Friday, November 30, 2007
Non-profits Often Behave Like For-Profits
This morning's St. Louis Post-Dispatch has an article on the Southlake (Tx) Carroll Dragons football program. Southlake, a suburb of Fort Worth, is a wealthy enclave whose residents have a high willingness to pay for the local high school football program. What the author, Tim O'Neill, describes could as well describe many major college programs and professional programs. A couple of excerpts:
The domination on the field of play:
Call it Texas football pageantry on afterburner, fired by championships. Since 1988, the school has won eight state football crowns, including three of the last four at the big-school level. Over the past five years, the Dragons are 72-2.
There is the use of two part tariffs:
The concrete grandstand includes 1,621 reserved seats for season-ticket holders, who buy $90 three-year seat licenses to ward off the long waiting list.
There are the first-rate facilities:
Having great facilities certainly helps. This suburb of airline pilots, business executives and Dallas Cowboy football players living in $500,000-plus homes provides the Dragons with three outdoor practice fields and an indoor center that covers a 60-yard-long turf field.
There is revenue sharing:
The Carroll Independent School District is among the Texas districts that pay into a "Robin Hood" fund for less-fortunate schools. This year it will send $11 million.
After having studied various facets of sports economics for the past 13 years or so, it still interests me how similar the motivations are for for-profit and not-for-profit sports programs. Of course being not-for-profit doesn't really mean that you can't have profits as your objective. All having this status does is restrict how profits can be distributed.
Labels: demand for sports, high school football, profit-maximization
Thursday, November 29, 2007
North American Association of Sports Economists
The North American Association of Sports Economists has negotiated with the Journal of Sports Economics to get members of the Association cut rate subscriptions to the JSE. If anyone who regularly reads The Sports Economist is interested in NAASE or the JSE, you can learn more about both the association and the journal at the association website.
The reason for this post is to inform the readers of The Sports Economist blog that it is possible to join the association and get a very good deal on the journal. For $50 one gets a one year membership in NAASE AND an annual subscription to the Journal of Sports Economics. In comparison, an individual subscription to the JSE without going through NAASE is about $95 a year.
You can even pay online either using a paypal account or a credit card payment to paypal. Details of the process are at the NAASE website.
I apologize to anyone offended by the use of this blog to advertise the North American Association of Sports Economists. I hope the great cost savings on the Journal of Sports Economics makes up for it.
Revision: Here is the link directly to the membership page http://www.kennesaw.edu/naase/membership.html.
The reason for this post is to inform the readers of The Sports Economist blog that it is possible to join the association and get a very good deal on the journal. For $50 one gets a one year membership in NAASE AND an annual subscription to the Journal of Sports Economics. In comparison, an individual subscription to the JSE without going through NAASE is about $95 a year.
You can even pay online either using a paypal account or a credit card payment to paypal. Details of the process are at the NAASE website.
I apologize to anyone offended by the use of this blog to advertise the North American Association of Sports Economists. I hope the great cost savings on the Journal of Sports Economics makes up for it.
Revision: Here is the link directly to the membership page http://www.kennesaw.edu/naase/membership.html.
Wednesday, November 28, 2007
What Is the Price Elasticity of Demand for NFL Network?
Gregg Easterbrook of ESPN knows. It's greater than one (in absolute value):
No, Gregg. If you cut prices, that will lead to an increase in the quantity demanded, not demand; if you cut prices, you move downward along the demand curve, you don't shift it.
And whether that will lead to an increase in the revenues for the firm depends on the price elasticity of demand. And it is not at all clear that the price elasticity of demand for NFL Network is greater than one.
The NFL's insistence on asking too much for its channel is yet another example of how often big business, with zillions of dollars in executive-suite and economic-consultant spending, nevertheless acts as if it's ignorant of basic economics. To increase revenues, cut prices; this raises demand. (A high price suppresses demand.)
No, Gregg. If you cut prices, that will lead to an increase in the quantity demanded, not demand; if you cut prices, you move downward along the demand curve, you don't shift it.
And whether that will lead to an increase in the revenues for the firm depends on the price elasticity of demand. And it is not at all clear that the price elasticity of demand for NFL Network is greater than one.
Labels: Elasticity of demand
Ticket Scalping in Missouri - Now It's Legal
In Missouri, ticket scalping at prices above face value is now legal..
And there was some rejoicing (and economic development???).
To wit: Hal Wagner, owner of Ace Sports & Nationwide Tickets at Oak Park Mall, already has opened a location at Independence Center.
“We’ve been waiting for that ridiculous law to be repealed,” said Wagner, whose company buys and resells tickets at prices that exceed face value. “This is a great, great thing for Missourians.”
But ticket scalping was still illegal last weekend when the University of Missouri and the University of Kansas met in Kansas City to determine the Big XII North champion in football. But you wouldn't have known it had you looked at the vigorous secondary market in tickets around Arrowhead Stadium.
Before the Border War on Saturday night at Arrowhead, there was the Price War in the parking lot.
“Tickets! I got tickets!” a man named Bill yelled as cars crept by him on the way to the MU-KU game. “Two tickets, $600!”
One week before a new Missouri law will kick in legalizing ticket scalping at sporting events, scalpers like Bill, who declined to give his last name, combed their way through the crowd. Tickets with a face value of $30 to $55 sold from $100 to as much as $400.
“This is a day to make money,” he said.
Underpriced tickets create opportunities for scalpers. As I've written before, event tickets are priced with an eye towards expected demand and are oftentimes set months in advance. No one can throw anyone under the bus for underpricing this particular event. Who'd have thought, coming into this game, that MU and KU would have been ranked 4th and 2nd respectively in the BCS ratings with one loss between them and with both schools sporting national championship hopes? Not I, said the fly. The Missouri Tigers, with all their returning talent, had not had many Novembers to remember recently. The Kansas Jayhawks were coming off a 0.500 season in which they were not invited to a bowl.
The beauty of legalized scalping is that it allows tickets to go to the people who value them the most and it allows more information to be used in the setting of ticket prices. But the first article notes that scalping today has some new problems.
