Thursday, October 08, 2009

Fans as Inputs, An Apparently On-Going Series 

In an earlier post I mentioned that there aren't too many treatments in the formal sports economics literature that examine fans as inputs. One notable exception is that from David Boyd and Laura Boyd that appeared in the Journal of Economics and Finance in 1998 (issue 2/3 pp 169 - 179). They develop a model where fans are an input in winning and they use it to give an explanation as to why the common finding of inelastic ticket pricing is not inconsistent with profit maximization.

Here's the conclusion to their article.
Increasingly, economists are utilizing standard microeconomic analysis in an attempt to better understand the world of professional sports. However, since most of microeconomic theory is based on profit-maximizing behavior, the assumption of profit maximization in the sporting world must first be justified before microeconomists can legitimately apply their tools. In this paper, we have shown that some existing empirical evidence regarding the elasticity of demand for tickets to professional sporting events which, on the surface, seems to raise questions about profit-maximizing ticket pricing policy is not necessarily inconsistent with team profit maximization.

We have offered here a theory of team sports ticket pricing, based on the home field advantage, which implies that the traditional price elasticity of demand, measuring the ceteris paribus effect of changing ticket prices on attendance, is less elastic than is the elasticity of demand relevant for team profit maximization. The results of the theoretical analysis generated the prediction that accounting for simultaneity between attendance and team performance would result in a more elastic point estimate of the elasticity of demand for tickets. This hypothesis was supported using data from professional baseball. Moreover, the model generated predictions about how traditional, ceteris paribus elasticities of demand for tickets are likely to vary across different professional team sports. Again, these predictions were consistent with the results of existing empirical work on professional baseball and basketball. Although the assumption of profit-maximization as applied to professional athletics is far from fully vindicated, the results of this work can certainly be used as one piece of evidence for those who continue to use microeconomic theory to better understand the world of professional sport.
There are other reasons which were put forth by previous researchers (and mentioned by Boyd and Boyd) as well as others since this paper was published in 1998, but I won't go into them here. Here is the other part to this little series of posts.

Thank's to commenter Peter G. for his Super Bowl comment that spurred me to remember the Boyd and Boyd paper.

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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):

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.

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Thursday, October 25, 2007

Ticket Prices and Team Quality 

The Kansas City Royals have raised ticket prices for next season by 15%. This announcement comes on the heels of another not-so stellar season. It also comes after taxpayers in Jackson County* approved a tax increase to help pay for renovations to Royals Stadium. So given that background, it's no surprise that Royals senior vice president of business operations Kevin Uhlich has trotted out that good ol' war horse:

Dayton Moore’s mission is to make this into a contending team again. We haven’t been to the playoffs in 22 years. To get back there, we needed to improve our international presence, our scouting, add minor-league teams. This requires money, and frankly, we couldn’t do that with our present budget.”

We sports economists are skeptical about such claims about the connection between ticket prices and player/scouting/etc. payroll. A more likely claim is that there is correlation between ticket prices and payroll, but no causal relationship. Both are driven by an increase in demand for the game. This increase pushes up ticket prices and it increases the demand for players etc. which, in turn, drives their salaries upward.

Colleagues Ken Park, Soonhwan Lee, and I have a paper that we are revising that looks at the long-run elasticity of ticket demand of individual baseball teams using an attendance time-series demand model for several Major League Baseball teams (rough draft here. I hope to have a revised draft up soon). We estimate the Kansas City Royals have a long-run elasticity of demand of 1.46. If so, then without an increase in the demand for tickets, an increase ticket prices generates less revenue for the team, not more.

So something doesn't add up. Could it be that Kansas City is simply seeing a surge in demand for their games, a surge that seems to be league-wide for the most part, even given how poorly the Royals have played over the recent past (0.426 WPCT in 2007, 0.383 in 2006, and 0.346 in 2005 along with last-place finishes in the AL Central in each of those years)? They drew less than 18,000 fans per game in 2005 and 2006 but almost 20,000 fans per game in 2007. Could it be that they are simply adjusting their prices towards some equilibrium in response to a demand shift?

*Jon Meyers noted in the comments that it was the voters of Jackson County, Mo. that passed the tax increase to renovate Kaufmann Stadium, not Johnson County. I have made the correction and I thank Jon for noting my mistake.

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