious factor and this answers the question “How do you change quantity supplied?” and explains the Law of Supply. Everything else shifts the supply curve and can be summarized into the following groups: o Change in technology o Change in the price of a necessary resource o Change in the number of sellers o Change in sellers’ expectations At this point apply the general information to the specific example in the book about baseball cards (why the Mantle and Aaron cards sell for different prices). Take note this is not a competitive market (as there may not be many sellers) but the model developed is still a useful one. In addition, a discussion about Michael Lewis’ The Blind Side (and the change in demand for the left tackle position) may be useful for those who saw the movie or read the book. Later discussions in the book about ceilings and floors, and the discussion of the economics of ticket scalping may fall right into place at this point.
Illustrating Elasticity: A Warning The equation used for elasticity in the textbook is ε = %Q/%p. Depending on their past classes, students may have learned to calculate % as either (New – Old)/Old or (New – Old)/Average. This first method is used in the examples in the book but has the disadvantage of resulting in a different elasticity depending on which price and quantity combination is considered the starting point. The second method results in
the same elasticity whether prices are increasing or decreasing but is less intuitive and harder to calculate. Under either method, the elasticity calculated may be different for a large change in price compared to a small change in price.
Output and the Production Function The discussion of what exactly constitutes output (Q) is worth some discussion as this question is reoccurring throughout this course. In this section the text settles on output being the number of wins produced per season, but it could just as easily be attendance, television appearances (or revenue), games played, popularity, etc… Regardless, as the semester progresses healthy discussions of what constitutes the market will lead to the proper definition of output (which will change as we discuss different products). The time spent on the other main themes in this section (the production function, total product of labor, marginal product of labor, diminishing returns, marginal cost, etc…) should be a function of the class background distribution. If the students are not used to these concepts slowing down quite a bit may be a good investment for the class.
A Discussion on Market Power It could be said that the most reoccurring theme in this course will be the ability for individuals and firms to flex their monopoly and monopsony power. This in turn helps explain why the sports world has such an unusual economic landscape. With that in mind it may be useful to take your time with the section on market structures and highlight the monopolist ability to restrict output in order to maximize profits.
◼ Solutions to Back-of-Chapter Problems 2.1 Some cities in England have several teams in the Premier League (the country’s top soccer league). Explain how the presence of multiple teams affects the monopoly power of those teams compared to if there were only one such team in each city, as is typically the case in the US. Answer:
The presence of another team in the same city reduces each team’s monopoly power since the other team(s) provides a substitute for the team’s product. Manchester United, for example, cannot charge too much for their tickets for fear of fans abandoning the team and becoming fans of Manchester City instead. 2.2 The marginal cost of admitting an additional fan to watch the Sacramento Kings play basketball is close to zero, but the average price of a ticket to a Kings game is about $60. What do these facts tell you about the market in which the Kings operate? Justify your answer. Answer:
The Kings must have some degree of monopoly power since under perfect competition firms set P MC while the Kings set P MC.
2.3 During the 2016 NFL season, television ratings suffered until the November elections, after which they rebounded. Use the supply and demand model to explain why this may have occurred. Answer:
The 2016 presidential election (and debates that preceded the election)drew a lot of public attention. While the debates occurred the demand for the 2016 NFL games decreased as more viewers watched the election coverage. After the election the demand for NFL games went back to normal along with the TV viewership.
2.4 Use supply and demand to show why teams that win championships typically raise their ticket prices the next season. Answer:
Since fans typically like winning and since their good memories persist for at least one season, championship teams generally experience an increase in demand for their product. An increase in demand shifts the demand curve to the right leading to an increase in equilibrium prices.