Missouri Attorney General Jay Nixon recently cracked down on ticket brokers, suing three of them for scalping tickets to an upcoming Hannah Montana concert at the Sprint Center. Nixon later asked for a temporary restraining order against an Illinois broker who was selling tickets to the recent Missouri-Kansas football game at prices well above face value.
“Unfortunately, the elimination of this consumer-protection tool has come at a time when the ability to take unfair advantage of consumers has grown significantly through the Internet,” said Nixon spokesman Scott Holste.
If he's talking about the ability of scalpers to snap up loads of tickets when they first go online, what amounts to butting into a virtual line, that's not the fault of scalping per-se. You can argue that legalizing scalping increases the benefits from butting-in, but it's not scalping that is the root cause of this problem. It's the butting-in.
If you are cooking a turkey and you realize you might burn your hand, you don't throw away the food to keep from getting burned. You take other precautions to keep from getting burned. Why ban an activity where people engage in voluntary trade when the problem lies elsewhere?
Why not ban computers? Technology has lowered the cost of butting in, so if you make an argument that scalping should be banned because of the butting in, you can make a similar argument about banning computers.
Of course banning computers is not the optimal solution, but neither is banning the secondary resale of tickets above face value.
Labels: ticket demand, ticket pricing, ticket scalping
Monday, November 26, 2007
NFL's Game of Chicken
The strategic game between the NFL and "Big Cable" was the feature story by Barry Horn on the front page of Sunday's Dallas Morning News sports section. He describes a classic "game of chicken":
Even with this rationale, the NFL still had to deal with the cable providers and the "chicken and egg" problem for a startup channel -- they needed viewers to get on main cable tier but it's hard to attract viewers quickly if stuck on a specialized "sports tier." As the Horn article notes, satellite services and "small cable" went for the new network, but "Big Cable" did not (these difference in the risk taking and innovation is an interesting economic story in itself). According to Big Cable, viewers didn't care about the absence of the network. Only about 1/3 of households currently receive the NFL Network.
The NFL countered by putting better matchups on. As Dallas owner Jerry Jones states:
The article alludes to possible intervention over the long run by the FCC and state legislators. I can only hope that doesn't happen, other than prompting them to reduce whatever barriers to competitive entry exist. There is a marketplace out there, and it is working itself out albeit not in some kind of instantaneous, nirvana kind of way. By the way, I'll be enjoying the game on my DirectTV connection.
The NFL hoped the promise of a Packers-Cowboys extravaganza in its second season of broadcasting games would ignite a run of viewers demanding their cable carriers offer the network. But a funny thing has happened to the most irresistible force in the sports universe. The NFL has run into an immovable object: big cable carriers.Phil Miller's post in 2005 alerted Sports Economist readers to the blooming idea of an NFL Network. In a September post Skip provided an economic rationale for these kinds of vertical integration moves by sports leagues, observing that technological changes have made intermediaries (somewhat) less valuable than in bygone days.
Even with this rationale, the NFL still had to deal with the cable providers and the "chicken and egg" problem for a startup channel -- they needed viewers to get on main cable tier but it's hard to attract viewers quickly if stuck on a specialized "sports tier." As the Horn article notes, satellite services and "small cable" went for the new network, but "Big Cable" did not (these difference in the risk taking and innovation is an interesting economic story in itself). According to Big Cable, viewers didn't care about the absence of the network. Only about 1/3 of households currently receive the NFL Network.
The NFL countered by putting better matchups on. As Dallas owner Jerry Jones states:
"it's no accident that there are two Dallas Cowboys appearances in the network's eight games" ... "We anticipate broadening the number of games on NFL Network," "The cable companies are screwing with our fans, if you will. And we've got to stop it."Then, the NFL got the huge unanticipated boost of both teams holding 10-1 records coming into the game. That puts the spotlight back on Big Cable. The impact is softened somewhat by some local cable franchises and/or local cable channels working out one-time deals to carry the game as has happened in and around Dallas.
"The NFL knew it had something special when its scheduling formula spit out a Packers-Cowboys matchup this season. While the league could never have anticipated they would rank as the top teams in the NFC, it did know the value of tradition and could document each team's enormous drawing power on national television." (Horn)
The article alludes to possible intervention over the long run by the FCC and state legislators. I can only hope that doesn't happen, other than prompting them to reduce whatever barriers to competitive entry exist. There is a marketplace out there, and it is working itself out albeit not in some kind of instantaneous, nirvana kind of way. By the way, I'll be enjoying the game on my DirectTV connection.
Sunday, November 25, 2007
Unbalanced Schedules and Competitive Balance
With the NFL approaching the business-end of the season, the strength of schedule becomes of increasing importance and an interesting feature of many leagues is the deliberate use of an unbalanced schedule. The reasons for this may include time constraints, the desire to maximise match attendance and the enhancement of competitive balance.
Liam Lenten of La Trobe University in Australia makes an interesting contribution to this debate in this examination of competitive balance in the context of the unbalanced schedule in the Scottish Premier League. Lenten suggests that comparisons between the SPL and other European competitions requires a correction to the competitive balance statistic, in order to control for the unbalanced schedule. Once such corrections are made, he argues the SPL is consistently less competitive than other European leagues. 2007 has been a productive year for Liam, so look out for more of his working papers in future posts.
Liam Lenten of La Trobe University in Australia makes an interesting contribution to this debate in this examination of competitive balance in the context of the unbalanced schedule in the Scottish Premier League. Lenten suggests that comparisons between the SPL and other European competitions requires a correction to the competitive balance statistic, in order to control for the unbalanced schedule. Once such corrections are made, he argues the SPL is consistently less competitive than other European leagues. 2007 has been a productive year for Liam, so look out for more of his working papers in future posts.
Friday, November 23, 2007
A measure of success
I’d like to connect two ideas – the sensitivity of pay to performance and the quality of the England soccer team. I have long argued that money buys success in sport. My evidence is based on running regressions of team win percentages on wage expenditure: the coefficient on wages is usually significant at the 1% level and the percentage of variation explained by wages is substantial- between 30% and 90%, depending on the league and the period of time covered. Most notably, if you average over time the amount of variation explained becomes very high. Then I get asked: if that’s true why have the Yankees had the highest payroll for the last seven years but haven’t won a World Series?
