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Chapter 8: Economics of Professional Sports

Chapter 8: Economics of Professional Sports. Time Honored Myths. Team owners are losing money. They stay in the game for the fun if it! The ball park is a heaven for “ordinary” fans! Players are under-paid! Supreme Court’s rule in 1922 granting MLB exemption from Anti Trust Law is justified!.

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Chapter 8: Economics of Professional Sports

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  1. Chapter 8:Economics of Professional Sports

  2. Time Honored Myths • Team owners are losing money. They stay in the game for the fun if it! • The ball park is a heaven for “ordinary” fans! • Players are under-paid! • Supreme Court’s rule in 1922 granting MLB exemption from Anti Trust Law is justified!

  3. Product Market • Output of this market in entertainment • Team owners form a “cartel” named the league franchise to maximize joint profit (e.g., MLB, NFL, NBA, NHL, MLS) • Team owners share the “monopoly” profit

  4. Cartel as a Joint Monopoly Price D MC P=MC 80 MR=MC 70 D MR Quantity 5 7

  5. Owners & League Franchise • Owners are the ultimate decision makers: hire payers and coaches, rent stadiums, sell tickets, monitor behavior of teams, players, and coaches • Owners hire a “commissioner” for interdependent operation of the league: schedule games, sell broadcasting rights, negotiate with players’ union

  6. Owners & League Franchise • Players and coaches are under binding contracts. They can’t change teams unless released or traded • League franchise controls the market share by preventing or consolidating competition (e.g., NBA-ABA, NFL-USFL)

  7. Labor Market • Teams transact in the labor market • Monopsony: a market with only one buyer, but many sellers • Draft: a parity arrangement where weaker teams hire stronger players

  8. Bilateral Monopsony • League franchise to hire players • Labor union to represent player rights • Exploitation: owners want to pay the “supply” wage, workers want to make the “demand” wage • Possibility for conflict and strike

  9. Wage Determination Range of Negotiations=AB Wage D Marginal Labor Cost Labor Supply A D-Wage MLC=MRP S-Wage B MRP=Labor Demand E Employment

  10. Monopsony vs. Competition Monopsony: 4 at $600,000 each Competition: 5 at $700,000 each Wage ($000) D MLC MLC=MRP A S 900 C DW Loss=ABC 700 600 B D=S S MRP=D 4 5 No. of Starting Pitchers

  11. Free Agency • Players can find the highest paying team after they play several years in the league (NFL: 5 years; MLB: 6 years) • Average MLB salary has gone up $21,300 in 1976 to $1,983,850 in 2000

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