2.5 Use a graph with attendance on the horizontal axis and the price of tickets on the vertical axis to show the effect of the following on the market for tickets to see the Vancouver Canucks play hockey. (a) The quality of play falls, as European players are attracted to play in rival hockey leagues in their home countries. (b) Vancouver places a C$1 tax on all tickets sold. (c) A recession reduces the average income in Vancouver and the surrounding area. (d) The NBA puts a new basketball franchise in Vancouver. Answers: In each case, the student should show a supply and demand graph, with the appropriate shift of the correct curve. (a) Demand shifts left, price decreases, equilibrium quantity decreases. (b) This can either be shown as a leftward shift of the demand curve or a leftward shift of the supply curve. In either case, if a fixed (per unit) tax is placed on tickets the vertical distance between the new and old curves should equal the tax. (c) Demand shifts left, price decreases, equilibrium quantity decreases. (d) Demand shifts left, price decreases, equilibrium quantity decreases. 2.6 Use the concepts of production and cost from section 2.2 to explain why NASCAR teams might have to spend far more to move up from an average finish of second to first than from 20th to 19th. Answer: Marginal cost increases at an increasing rate. Therefore, the cost of increasing from 20th to 19th may not incur a large cost. Yet the cost on the margin of moving from second to first is very high. 2.7 Use a graph to show how the marginal product of offensive labor in the NFL might change if wide receivers in the NFL are no longer allowed to use gloves that make it easier to catch the ball on cold days. Answer: When we assume the product is wins then decreasing the WR effectiveness would decrease the position’s marginal product. On a graph we should see the MP decrease yet still see signs of diminishing returns. 2.8 Suppose that the WNBA’s Los Angeles Sparks raise ticket prices from $50 to $60 per seat and experience a 5 percent decline in tickets sold. What is the elasticity of demand for tickets? Answer:
First we compute the percentage change in price, then compare this number to the 5%decline in tickets. To compute the percentage change in price we find the price changed by [(60-50)/((60+50)/2)] = 18%. To compute the elasticity of demand we take the percentage change of QD over the percentage change in price. In this problem the elasticity of demand comes out to (.05/.18) = 0.275.
2.9 Since the 1990s, many Major League Baseball teams have moved to new stadiums that are far smaller than the ones they have replaced. Assuming no change in demand, use an appropriate graph to show how such a change impacts ticket prices. Answer:
Starting with a regular supply and demand graph, a reduction in the number of seats shifts supply to the left. Keep in mind each of the supply curves (the old and the new stadiums) should be perfectly inelastic. Equilibrium prices rise.
2.10 Suppose the Tampa Bay Rays baseball team charges $10 bleacher seats (poor seats in the outfield) and sells 250,000 of them over the course of the season. The next season, the Rays increase the price to $12 and sell 200,000 tickets. (a) What is the elasticity of demand for bleacher seats at Rays games using the point method? (b) What is the elasticity of demand for bleacher seats at Rays games using the arc method? (b) Assuming the marginal cost of admitting one more fan is zero, is the price increase a good idea? Answer:
(a) For the point method, we follow the approach outlined in the textbook to compute percentage change as (New – Old)/Old. We have ε=%Q/%p=((200,000250,000)/250,000)/((12-10)/10)=-1. Since |ε|=1, the demand is unit elastic based on the point method. (b) The arc method is also called the midpoint method, i.e., the percentage change is computed as (New – Old)/Average. We have ε=%Q/%p=((200,000250,000)/225,000)/((12-10)/11)=-1.22. Since |ε|>1, the demand is elastic based on the arc method. (c) The price increase is not a good idea. Total revenues have fallen from $2,500,000 (250,000)(10) to $2,400,000 (200,000)(12). Anytime elasticity is greater than one, an increase in prices will result in a drop in total revenue.
Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA
Chapter 3 Sports Leagues and Franchises ◼ Outline Introduction Learning Objectives 3.1 3.2
Open Versus Closed Leagues The Economics of Team Behavior Maximizing Profits or Maximizing Wins?
