Chapter Three: Sports Franchises as ProfitMaximizing Firms

1
Chapter Three Sports Franchises as
Profit-Maximizing Firms

• Do professional sports teams profit-maximizing?
  i.e. what are the other benefits owners can
  derive from the ownership of professional sports
  franchises?
• Review Table 3.1
• The Ego Premium and the Price of a Sports
  Franchise
  
• Review Figure 3.1

2
Profits, Revenues, and Costs

• Profits Total Revenue Total Costs
• Revenue Streams
• Gate receipts
• Television revenues
• Stadium revenues
• Licensing income
• Costs
• Player salaries are the primary fixed costs.
• Travel
• Marketing
• Administrative
• Venue expenses
• Player development NHL and MLB
• Andrew Zimbalist estimates that development cost
  in MLB is 5 million per year, or 1 million per
  player.

3
Turning Profits into Losses

• Vertical integration
• Example Atlanta Braves and TBA
• Large administrative costs
• Example The OMalleys of the LA Dodgers paying
  themselves a salary.
  
• Depreciation of players The Veeck Loophole

4
The Importance of Leagues

• Setting the rules (What is the purpose of the
  rules?)
  
• To enhance the enjoyment of fans.
• How? Limit injuries to star attractions.
• Promote competitive balance.
• Note Any strategy that provides a permanent
  advantage will be outlawed
  
  
• i.e. The three second rule in basketball.
• In the long-run, competitive differences are a
  function of talent alone.
  
•  Limiting entry
• Entry is limited to maintain the monopoly power
  of existing franchises.
  
• If entry is too limited, though, rival leagues
  can form. However, as we will see, rival leagues
  are typically doomed to failure.
  
•  Competitive balance and revenue sharing
• We will discuss competitive balance in depth
  after chapter three.
  
•  Marketing
• Public goods and the free rider effect.

5
Neal, Walter. The Peculiar Economics of
Professional Sports Quarterly Journal of
Economics 78 (February, 1964) 1-14.

• Louis-Schmelling paradox
• The inverted joint product or the product joint
• Joint product - two products technologically
  resulting from a single process.
  
• Product joint - An indivisible product from the
  separate processes of two or more firms.
  
• Professional baseball produces several
  interrelated streams of utility
  
• In-person viewing of the game
• Broadcasts of games
• League standing effect
• Fourth Estate Benefit
• Conclusion The several joint products which are
  products joint of legally separate business firms
  are really the complex joint products of one
  firm, and this firm is necessarily an
  all-embracing firm or natural monopoly.

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Neale (1964), cont.

• Four possible cases of interleague competition
• Major League Baseball solution the joining of
  two leagues into one monopoly.
  
• The professional football solution of the 1940s
  The bankruptcy of one league.
  
• Survival of two or more leagues that are not
  economically competitive due to geographic
  distances or the institutions of sport and
  culture.
• Survival of two or more leagues that are
  economically competitive and which could be
  sportingly competitive.
  
• The second case is the most common solution.
  Geographic distances and culture institutions
  seem to be overcome overtime (exception CFL and
  Japanese baseball).
• In general, additional leagues bid up costs and
  reduce revenues, hence reducing the profitability
  of each league.