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Chapter Five: The Public Finance of Sports

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? ...

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Chapter Five: The Public Finance of Sports

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  1. 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 Winner’s Curse • Economic Geography and Sports

  2. The Value of a New Stadium:Anecdotal 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 Baseball’s 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

  3. 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.

  4. 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?

  5. 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

  6. The Winner’s 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.

  7. 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.

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