3.3
Closed Leagues: Revenue and Cost in North American Sports Revenue is Determined by Demand A Detailed Look at Revenue Costs League Size, Opportunity Cost, and Team Movement
3.4
Open Leagues: Revenue and Cost in European Soccer Profit Maximization in Soccer
3.5
Single-Entity Ownership
Biographical Sketch: Bill Veeck Summary, Discussion Questions, Problems
◼ Teaching Tips and Additional Examples There are significant changes in the seventh edition of the text. Figures have been updated to reflect the current state of the industry. In addition, the chapter has been reorganized. The text broadens the scope of the sports industry and begins a discussion on the difference between closed leagues (like a typical North American league) vs. open leagues (such as European soccer leagues). Drawing a link between closed leagues and monopoly power is helpful and that task begins here. As the text points out this structure often leads to different objectives for the clubs. Closed leagues often lead to more profit maximizing objectives while open leagues lead to win maximizing leagues. An important distinction that is often lost on students is the actual (economic) profitability of a team, versus the profits that are reported using Generally Accepted Accounting Principles. Andrew Zimbalist’s book, The Bottom Line, collects ten years of his editorials from publications such as Sports Business Journal and the New York Times. Many of the essays provide lively accounts of how difficult it can be to evaluate a team’s actual profitability. You could either assign articles from the book to students or walk them through the numbers with a spreadsheet. Many regard Bill Veeck as one of the most delightful characters to grace the world of sports. Consider taking time out to “personalize” the material by talking about Bill Veeck’s wild marketing ploys (such as the infamous Disco Demolition Night) and his use of the marketplace to advance broader causes (such as integrating the American League). Reading books like Veeck as in Wreck or The Hustler’s Handbook are
both fun and valuable sources of background information. You should also be alert for current stories about his son, Michael Veeck, and his antics as an owner of the minor leagues’ St. Paul Saints. Of course, the most famous of all sports economics books (later turned into a movie) marketed to the general public is Michael Lewis’ Moneyball. While this book likely needs no introduction, students continue to find this an interesting inside look at baseball that highlights important economic issues such as competitive balance, revenue sharing, and marginal revenue product. In a 2006 article in the Journal of Economic Perspectives, Jahn Hakes and Skip Sauer analyze the Moneyball effect and what has happened to it in the wake of the book’s widespread publication. A special issue of the International Journal of Sport Finance is also dedicated to the applications of the Moneyball Hypothesis to other sports. For a more advanced look into the issue of team sports (and much more advanced) look at Stefan Kesenne’s The Economic Theory of Professional Team Sports: An Analytical Treatment.
◼
Additional Sources
1.
Regular reports in Forbes on franchise profits and values.
2.
Zimbalist, Andrew, The Bottom Line: Observations and Arguments on the Sports Business, Philadelphia, PA: Temple University Press, 2006.
3.
Veeck, Bill and Ed Linn, Veeck – As in Wreck: The Autobiography of Bill Veeck, University of Chicago Press, 2001.
4.
Veeck, Bill and Ed Linn, The Hustler’s Handbook, Simon and Schuster, 1989.
5.
Lewis, Michael, Moneyball: The Art of Winning an Unfair Game, W. W. Norton, 2004.
6.
Hakes, Jahn K. and Raymond D. Sauer, “An Economic Evaluation of the Moneyball Hypothesis,” Journal of Economic Perspectives, Vol. 20:3, Summer 2006.
7.
Bill Gerrard and Dennis Howard, eds. International Journal of Sport Finance, Vol. 2:4, Fall 2007.
8.
Kesenne, Stefan, The Economic Theory of Professional Team Sports: An Analytical Treatment, Edward Elgar Publishing, 2007.
◼ Solutions to Back-of-Chapter Problems 3.1 Suppose that you are the owner of a professional baseball team in a major city, and MLB allows a second team to locate in your city. Describe and show using a graph the potential impact on your attendance. Answer:
Another team’s locating in your city would dilute your monopoly power. This will greatly impact the demand for attendance for your team, and will shift the demand curve to the left. The resulting marginal revenue curve will also be lower than the original one, leading to a lower price that your team will charge.
