Earlier this week, John Topoleski from the University of New Orleans wrote asking about the NFL's blackout policy. The Saints were 5,000 tickets short of selling out Sunday's game vs. Seattle, and were thus facing the threat of the NFL's blackout policy. No sellout by midweek, and the game would not be televised in New Orleans. They didn't, and it won't.
John said: "For the life of me I can't figure out what the blackout rule does except punish the fans of the city. It seems that everybody loses with a blackout (which is why the local TV station often buys the remaining tickets). But I guess in a repeated setting where there's a threat of a blackout each week, maybe it somehow makes sense?"
Maybe. The blackout rule is the only rule of its kind that I know of. For it to make sense, as opposed to being an anomalous mistake, there must be conditions unique to the NFL which make it an optimal rule for them, but not any other sport.
The NFL is an exceptionally well-run league. Their growth - propelled in large part by television - is a phenomenal success story. So any potential critic such as myself should recognize that they know what they are doing.
It is generally accepted that televising games nation-wide helped transform the NFL from a regional entity into the most popular game in the country. Today, most of the NFL's revenue is derived from national, league-wide TV contracts. The blackout policy generates extra incentives for teams to "put fannies in the seats." A full house in Tampa or Seattle makes for a more compelling television spectacle in Richmond or Salt Lake City. The blackout policy balances two interests: the interests of the league in televising games attended by a full house, and the interests of the local team in collecting advertising revenue from local broadcasts of their games.
One point I make repeatedly to my students in sports economics is that pricing a game such that it's a sellout is profit-maximizing only under special circumstances. Absent other considerations, it generally makes sense to price games such that capacity is not fully utilized. Specifically, it makes sense for teams to raise ticket prices above the level that would sell out the game (unless the capacity of the stadium is lower than what is optimal in the long run).
But sold out games full of crazy fans makes for a more compelling spectacle to the marginal, national fan. The NFL's blackout policy limits the incentive of teams to raise ticket prices by putting local advertising revenue at risk. It is a restraint on teams' exploitation of local market power, a restraint which makes the game more appealing in the national television market. The NFL has shown repeatedly that it is more unitized than other leagues. The blackout policy may be another manifestation of that.
John, thanks for writing. This answer is my best guess for the moment. Comments welcome.
Update: David Tufte left a comment which grew into a post at Voluntary Exchange. He suggests that the blackout rule is a simple substitute for full blown collusion, while building in a limited margin of tolerance for cheating. Also, he points out that Steve Landsburg's Armchair Economist discusses why some forms of entertainment routinely sell all seats available, and others do not.