The answer is that sports championships are contests involving repeated trials, which work in favour of a dominant team when outcomes are based on averaging these trials (league or series play), but against it when outcomes are based on elimination. For example, suppose the Yankees buy thesmelves a 60% probability of winning each game they plays (those are pretty good odds). Then if they play a best of five series their probability of winning it is 68%. But if they have to win four series in order to win the Fall Classic, then their probability of success is only 22%. Moreover, even if the process is repeated seven times there is still an 18% probability they will fail (unlikely perhaps, but no so improbable).
Likewise, England is a very successful soccer team in the sense that its win-loss record (treating draws as half a win) is just under 69% over its history, and even allowing for some catch-up in recent years, it is still averaging around the 60-65% mark (in failing to qualify for Euro 2008 its win loss record was 66%). But to win a championship you need to win enough qualifiers, then progress in a group stage, then win quarter-final, semi-final and final. Let us say there are 12 “must win” games in order to win a championship and England has a 65% chance of winning every game. On this basis its chance of winning the whole thing is a pitiful 0.5% and the probability of winning a World Cup or European Championship over the last 40 years was about 10%. That sounds about right to me. In order to give itself a decent chance, England need to achieve a probability of winning of about 75% in every game, and let’s see, that would put it on a par with, um, …Brazil.
The answer is that sports championships are contests involving repeated trials, which work in favour of a dominant team when outcomes are based on averaging these trials (league or series play), but against it when outcomes are based on elimination. For example, suppose the Yankees buy thesmelves a 60% probability of winning each game they plays (those are pretty good odds). Then if they play a best of five series their probability of winning it is 68%. But if they have to win four series in order to win the Fall Classic, then their probability of success is only 22%. Moreover, even if the process is repeated seven times there is still an 18% probability they will fail (unlikely perhaps, but no so improbable).
Likewise, England is a very successful soccer team in the sense that its win-loss record (treating draws as half a win) is just under 69% over its history, and even allowing for some catch-up in recent years, it is still averaging around the 60-65% mark (in failing to qualify for Euro 2008 its win loss record was 66%). But to win a championship you need to win enough qualifiers, then progress in a group stage, then win quarter-final, semi-final and final. Let us say there are 12 “must win” games in order to win a championship and England has a 65% chance of winning every game. On this basis its chance of winning the whole thing is a pitiful 0.5% and the probability of winning a World Cup or European Championship over the last 40 years was about 10%. That sounds about right to me. In order to give itself a decent chance, England need to achieve a probability of winning of about 75% in every game, and let’s see, that would put it on a par with, um, …Brazil.
Thursday, November 22, 2007
Thanksgiving Potpourri
A couple of items to ponder while digesting your turkey and stuffing:
- An interesting article from the Houston Chronicle on the moral hazard involved in buyout clauses for college football head coaches. It seems that most athletic departments can't come up with enough money to buy losing coaches out of their long-term contracts. Instead, ADs turn to deep pockets donors who pony up the cash for the buyout. ADs shouldn't write buyout clauses into contracts that they can't pay. But it appears that rational ADs know that their donors will gladly pay the buyout out of their own pockets if it turns out that Coach Wunderkind can't beat Texas and Oklahoma.
- Dennis Coates discussed an article about the lack of economic development around M & T Bank Stadium in Baltimore a few weeks ago. A recent article in the San Antonio Express News about the neighborhood surrounding the AT&T Center, home of the San Antonio Spurs, makes a similar point. Like the Baltimore article, the picture here says it all. But this quote about the bonanza of economic development around the arena is also telling
The crazy thing about the AT&T Center is that the Spurs are claiming it is obsolete just five years after a significant renovation, and are demanding a new, publicly financed arena to replace it."The nearest buildings were Leon's tattoo parlor, a tiny funeral home, an auto repair shop, a vacant liquor store and a quiet, aging neighborhood.
Beyond the tracks on Houston Street, a Coca-Cola bottling plant operates south of the arena. Directly to the east, golfers hit the links at the city-owned Willow Springs Golf Course. A Ryder truck rental office and similar companies do business in an industrial zone north of the arena.
Few, if any, businesses appear to complement a state-of-the-art sports arena."
Tail starts to wag
England's 3-2 defeat by Croatia last night, eliminating them from the Euro 2008 soccer championship, looks likely to set off the kind of "club versus country" debate referred to in my last blog. Financial casualties are the broadcasters, whose audiences in one of Europe's largest broadcast markets will now be negligible, plus sellers of England merchandise. The Football Association, which governs the game in England as well as running the England team is said to be facing a loss of about £20 million in income.
In the media feeding frenzy the blame is being leveled at the coach Steve McClaren (now sacked), the players (caring more about their club than their country), the influx of foreign players (not enough domestic talent), the FA (incompetence), the clubs (lack of training and development), the profit seeking owners of Premier League, the European Union (no exemption from antitrust for sport, so domestic players cannot be awarded preference). Politicians are getting involved because constituents are unhappy. Who knows, maybe it will even create added pressure for a referendum on the new EU treaty. If I were a foreign owner in the EPL I would be lying low for a few months.
Watching the game, it was very noticeable that the Wembley pitch had been badly damaged by last month's NFL game (you could still see the yardage marks on the sideline). Since we're in the blame game here, I vote we place it fairly and squarely with our American cousins. Of course, I am hastily rediscovering my Polish roots. Nic się nie stalo, Polacy nic się nie stało!
In the media feeding frenzy the blame is being leveled at the coach Steve McClaren (now sacked), the players (caring more about their club than their country), the influx of foreign players (not enough domestic talent), the FA (incompetence), the clubs (lack of training and development), the profit seeking owners of Premier League, the European Union (no exemption from antitrust for sport, so domestic players cannot be awarded preference). Politicians are getting involved because constituents are unhappy. Who knows, maybe it will even create added pressure for a referendum on the new EU treaty. If I were a foreign owner in the EPL I would be lying low for a few months.
Watching the game, it was very noticeable that the Wembley pitch had been badly damaged by last month's NFL game (you could still see the yardage marks on the sideline). Since we're in the blame game here, I vote we place it fairly and squarely with our American cousins. Of course, I am hastily rediscovering my Polish roots. Nic się nie stalo, Polacy nic się nie stało!