3.2 Draw a graph that shows the demand for seats at an NFL stadium. Show how each demand would be affected if: (a) The prices of parking and food at the games increase. (b) Televised games switch from free TV to pay-per-view only. (c) A new league forms with a team that plays nearby. (d) The quality of the team decreases dramatically. (e) The length of the season increases. Answers: (a) Increase in the price of a complement; demand shifts leftward. (b) Increase in the price of a substitute; demand shifts rightward. (c) Decrease in the price of a substitute (as the new league decreases the cost of viewing an alternative game); demand shifts leftward. (d) The quality of the good falls, and fans’ taste for seeing the team declines. Demand shifts leftward. (e) The availability of possible games increases, creating more substitutes for each individual game; demand shifts leftward. 3.3 True or false; explain your answer: “If all teams are of equal quality, it doesn’t matter whether they share gate receipts or not—revenue will remain unchanged.” Answer: False. Revenue for each team is determined by more than simply team quality. For example, teams with the biggest venues will receive more revenue from home games if they do not share gate receipts than if they do. Conversely, small venue teams will benefit from revenue sharing, as they stand to gain a share of the larger gate receipts enjoyed by other teams. The same holds true for market size. Large market teams that have high average attendance figures will be net losers under revenue sharing. 3.4 Some researchers argue that revenue sharing is like socialism in that it removes the incentive to outperform rivals. Do you agree with this statement? Why or why not? Answer:
Students should be able to apply the concepts presented in this chapter to formulate their response. For example, there may be limits as to how much better an owner may want his or her team to be relative to its rivals if the existence of a single “super team” causes attendance around the league to fall due to a perceived lack of competition. This is especially true if building the team would require significantly higher payroll costs, as in the Rangers/Islanders example. On the other hand, leagues are stable only when the teams that belong to that league are also financially stable. Thus, a certain level of revenue sharing may be necessary for the financial health of the league (and also the long term profitability of each member).
3.5 Suppose that each team in a league has a demand curve for generic advertising (a league-wide nonteam–specific campaign) equal to Q 1,000 5p. If there are 20 teams in the league, and ads cost $175 each, how many ads will the teams want to purchase as a group? Answer:
This problem can be solved in two ways. Because league-wide marketing campaigns are nonrival in consumption, we could add the demand curves vertically (the intercept is multiplied by 20). Each team’s demand function is p
200
0.2Q
Thus, the market demand curve is p When p
4000
4Q
175, the equilibrium quantity of ads purchased is 175 Q
4000 4Q 956.25
Alternatively, one can assume that the price each individual firm will pay for an advertisement is p $175/20 $8.75. Q Q
1000 5p 956.25
1,000
5(8.75)
3.6 Use the marginal revenue and marginal cost curve from the theory of clubs to explain why the NFL has 32 teams while the Bundesliga-1, the top German soccer league, has only 20 teams. Answer:
Because Germany is a smaller country than the United States, the marginal revenue from adding new teams into the league is less than in the United States. Therefore, the optimal number of firm (clubs) is lower in Germany than in the United States.
3.7 How can it be that the weakest teams in the National League from a wins-losses perspective are among of the most profitable? Answer:
There are two potential reasons for this. First of all, there is not a perfect correlation between winning and revenues. While good teams tend to generate higher ticket sales, there are other contributing factors as well. For example, it could be that the team just moved into a new stadium which may be generating high revenues despite their poor performance. In addition, weak NL teams may have a poor record because of a low payroll. In this case, while weak teams produce low revenues, theyalso enjoy low player costs. Revenue sharing may also play a large role in the story. If teams share a great deal of revenue, then individual team performance is not as important as individual team profit.
3.8
Suppose that teams in the major European leagues shared all revenue equally (less a contribution to parachute payments). How might this impact the quality of teams? Explain the likely impact on the teams from that league that qualify for the Champions League. Would they be more or less successful?
Answer:
If all European leagues shared all revenue equally, this would decrease the incentive for teams to move to a more lucrative league, e.g., through promotion to a higher tier league or qualification for the Champions League. The European leagues would effectively look similar to the NFL, where there is no promotion or relegation but more year-to-year turnovers within the standing.
