Coca Cola Promotion: Will It Work?

According to Sports Illustrated (item #10 on this list),

Coca-Cola began selling some 200 million specially designed cans offering U.K. soccer fans a chance to win the equivalent of $479,000 in transfer funds for their favorite English or Scottish team. The winning fan’s club will be given the money to spend on the player or players of its choice, while the fan will pocket another $19,000.

Let’s assume that soccer clubs are profit maximizers. Let’s also assume that dropping an extra $479K on them will have no effect on the marginal revenue product of an extra unit of playing ability. It follows, then, that this gift would have no effect on their spending on players other than some cosmetic designation of, “We used the money to hire player X,” meanwhile shuffling other payroll funds into their profits somehow. That’s the standard textbook answer. If spending the money on better players would bring more fans to the games and increases revenues enough to cover the incremental costs, then the team should have been doing it anyway, if it is a profit maximizer.

So why do I not necessarily believe the textbook answer?

  1. What if owners of UK soccer teams are not profit-maximizers? It is possible that giving them more money to spend on players will increase the owners’ utility from having a better team. This would be a standard income effect for consumption models, assuming that team wins are a normal (vs. inferior) good.
  2. What if the team would like to hire more talent, and what if doing so would increase the team’s profits, but what if the team is in a precarious financial position and is unable to borrow the money? That is a lot of “what ifs”. I suppose it is possible the information costs are so high in the capital markets for professional soccer in the UK that some potentially good investments might get overlooked. But I doubt it.
  3. I’m ignorant? Maybe, but not of basic profit-maximizing models. Maybe Coca-Cola has detailed accounting monitoring specified as a condition of the prize, to make sure the club spends the extra money on player talent. I’m skeptical.

Sports Illustrated loves the promotion, calling it “Cool sports promotion of the week”.

Imagine winning the chance to help your favorite team acquire real players to help on the field.

I expect it is a profit-enhancing promotion for Coca-Cola. But to the extent that the winning fan’s team is a profit-maximizer, the promotion will not do much to affect that team’s talent acquisition decisions, with the proviso that major league sports teams are likely not completely driven by profit-maximization.

Instead of the Sports Illustrated imaginings, try this: Imagine you own the team favoured by the winner of the Coca-Cola lottery. You hold a big press conference/celebration when you receive the cheque [UK and Cdn spelling] for nearly half a million US$. You might even give the fan a season’s pass. Then what do you do with the money? You can’t just pocket it, if for no other reason than that it would look bad. So you have to make some expenditures on players that have the appearance of resulting from this windfall.

In other words, this Coca-Cola lottery is going to have some effect on the acquisition of player talent by the lucky team, but most likely for only a short time (long enough for the owner to cut back on player expenditures elsewhere in ways that are not obvious). Because appearances matter, the promotion will have some effect, even for profit-maximizing teams; but the effect will probably be short-lived.

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Author: John Palmer

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