Tuesday, November 20, 2007
Globalization and sporting nationalism
Despite being much over-hyped, globalization is a genuine phenomenon in sports. Absent barriers (legal, economic or cultural) to mobility, talent will migrate to where it is valued most highly. Thus MLB sucks in talent from central America and Japan, the NHL raids northern and eastern Europe, and the NBA searches for tall people everywhere. In the soccer world Brazilians and Argentines migrate via Portugal and Spain into Italy and England, and an increasingly large share of the top talent plays in England thanks the Premier League’s economic dominance. This happens to coincide with the migration of substantial numbers of Poles (and other East Europeans) into the UK (and you wouldn’t expect to find me complaining about that).
Yesterday’s Independent newspaper carried a very good article on the parallel between general economic migration and soccer migration from the managing director of HSBC. One complaint about soccer migrants in to England is that they have deprived English players of the chance to play at the highest level (less than half of Premier League players are eligible to play for England). The article points out that England’s performance has not in fact deteriorated, and raises the puzzle as to why second rate English players have not looked for opportunities abroad.
There are broader issues here. Economic migration occurs because the wage rate at which domestic supply meets domestic demand is much higher than the equilibrium wage rate abroad. In this sense there is no difference between middle class Californian families wanting to hire Mexican gardeners than Arsenal fans wanting a team that will win the Champions League (except that there is some evidence that fans will pay a premium to watch the skills of Brazilian stars even if a cheaper domestic alternative is available). In my experience club fans couldn’t care less about nationality, as long as their team wins. Furthermore, since in team sports there really are only club fans in the USA, no one there seems to care about nationality.
However, some people do care about the national team in soccer, rugby and (all right, I know I keep banging on about it) cricket. These people want restrictions on migration to support the development of the national team. Who are these people, and how much do they really care? In soccer there are relatively few national team games, and I think interest in the Premier League far exceeds interest in the England team, even if it does become a national obsession at World Cup and European Championship times (when there are no EPL games). One might ask whether the tail should be allowed to wag the dog.
On the other hand, in rugby and cricket the national team game is far more important than the club game, and so preparation of national team players matters more than the health of any one club. But, I would argue, one factor that has strangled the club game in rugby and cricket is precisely this phenomenon. National team games fail to create a large loyal fan base because there are so few games played; local loyalties are strangled because the best players get snatched away at critical moments. Only soccer has managed the trick of sustaining interest both at club and international level because of the underlying strength of the club game. Perhaps we need fewer concessions to the sporting nationalists, and more support for the grassroots – the clubs that play the game regularly.
Yesterday’s Independent newspaper carried a very good article on the parallel between general economic migration and soccer migration from the managing director of HSBC. One complaint about soccer migrants in to England is that they have deprived English players of the chance to play at the highest level (less than half of Premier League players are eligible to play for England). The article points out that England’s performance has not in fact deteriorated, and raises the puzzle as to why second rate English players have not looked for opportunities abroad.
There are broader issues here. Economic migration occurs because the wage rate at which domestic supply meets domestic demand is much higher than the equilibrium wage rate abroad. In this sense there is no difference between middle class Californian families wanting to hire Mexican gardeners than Arsenal fans wanting a team that will win the Champions League (except that there is some evidence that fans will pay a premium to watch the skills of Brazilian stars even if a cheaper domestic alternative is available). In my experience club fans couldn’t care less about nationality, as long as their team wins. Furthermore, since in team sports there really are only club fans in the USA, no one there seems to care about nationality.
However, some people do care about the national team in soccer, rugby and (all right, I know I keep banging on about it) cricket. These people want restrictions on migration to support the development of the national team. Who are these people, and how much do they really care? In soccer there are relatively few national team games, and I think interest in the Premier League far exceeds interest in the England team, even if it does become a national obsession at World Cup and European Championship times (when there are no EPL games). One might ask whether the tail should be allowed to wag the dog.
On the other hand, in rugby and cricket the national team game is far more important than the club game, and so preparation of national team players matters more than the health of any one club. But, I would argue, one factor that has strangled the club game in rugby and cricket is precisely this phenomenon. National team games fail to create a large loyal fan base because there are so few games played; local loyalties are strangled because the best players get snatched away at critical moments. Only soccer has managed the trick of sustaining interest both at club and international level because of the underlying strength of the club game. Perhaps we need fewer concessions to the sporting nationalists, and more support for the grassroots – the clubs that play the game regularly.
Thursday, November 15, 2007
A-Rod Discovers the "Yankee Premium"
Three weeks ago Scott Boras stole the spotlight from the (flagging) World Series by announcing A-Rod's intention to seek a new employer. Breaking news last night and today: A-Rod returns to New York for roughly the same amount.
View #1) Boras/A-Rod were gaming the Yanks all along. If so, they aren't good game players.
View # 2) Offered by some guy on Dan Patrick's Fox Sports Radio show today -- A-Rod's followed his heart back to NY. A-Rod and emotion? Maybe the guy was Scott Boras.
View #3) Expressed by Dan Patrick -- A-Rod and Boras tested the market and quickly figured out that no team would be offering anything near the Yanks. Bingo!
View #3 fits with my post on the Yankee Premium (June 2005). Yankee players near their prime can't expect to receive anything near their Yankee salary unless they find a totally insane owner. My premise is that the Yankees' huge revenue advantage over the rest of the league does not all end up in the Steinbrenners' pockets. Instead, players effectively capture large shares of this surplus ("rent"). One implication is that Yankee payroll figures hugely overstate the competitive abilities of their players. I did a quick comparison to similar players and estimated that among starters and top pitchers, the "Premium" doubled what the players skills were valued in the rest the market value.