3.9 Why might a league favor a single entity ownership model? Explain the differences in the risks and rewards of such a system compared to a franchise owner system. Answer: A single entity structure reduces economic competition among rival teams which lowers the cost of, for example, acquiring players. One risk of a single-entity structure is the real concern with on-field competition. For sports to be successful, it is necessary that the impression of intense on-field competition is maintained. This feeling may be lost when all teams are owned by the same company. This is especially a concern late in the season when playoff positions are on the line.
Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA
Chapter 4 Monopoly and Antitrust
◼ Outline Introduction Learning Objectives 4.1
What’s Wrong with Monopoly? Monopolists and Deadweight Loss Do Monopolies Always Charge Monopoly Prices? Promotion, Relegation, and Monopoly Power in Open Leagues
4.2
Strategic Pricing Variable and Dynamic Ticket Pricing Bundling Price Discrimination and Two-part Pricing
4.3
What’s Right with Monopoly?
4.4
Strategic Barriers to Entry
4.5
Society’s Response to Monopoly: Antitrust Laws An Important Anomaly: Baseball’s Antitrust Exemption Leagues That Lack an Antitrust Exemption Limited Exemptions: The NFL and Television
Biographical Sketch: Alvin “Pete” Rozelle Summary, Discussion Questions, Problems
◼ Teaching Tips and Additional Examples The seventh edition of this chapter is slightly reorganized. Discussion of the NCAA and Game Theory are tabled for later chapters while they continue to discuss in more detail some international sports such as European Soccer. As part of your discussion of monopoly power, it is useful to make a direct comparison to the competitive solution and the effect of entry barriers on market power. In addition to the material in this chapter, you can refer back to the section on limiting entry in Chapter 3. All professional leagues, and teams within those leagues, maintain their monopoly power through strictly enforced entry barriers. This chapter relies heavily on Industrial Organization, which in turn relies heavily on the legal system to help explain how monopolies are created and sustained. The discussion of antitrust law is critical since antitrust exemptions (limited or full) are the source of professional sports monopoly and monopsony power. Think of real life examples of collusion taking place in the business world and think of how seriously the federal government takes these cases. The movie The Informant is an excellent recent example. Yet the Yankees and Red Sox are two for profit businesses that are able to get together as members of a cartel by MLB. This ability is what separates the sports franchises from the typical business.
Illustrating Consumer Surplus: Further examples You can illustrate the concept of consumer surplus and personal seat licenses by asking the class if anyone is a particularly big fan of one of your school’s teams, such as basketball. For those that raise their hands, ask what they would be willing to pay for a ticket (per game). Then ask if there is someone who likes the team, but would not be willing to pay quite as much. Repeat the process a few more times so that 3–5 students have offered a decreasing series of prices. Suppose the results follow this pattern: Student
Pay Offer for Seat
Alex
$55.00
Brenda
$50.00
Carl
$30.00
David
$20.00
Eleanor
$10.00
Naturally, your results will differ from these, but you can follow the general pattern. If you feel theatrical, you can have them come to the front of the class and stand in the order of their willingness to pay. Plot the points as if you are plotting a demand curve and connect the dots. In this example, announce that the market price is $20.00 and draw a horizontal line at the market price. Ask Alex whether he would be willing to buy a ticket and ask him how he feels. Repeat for Brenda. Get her to compare her feelings with Alex’s. Illustrate the difference for Alex and Brenda by drawing vertical lines from the market price to the points for Alex and Brenda. These lines represent the extra pleasure—the consumer surplus—that each consumer receives from buying a sandwich. Repeat for the others. Get David to acknowledge that he does not care whether he buys a ticket; illustrate this by showing that his consumer surplus is exactly zero. Get Eleanor to say that she does not want to buy one and show that her “surplus” is negative.
◼ Additional Sources 1.
http://baseball1.com/bb-data/congress is an entire Web site devoted to Congressional action regarding antitrust issues in baseball.
2.
Dixit, Avinash and Barry Nalebuff, Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life, (New York: W.W. Norton, 1993). This book is a painless introduction to strategic behavior and game theory.
3.
