Chapter Five: The Public Finance of Sports The Market for Sports Franchises

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Chapter Five The Public Finance of SportsThe
Market for Sports Franchises

• Topics to be Covered
• The Value of a New Stadium (Briefly)
• History of Franchise Mobility
• The All-or-Nothing Demand Curve
• The Winners Curse
• Economic Geography and Sports

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The Value of a New StadiumAnecdotal Evidence

• Review Table 5.1
• What does it mean to be a large market or a
  small market team? Review
• Schmidt, Martin B. and David J. Berri. (2002).
  Competitive Balance and Market Size in Major
  League Baseball A Response to Baseballs Blue
  Ribbon Panel. Review of Industrial Organization,
  21, n.1. (August) 41-54.
• According to Forbes Six of the seven most
  valuable franchises in the NFL in 2000 play in a
  stadium built since 1995. The lone exception is
  the Dallas Cowboys, whose value stems directly
  from their stadium.
• How does a new stadium impact the revenues of a
  team?
• Be able to illustrate the impact.
• Who pays for stadiums?
• Review Table 5.3
• The Story of George W. Bush and the Texas Rangers

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History of Franchise Mobility and Expansion

• Why do leagues limit the number of teams?
• Fear of non-competitive and unprofitable teams.
• The ability to extract monopoly rents from
  existing cities.
• History of Franchise Mobility and Expansion
• The Dodgers and Giants move west in the 1950s to
  forestall the threat of the Pacific Coast League.
• The expansion of MLB into Houston, New York, and
  Washington D.C. came about in response to the
  threat of a new league headed by Branch Rickey.
• The NFL expanded into Minnesota and Dallas in the
  1960s in response to the AFL
• The NFL expanded into New Orleans to secure
  legislative support for the NFL-AFL merger.
• In sum, leagues tend to expand historically in
  response to external forces.

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The Standard Monopoly Model

• The standard model of a monopoly has a firm
  facing a downward sloping demand curve. The firm
  cannot increase output without lowering price.
  Hence, marginal revenue (the amount of revenue
  from the last unit sold), is less than the price.
• Example P 360 4Q
• MR 360 8Q
• MC 40
• Profit is maximized where MR MC.
• Q 40 P 200
• How much consumer surplus is lost to monopoly
  power?

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The All-or-Nothing Demand Curve

• What if the monopoly can force the consumer into
  an all-or-nothing decision?
• Then the monopoly can extract even more consumer
  surplus, by forcing the consumer to purchase a
  greater quantity than the consumer desires.
• REVIEW THE ILLUSTRATION AND MATHEMATICS OF THIS
  MODEL

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The Winners Curse

• Why would a city submit a winning bid to host a
  new team?
• The team can generate a greater stream of profits
  in the winning city.
• The city over-estimates the value of the team.
• The auction mechanism may cause a city to submit
  a bid greater than the value of the team.
• Studies have shown that as the number of bidders
  increases, the amount the winning bid exceeds
  expected value increases. In other words,
  winning the auction itself becomes a goal,
  independent of expected benefits.

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Economic Geography and Sports

• Where is the most desirable place for a business
  to locate? The central business district.
  Review Figures 5.8 and 5.9
• Because the central business district is the most
  desirable, the price of land is higher in the
  center of town. Hence, stadiums have generally
  been located away from the central business
  district.
• The decay of inner cities have lowered the price
  of land. Combine this event with the desire to
  utilize stadiums to generate spillovers in the
  community and one can see why cities have chosen
  to build newer stadium within the host city.