While the idea and especially my crude methods for estimating the premium generated the most comments for any of my Sports Economist posts, recent Yankee signings offer strong confirmation of the basic idea The 36 year old Jorge Posada signed a deal worth $13 mil per year for 4 years. A 38 year old Mariano Rivera signed for an astonishing $15 million per year for 3 years, up from his prior $10 million. That's a lot for a guy pitching 70 innings per year. Maybe the Yankees made poor decisions on the personnel, and maybe not. In either case, the amounts that they forked vastly exceed the market values of comparable (or even better) players. Top flight catchers with strong offensive numbers can be purchased in the $4-$10 million range. Rivera's salary breaks down to about $70,000 per out. By comparison, Johan Santana made about $12,000 per out in 2006 and $20,000 per out in 2007 while Josh Beckett was around $12,000 this year. Yet, if Santana ends up with NY or anyone else for that matter, their salary will jump up to Yankee levels.
View #1) Boras/A-Rod were gaming the Yanks all along. If so, they aren't good game players.
View # 2) Offered by some guy on Dan Patrick's Fox Sports Radio show today -- A-Rod's followed his heart back to NY. A-Rod and emotion? Maybe the guy was Scott Boras.
View #3) Expressed by Dan Patrick -- A-Rod and Boras tested the market and quickly figured out that no team would be offering anything near the Yanks. Bingo!
View #3 fits with my post on the Yankee Premium (June 2005). Yankee players near their prime can't expect to receive anything near their Yankee salary unless they find a totally insane owner. My premise is that the Yankees' huge revenue advantage over the rest of the league does not all end up in the Steinbrenners' pockets. Instead, players effectively capture large shares of this surplus ("rent"). One implication is that Yankee payroll figures hugely overstate the competitive abilities of their players. I did a quick comparison to similar players and estimated that among starters and top pitchers, the "Premium" doubled what the players skills were valued in the rest the market value.
While the idea and especially my crude methods for estimating the premium generated the most comments for any of my Sports Economist posts, recent Yankee signings offer strong confirmation of the basic idea The 36 year old Jorge Posada signed a deal worth $13 mil per year for 4 years. A 38 year old Mariano Rivera signed for an astonishing $15 million per year for 3 years, up from his prior $10 million. That's a lot for a guy pitching 70 innings per year. Maybe the Yankees made poor decisions on the personnel, and maybe not. In either case, the amounts that they forked vastly exceed the market values of comparable (or even better) players. Top flight catchers with strong offensive numbers can be purchased in the $4-$10 million range. Rivera's salary breaks down to about $70,000 per out. By comparison, Johan Santana made about $12,000 per out in 2006 and $20,000 per out in 2007 while Josh Beckett was around $12,000 this year. Yet, if Santana ends up with NY or anyone else for that matter, their salary will jump up to Yankee levels.
Labels: baseball
Wednesday, November 14, 2007
Simultaneity and Identification: Creatine
In his latest weekly column (Nov 13, 2007, mostly about sports but also with a good dose of economics) at ESPN, Gregg Easterbrook writes,
If the demand curve shifted leftward, it also seems that the supply curve could have shifted to the right. Either shift (or both) would cause the price to drop, but it would be incorrect to attribute the price decline to either shift alone without more information.
Economics note: As the sense that creatine possesses forbidden powers has declined, so has its price. Five years ago, General Nutrition Centers sold a canister for $100 or more; now, canisters sell for $25 or so.It looks as if Easterbrook is attributing the drop in the price of creatine to a decline in demand. But it is also quite likely that the high prices induced entry and increased competition among suppliers. Indeed, most websites devoted to body-building point out that there are now many brands and varieties of creatine to choose from.
If the demand curve shifted leftward, it also seems that the supply curve could have shifted to the right. Either shift (or both) would cause the price to drop, but it would be incorrect to attribute the price decline to either shift alone without more information.
Labels: simultaneity
Whoa Nellie!
A paper on the AP poll in college football by Ohio State's Trevon Logan:
Thanks to Pablo Halkyard for the link.
Whoa, Nellie! Empirical Tests of College Football's Conventional WisdomLooks mighty interesting! Among the cited references are Brian's paper on path dependence in the polls, and former students Rodney Paul and Andy Weinbach's paper on the "Wisdom of Point Spread Markets." I'll let one of them comment on the study if they choose. The paper is at the NBER and also on Trevon's web page at Ohio State.
College football fans, coaches, and observers have adopted a set of beliefs about how college football poll voters behave. I document three pieces of conventional wisdom in college football regarding the timing of wins and losses, the value of playing strong opponents, and the value of winning by wide margins. Using a unique data set with 25 years of AP poll results, I test college football's conventional wisdom. In particular, I test (1) whether it is better to lose early or late in the season, (2) whether teams benefit from playing stronger opponents, and (3) whether teams are rewarded for winning by large margins. Contrary to conventional wisdom, I find that (1) it is better to lose later in the season than earlier, (2) AP voters do not pay attention to the strength of a defeated opponent, and (3) the benefit of winning by a large margin is negligible. I conclude by noting how these results inform debates about a potential playoff in college football.
Thanks to Pablo Halkyard for the link.
Ruminations from the Hot Stove League
Bill Shaikin provides a nice discussion of baseball's "cash tree" in the LA Times. Among many interesting observations:
Also in the Times, Thomas Bonk reports on the PGA's new drug testing plan. Beta blockers are banned, so it will be interesting to examine the putting statistics next season. Could we see a return of the yips?
--"Today is the first day free agents can sign with a new team. In the days and weeks to come, some player will sign a contract that appears so outrageous fans will shake their heads in amazement."I prefer big screen TV's for viewing sports, but Beane has a point. The oriental audiences for games involving Dice-K and Ichiro (20 million), and the NBA's Yao and Yi show (200 million) are staggering.
--"Baseball is awash in revenue, and you don't have to take Scott Boras' word for it. "
--Boras' word on revenues: " 'There's been a strong demand for corporate and premium seating .... -- 70% of the revenue comes from 30% of the seating.' "
--"Revenues from traditional tickets and local broadcast rights have more than tripled since 1994. And, with the value of sports programming rising to national advertisers struggling to reach mass audiences amid the proliferation of cable and satellite channels, national broadcast rights have soared from $52 million to $935 million."
Billy Beane on the international market: " '"There are millions -- possibly billions -- of people on the other side of the world that have yet to pick their favorite team. They're going to be able to pull up their cellphone some day and watch the Oakland A's from Hong Kong.' "
Also in the Times, Thomas Bonk reports on the PGA's new drug testing plan. Beta blockers are banned, so it will be interesting to examine the putting statistics next season. Could we see a return of the yips?