Edmonds, Edmund “The Curt Flood Act of 1998: A Hollow Gesture After All These Years?” Marquette Sports Law Journal, vol. 9, no. 2, Spring 1999, pp. 315–345. This reading provides a lawyer’s-eye view of the Curt Flood Act, the first Congressional attempt to limit baseball’s antitrust exemption.
◼ Solutions to Back-of-Chapter Problems 4.1 Use a standard monopoly firm graph to show and explain how the monopoly power of a team changes when another team locates nearby. Answer: When another team locates to a nearby city, the monopoly power of the local team goes down. Its demand curve and the corresponding marginal revenue curve would shift to the left, leading to lowered profit-maximizing price and quantity. 4.2 You are the commissioner of the National Hockey League. You have been called to testify on an antitrust case against the NHL. Argue that: (a) The NHL is not a monopoly. (b) Even if it is a monopoly, it is a natural monopoly. Answers: (a) To argue that the NHL is not a monopoly requires that the NHL have many substitutes. For example, college hockey, minor league hockey, other sports, even non-sports forms of entertainment might compete for the same consumer expenditures on entertainment. (b) To argue that the NHL is a natural monopoly, one needs to establish that the high fixed costs associated with the startup and maintenance of a team that, when combined with the low marginal costs of operating a franchise, would make it inefficient to have multiple teams/leagues operating in the same market, similar to the Detroit Lions example in the text.
4.3 Why can’t a Premier League team like Arsenal exert as much monopoly power as the NFL’s Chicago Bears? Answer:
First of all, London is home to Arsenal as well as 5 or 6 other English Premier League soccer teams. If Arsenal charges too much for tickets or provides a poor product on the field, soccer fans can simply go across town to Tottenham Hotspurs, Charleton Athletic, Chelsea, or Fulham. More importantly, however, is the fact that the NFL can restrict entry into the Chicago market, while the EPL is an open league with promotions and relegations. If Arsenal was making a lot of monopoly profits, this would give the incentive for other people to start football clubs in London. If the market could support multiple clubs, it is likely that the high revenues earned by the startup clubs would allow them to spend sufficiently on payroll such that the team would eventually earn promotion to the Premier League and become a full competitor to Arsenal. In fact, most of England’s largest cities, including Birmingham, Liverpool, Manchester, and London, generally have more than one team in the EPL in any given season.
4.4 Suppose that the demand curve for tickets to see a football team is given by Q = 100,000 − 100p and marginal cost is 0. (a) How many tickets would the team be able to sell (ignoring capacity constraints) if it behaved competitively and set p = MC? (b) How many tickets would it sell – and what price would it charge – if it behaved like a monopoly. (Hint: In this case the marginal revenue curve is given by MR = 1000 − 0.02Q.) (c) Which pricing strategy generates more revenue, the monopoly price or the competitive price? (d) Compute the deadweight loss and decrease in consumer surplus in the change from competitive to monopoly pricing. Answer:
(a) If the team sets prices at competitive levels, p = MC, with MC = 0. Plug p = 0 into the demand equation, Q = 100,000 − 100p, so Q = 100,000. (b) If the team acts like a monopoly, it will set MC = MR. MR = 1000 – 0.02Q = 0 = MC Q = 50,000 P = $500
(c) Under competitive pricing, the team’s revenue is given by 100,000∙$0=$0. Under Monopoly pricing, revenue is given by 50,000∙$500=$25,000,000. So monopoly pricing generates more revenue, as expected. (d) The deadweight loss associated with the monopoly is given by the area of triangle (100,000-50,000) ∙$500∙1/2=$12,500,000.
4.5 Why was the limited exemption from antitrust laws so crucial to the development of the NFL? Answer:
The limited exemption allowed the NFL to act as a monopolist over one of its most important sources of revenue—broadcast rights. The monopoly position granted by the limited exemption meant that teams would not undercut one another in negotiations with television networks. The agreement also had the effect of galvanizing the owners into a unified group rather than a loose collection of teams that competed both on and off the field. The off-field cooperation brought about by the joint television contracts and the sharing of resulting revenues significantly strengthened the league.