Lecture Issues in economics today - Chapter 40

After reading this chapter, you should be able to: Define economics and the features of the economic perspective, describe the role of economic theory in economics, distinguish microeconomics from macroeconomics and positive economics from normative economics, list the categories of scarce resources and delineate the nature of the economizing problem,...

Chapter 40

If You Build it Will They Come?

And Other Sports Questions

Chapter Outline

• THE PROBLEM FOR CITIES

• THE PROBLEM FOR OWNERS

• THE SPORTS LABOR MARKET

• THE VOCABULARY OF SPORTS

LABOR ECONOMICS

The Problem for Cities

• If a city wants a team should it

– wait for expansion?

• Cities that succeeded with expansion

– Football

» Jacksonville, Charlotte, Cleveland*, Houston*

– Baseball

» Miami, Tampa, Denver, Phoenix

– lure a team from another city?

• Cities that succeeded with luring others

– Football

» St Louis, Memphis, Oakland-LA-Oakland, Baltimore

The Economic Impact of a

Sports Teams

• Are lures to sports franchises the same as

lures to other business?

– Most economists, argue that sports teams do not offer much economic impact The reasons are

• Few home games (8 in football up to 81 in baseball)

• Local substitution: the effect of the substitution of one economic activity for another within a community, so the net effect is zero Money spent at the stadium is mostly money that would have been spent in the city anyway.

Why are Stadiums Publicly

Funded

because a team is in the town People

in a city may enjoy following a local team and be willing to pay higher taxes

to experience that enjoyment.

The Problems for Owners

• To Move or to stay

– Owners often threaten to move to get better stadiums or luxury boxes added to existing stadiums

• To Win or to Profit

– Small market teams rarely succeed in baseball because the bulk of revenue is locally derived (local TV deals) whereas this is not a factor in football because the revenue is generally shared

The Sports Labor Market

• To economists all firms compare the revenue they gain by having an employee, their

marginal revenue product, with what that employee gets in wages and benefits

• Sports is no different except there are often

limits on what players can do They can not

– pick the team they want to play for

– agree to a lower salary than league minimums – make so much that their team violates a salary cap

The Negotiation

• The wage for any player will be between the most they are worth (their marginal revenue product ) and the least they will accept, their

Reservation Wage ( the least amount that a player will accept because it is the next best offer)

• Where the negotiation ends up depends

greatly on the institutional framework of the sport.

Necessary Vocabulary

• Free Agent: A player that is able to offer services to the highest bidder

• Draft: The process by which new talent is assigned to teams

• Salary Cap: the maximum in total payroll that a team can pay its players

• Revenue Sharing: the process by which some

revenues are distributed to all teams rather than simply the teams that generate them

• Reserve Clause: a clause that requires that players resign with the team to which they belonged the

previous year

• Strike: an action by labor to deny employers the

services of the employees

The Various Sports

• Team Sports

– Football

• League minimum salaries

• Limited free agency after several years of service

• Salary cap

– Baseball

• League minimum salaries

• Binding arbitration after 3 years

• Free agency after 6 years

• No salary cap

– Basketball

• League minimum salaries

• Free agency after several years

The Various Sports

• Individual Sports

– In golf, tennis etc talent is paid appearance fees and winnings.

– In motor sports (NASCAR, CART, IRL, F1) talent is paid a salary and a share of

winnings.

Strikes and Lockouts

• There have been repeated strikes and

lockouts in the team sports and none in the individual sports.

• The fundamental economic reason for

this is that there is a direct relationship between pay and performance in

individual sports and no such relationship in team sports.

Safety in Motor Sports

• In 2000 and 2001 NASCAR lost four drivers in accidents on the track

• In 2001 CART cancelled a race two hours

before it was to start because of safety concerns.

• Safety-speed trade-offs:

– Everyone is made better off when safety is improved for everyone but if drivers must choose between being safe and winning a race, many choose to try to win