Tuesday, November 13, 2007
Ties That Bind Us
Last Saturday the British Horseracing’s Champion Flat Jockey contest was settled…in a tie. Seb Sanders and Jamie Spencer shared the title with 190 wins each for the season. No play-off, no decider, no outright winner. Now, even some UK based bloggers have argued that this was ridiculous- what major championship is settled without an outright winner? But generally, the reaction over here has been more appreciative of a close fought contest, rather than dismissive. There are some discussions about restructuring the rules, but this has to do with whether other metrics are intrinsically superior (e.g. season’s winnings, or ruling out races on all-weather surfaces) rather than the undesirability of a tie per se.
My point is that ties seem far more culturally acceptable outside of the US. Most obviously, tied soccer matches are an everyday occurrence, accounting for about one third of all league games. In cricket ties (as in soccer, these are called “draws” in Bringlish) are also commonplace, even for international test matches played over five days. Because there is no strike-out rule the chances are slim that all batters can be retired (“out”), even with the limitation of two innings per team. But there are two famous instances of “tied tests”, referring to the situation where the scores were level after all the batters had been retired.
No one suggests that it is a shame that these games did not have a winner; rather it is held to be a blessing that there did not need to be a loser. And that, I guess, is the rub. Americans used to have tied games, so that no one was a loser, but this never seems to have been seen as satisfactory- one (male) American once described a tie to me as “like kissing your sister”. I’m not sure that differences in the way we play our games tells us much about our characters, because too often the rules were set up to suit some Victorian administrator and then inertia has set in. But I wonder if the case of the tied game is the exception that proves the rule.
My point is that ties seem far more culturally acceptable outside of the US. Most obviously, tied soccer matches are an everyday occurrence, accounting for about one third of all league games. In cricket ties (as in soccer, these are called “draws” in Bringlish) are also commonplace, even for international test matches played over five days. Because there is no strike-out rule the chances are slim that all batters can be retired (“out”), even with the limitation of two innings per team. But there are two famous instances of “tied tests”, referring to the situation where the scores were level after all the batters had been retired.
No one suggests that it is a shame that these games did not have a winner; rather it is held to be a blessing that there did not need to be a loser. And that, I guess, is the rub. Americans used to have tied games, so that no one was a loser, but this never seems to have been seen as satisfactory- one (male) American once described a tie to me as “like kissing your sister”. I’m not sure that differences in the way we play our games tells us much about our characters, because too often the rules were set up to suit some Victorian administrator and then inertia has set in. But I wonder if the case of the tied game is the exception that proves the rule.
Monday, November 12, 2007
The Schematic Irish Notre Dame Potpurri
Some notes on the team that takes the field with a "decided schematic advantage."
--The 1-9 Domers are sitting 103rd in the Sagarin ratings this week. This puts them just above 7-3 Hofstra, who are 16th among teams from the Championship Sub-division (1-AA). The Irish are thus a "playoff-caliber" team. Barely.
--The question on everyone's mind after Air Force did the business in South Bend on Saturday: "Would Notre Dame be an underdog at home next week vs. Duke?" The answer is no: ND is currently a 5 point favorite for this bottom-ten tussle. Although the doormats of the ACC would appear to be a walkover for anyone, Irish fans shouldn't get too comfortable: Duke gave Navy fits before losing on a last-second field goal.
--Notre Dame made a historic mistake when they hired Charlie Weis, for in doing so, they imported the dreaded chicken curse. A little-known and under-appreciated fact is that Weis was an assistant coach for the South Carolina Gamecocks in the late 1980s. His subsequent rise with the NFL's Patriots certainly created an identification problem.
--Next question: What do former NFL coaches Bill Callahan (dead man walking at Nebraska), John Mackovic (4-7 at Texas), and Charlie Weis have in common? Other than losing spectacularly at powerhouse programs, they've had a pronounced tendency to bury their head in a play chart while pacing the sideline.
--Weis' response after the defeat by Air Force: to "do a deeper level of thinking than you've done in the past." Oh dear me. This team is truly in serious trouble. A little more Les Miles and a little less playbook is surely in order for the Schematic Irish.
--The 1-9 Domers are sitting 103rd in the Sagarin ratings this week. This puts them just above 7-3 Hofstra, who are 16th among teams from the Championship Sub-division (1-AA). The Irish are thus a "playoff-caliber" team. Barely.
--The question on everyone's mind after Air Force did the business in South Bend on Saturday: "Would Notre Dame be an underdog at home next week vs. Duke?" The answer is no: ND is currently a 5 point favorite for this bottom-ten tussle. Although the doormats of the ACC would appear to be a walkover for anyone, Irish fans shouldn't get too comfortable: Duke gave Navy fits before losing on a last-second field goal.
--Notre Dame made a historic mistake when they hired Charlie Weis, for in doing so, they imported the dreaded chicken curse. A little-known and under-appreciated fact is that Weis was an assistant coach for the South Carolina Gamecocks in the late 1980s. His subsequent rise with the NFL's Patriots certainly created an identification problem.
Question: Who is great?It also pushed the problem of Gamecockiness below the surface. But with Weis' return to the land of college football, the chicken curse emerged with a flourish. And in classic curse fashion, with two BCS Bowl appearances teasing the faithful, before the inevitable, horrifying crash. The curse is mighty busy these days, having finished the career of former ND coach Lou Holtz, with another work in progress. It's a powerful thing, I'm tellin' ya!
a) Belichick; b) Brady; c) Weis; d) all of the above; e) a&b only.
--Next question: What do former NFL coaches Bill Callahan (dead man walking at Nebraska), John Mackovic (4-7 at Texas), and Charlie Weis have in common? Other than losing spectacularly at powerhouse programs, they've had a pronounced tendency to bury their head in a play chart while pacing the sideline.
--Weis' response after the defeat by Air Force: to "do a deeper level of thinking than you've done in the past." Oh dear me. This team is truly in serious trouble. A little more Les Miles and a little less playbook is surely in order for the Schematic Irish.
Labels: Charlie Weis, college football, Notre Dame
Friday, November 09, 2007
Fear and loathing in Seattle
NBA commissioner David Stern is putting the screws to Seattle in his attempts to get the community to provide taxpayer subsidies that are lucrative enough to keep the team from departing the "Emerald City" to even greener fields in Oklahoma.
Stern blasts city officials and the overwhelming majority of voters in the city for passing a law requiring (gasp!) that any funds used to help build an arena earn the same rate of return as a treasury bill. "That measure simply means there is no way city money would ever be used on an arena project," Stern said. Effectively, Stern has just confirmed what sports economists have known all along: taxpayer spending on sports infrastructure is unlikely to provide significant returns on the investment.
In addition, Stern also said that "if the team moves, there's not going to be another team there, not in any conceivable future plan that I could envision." Of course, he can't possibly mean this. The Big Four leagues are full of stories of cities that lost teams and then regained them including New York, Milwaukee, Seattle, and Washington in MLB, Charlotte and New Orleans in the NBA, Denver and Minneapolis in the NHL, and St. Louis, Oakland, Cleveland, Houston, and Baltimore in the NFL. (I certainly may be missing some other examples here.)
Indeed this is a classic example of the time inconsistency problem for which Finn Kydland and Ed Prescott (my graduate school macro professor!) won the Nobel Prize in 2004. Stern would like to threaten Seattle with the permanent loss of their NBA team in order to secure taxpayer concessions now. But should the team move, the NBA has every reason to want to back off its previous threats and relocate a team back into to the area due to the size, location, and income levels of the city. Even having lost a team, Seattle will likely remain a better candidate for a successful franchise than smaller and poorer cities such as New Orleans or Memphis. Certainly Seattle should not fall for Stern's bluster.
Stern blasts city officials and the overwhelming majority of voters in the city for passing a law requiring (gasp!) that any funds used to help build an arena earn the same rate of return as a treasury bill. "That measure simply means there is no way city money would ever be used on an arena project," Stern said. Effectively, Stern has just confirmed what sports economists have known all along: taxpayer spending on sports infrastructure is unlikely to provide significant returns on the investment.
In addition, Stern also said that "if the team moves, there's not going to be another team there, not in any conceivable future plan that I could envision." Of course, he can't possibly mean this. The Big Four leagues are full of stories of cities that lost teams and then regained them including New York, Milwaukee, Seattle, and Washington in MLB, Charlotte and New Orleans in the NBA, Denver and Minneapolis in the NHL, and St. Louis, Oakland, Cleveland, Houston, and Baltimore in the NFL. (I certainly may be missing some other examples here.)
Indeed this is a classic example of the time inconsistency problem for which Finn Kydland and Ed Prescott (my graduate school macro professor!) won the Nobel Prize in 2004. Stern would like to threaten Seattle with the permanent loss of their NBA team in order to secure taxpayer concessions now. But should the team move, the NBA has every reason to want to back off its previous threats and relocate a team back into to the area due to the size, location, and income levels of the city. Even having lost a team, Seattle will likely remain a better candidate for a successful franchise than smaller and poorer cities such as New Orleans or Memphis. Certainly Seattle should not fall for Stern's bluster.
Tuesday, November 06, 2007
Hypothesis Refuted?
Andy Pettitte has declined his option to remain with the Yankees, claiming that he needs time to figure out whether he wants to pitch at all next year. Like Alex Rodriguez, his contract gave him ten days after the World Series to make up his mind. The Yanks have apparently said to Pettitte, go ahead, take your time to decide, we want you back.
At first glance, this seems inconsistent with the good professor's hypothesis noted in the post below. The Yanks' tone in response to Pettitte has been one of accommodation. In contrast, their tone with Rodriguez was furious. (You might be too if a loud public NO! cost you over $20 million). Furious vs. accommodating could imply that there is simply no way back to the Yanks for A-Rod. But how many holes do the Yanks wish to fill, while competing with a well-stocked Boston club for the summit of the American League? It could be that the welcoming response to the Pettitte announcement is a signal that the Yanks will ultimately enter "let's talk" mode.
Or something else. One thing seems clear: Yankee machinations are likely to dominate the hot stove league.
At first glance, this seems inconsistent with the good professor's hypothesis noted in the post below. The Yanks' tone in response to Pettitte has been one of accommodation. In contrast, their tone with Rodriguez was furious. (You might be too if a loud public NO! cost you over $20 million). Furious vs. accommodating could imply that there is simply no way back to the Yanks for A-Rod. But how many holes do the Yanks wish to fill, while competing with a well-stocked Boston club for the summit of the American League? It could be that the welcoming response to the Pettitte announcement is a signal that the Yanks will ultimately enter "let's talk" mode.
Or something else. One thing seems clear: Yankee machinations are likely to dominate the hot stove league.
Monday, November 05, 2007
Two on Strategic Negotiation
A Yale law professor has a unique and interesting angle on Alex Rodriguez announcement during the Red Sox World Series clincher: it was a signal that he really does want to remain in New York. Read the argument for yourself.
Sonics owner Clay Bennett has announced his intent to move the team to Oklahoma City. In the high stakes arena subsidy game, both Bennett and the Seattle area appear to have taken things to the limit. Bennett is interviewed here by The Oklahoman. He comes across as very well informed and rational, and perfectly happy with the idea of moving. That may have been his intent all along. In the larger supergame that is being played, I doubt that Seattle fans considered the prospect that MLB and the NFL would tap out local taxpayers, leaving the Sonics ripe for the taking. But that's how I see this scenario playing out. Bennett likely figured that out four years ago.
Sonics owner Clay Bennett has announced his intent to move the team to Oklahoma City. In the high stakes arena subsidy game, both Bennett and the Seattle area appear to have taken things to the limit. Bennett is interviewed here by The Oklahoman. He comes across as very well informed and rational, and perfectly happy with the idea of moving. That may have been his intent all along. In the larger supergame that is being played, I doubt that Seattle fans considered the prospect that MLB and the NFL would tap out local taxpayers, leaving the Sonics ripe for the taking. But that's how I see this scenario playing out. Bennett likely figured that out four years ago.
Saturday, November 03, 2007
Revenue Sharing in MLB
Michael Lewis has an Op-Ed in the NYTimes this morning, pointing out that the present revenue-sharing formula in major league baseball does little to affect the quality of the various teams on average and despite the fact that some small market teams do well now and then.
The reason? Revenue sharing has little impact on the expected marginal revenue and marginal costs of ticket sales, and it especially has little impact on the expected marginal revenue product and marginal factor costs of hiring more talent for the team. As a result, many teams like, say, Tampa Bay, respond to what is essentially a lump-sum transfer by pocketing the extra cash.
Lewis points to several other examples of teams that have received large revenue-sharing payments not by spending the increased revenue on more talent.
Of course there have been exceptions. But if this is the general case, perhaps it is time for a second look at the revenue-sharing formula.
Isn't basic economics fun?
The reason? Revenue sharing has little impact on the expected marginal revenue and marginal costs of ticket sales, and it especially has little impact on the expected marginal revenue product and marginal factor costs of hiring more talent for the team. As a result, many teams like, say, Tampa Bay, respond to what is essentially a lump-sum transfer by pocketing the extra cash.
Lewis points to several other examples of teams that have received large revenue-sharing payments not by spending the increased revenue on more talent.
So revenue-sharing also reduces the marginal revenue of an expected win, and not just for the big-market teams that are taxed to support the programme; it also reduces the incentive for small market teams, the recipients of revenue-sharing, to win too.Since 1998, millions of dollars have been transferred from richer teams to poorer ones in an attempt to let all teams share in the economic advantages associated with playing in big markets — a large fan base, lots of press coverage and lucrative local cable television contracts. Last year, more than $300 million was transferred.
Yet since revenue sharing began, at least one team from each of the big four markets — New York, Los Angeles, Chicago and Boston — has appeared in every World Series except 2006. In the 10 years before 1998, in contrast, only two Series included one of those big-market teams.
The problem is that the teams receiving payments have come to use them as a primary source of income — rather than to build winning teams. The most extreme example has been the Tampa Bay Devil Rays. In 2006, this team had a payroll of about $35 million, $42 million less than the 2006 league average. Not surprisingly, it won only 38 percent of its games and filled less than 40 percent of its seats for home games. It also collected more than $30 million in revenue-sharing transfers. This past season, the team reduced its payroll to $24 million and had about the same level of success.
The Pittsburgh Pirates and the Kansas City Royals have also received significant revenue-sharing payments but kept payrolls low. These teams may well be slowly destroying their customer base. (The Rockies were not so parsimonious. With the team receiving $16 million in 2006, it increased its payroll for the next season by around $15 million.)
The problem is that transfers are based on local revenues. Teams that receive money are encouraged to invest it in their payrolls. But if a team actually attracts fans by fielding a winning team, its revenue-sharing receipts will be reduced.
Of course there have been exceptions. But if this is the general case, perhaps it is time for a second look at the revenue-sharing formula.
Isn't basic economics fun?
Friday, November 02, 2007
England's "Minister of Sport"
In England, there is a government "ministry" that administers .... err, make that meddles with commercial sport. The mere existence of this agency is as fine an example of government bloat as one could imagine. For further evidence, FT.com gives us some quotes from the head honcho:
Gerry Sutcliffe, the sports minister, on Thursday prompted a furious response from Chelsea after singling the club out in remarks about football’s highest earners being paid “obscene” wages by teams losing touch with economic reality and their working class roots.Neither, apparently, does Mr Sutcliffe. The article continues: 'Mr Sutcliffe said there was a balance to be struck in sport between commercialism and governance, “and it’s going too far down the commercial route”.' Ah yes, a government minister making the case for "more governance." As I was saying...
He singled out John Terry, the England captain who commands a salary from Chelsea of more than £130,000 a week, making him the Premier League’s highest wage-earner. Speaking at an FT sports industry conference, Mr Sutcliffe said: “It’s obscene. To be paid [about] £150,000 a week, in relation to the ordinary man in the street – people can’t understand that.” While accepting that professional sportsmen had a relatively short career, the minister said it was unsustainable for clubs such as Chelsea to be heavily in the red. “That’s not living in the real world, in my view. Fans move away from that. Fans can’t understand that level of funding.”
Labels: governance, government
Thursday, November 01, 2007
The NBA: Where Hardly Any Game Matters
The NBA rolled out its 2007-08 product this week with its typical promotion. Although continuing to do well in many markets from a live gate standpoint , the league has really faltered in trying to grow, or even keep, its television audiences (July '07 post). One criticism often levied at the NBA is that with an 82 game regular season including weeks with 3 games and back-back road game nights, individual games just don't matter enough.
During the playoffs last year, it struck me how little individual NBA playoff games mattered from if based on the nearness of elimination or advancement. Why watch the first 4 games of a seven game series? Why not let it play out to five or six games and then pay attention? Dennis Wilson collected some figures for playoffs from 1990-2007 that put some substance to this feeling:
Should the NBA adopt a lose and you're out playoff format just like the NCAA? That's seems like too big of a step but more modest moves (see May '05 suggestions) might help build more interest. For example, a 2 out of 3 format means that all games meet the 2 or fewer wins from winning criterion. In the meantime, truth-in-advertising might dictate my title as NBA's new banner.
During the playoffs last year, it struck me how little individual NBA playoff games mattered from if based on the nearness of elimination or advancement. Why watch the first 4 games of a seven game series? Why not let it play out to five or six games and then pay attention? Dennis Wilson collected some figures for playoffs from 1990-2007 that put some substance to this feeling:
- Only 30% of playoff games were "closeout" games where a team could win or lose the series
- Only 25% involved games where both teams were 2 or fewer wins away from winning the series
- Only 17% of 7-game first round series and NBA finals met the 2 or fewer wins from winning situation
Should the NBA adopt a lose and you're out playoff format just like the NCAA? That's seems like too big of a step but more modest moves (see May '05 suggestions) might help build more interest. For example, a 2 out of 3 format means that all games meet the 2 or fewer wins from winning criterion. In the meantime, truth-in-advertising might dictate my title as NBA's new banner.
