Exam 2 Material Flashcards
What are fixed costs in the short run?
Coaches salary, player salary, facility size
Limitations to spending money to improve team quality
revenue structure, profit mentality of the owner, gate revenue and sharing
Advantages of large market teams
- larger revenue pool
- can buy more talent
What is gate revenue? How much does each league share?
-Revenue from ticket sales NFL: 40% MLB: 31% NHL: 35% NBA: 50%
How does NFL divide broadcasting rights revenue? How much does each team receive?
Shared evenly by each team
Each team receives $226million
What is an RSN?
Regional Sports Network;
Explain “TV broadcasts are a two-edge sword”
ADV: fans watch live = attracts advertisers = large revenue,
DIS: Watching TV at home substitutes attending games
Explain “ Network demand for broadcasts is a derived demand”
It is driven by sponsors’ demand for commercial time, advertisers are the deriver
Why would a network pay for broadcast rights even if it lost money in doing so?
- credibility; to establish themselves
- can attract affiliates
5 main sources of revenue for a sports franchise:
- Ticket revenue (gate revenue)
- Broadcasting revenue (broadcasting rights)
- Licensing Income
- Venue Revenue (concessions, luxury seats)
- Transfer Revenue (trades)
Detroit Lions sell 20 seat luxury suit for $350,000. Each ticket valued at $150. During a season with 8 home games, how much revenue will the lions have to share?
20 seats * $150 * 8 home games = $24,000
NFL only shares 40% of that therefore only has to share
$24,000 *.40 = $9600
Why do some critics consider revenue sharing a tax on quality?
relative quality is in question because there is no motivation to make a quality team
How does the NFL revenue sharing result in ‘tragedy of commons’
When something is shared, it is often abused
Why does ESPN pay so much more than other networks?
- Sunday football so was already taken, therefore HAD to get some NFL games so Monday night was all that was left
- clash with negotiator
What role did HULU and Netflix play in the growth for sports programming?
They took out the value of commercials in all tv programs that did not need to be viewed live, therefore increasing the value of commercials during live sports programming
Was the growth in sports programming good for players?
Yes because there was more money to pay players
“The effects of lower attendance will bleed into other aspects of the business” What does this mean?
- Less people attending games means less concession and merchandise revenue
- Less people at the games means less energy in the stadium resulting in a less entertaining game
Why are teams not seeing financial gains despite their winning success? (4)
- Most teams lack emotional connection w/fans
- In-person consumption doesn’t match fan consumption habits
- Teams fail to engage fans continuously
- Fans don’t feel heard/understood
Why would a corporation buy a luxury suite?
- to entertain and build relationships with clients
- families to spend time together
- can deduct up to 50% in taxes
What are some pitfalls to selling luxury suites to corporations?
- $ evaporates in financial down times
- traditional tickets decrease in number but increase in price
In a monopoly, consumer surplus shrink, where does this surplus go?
To the producer surplus and some to deadweight loss
What is the difference between dynamic ticket pricing and variable ticket pricing?
Dynamic: As season unfolds, prices change
Variable: Prices are known before season begins
Why would a team offer bundle ticket pricing?
To sell least popular game tickets with most popular game tickets
What is 1st degree price discrimination?
Know what will pay and charge that
What is 2nd degree price discrimination?
Certain criteria (BOGO)
What is 3rd degree price discrimination?
Belong to certain group (students, seniors, etc)
Explain “ The dynamic ticket prices make no assumptions about price elasticity”
Prices adjusting based on the season unfolding, purely demand driven at that point, price elasticity out the window
Why does baseball have a greater opportunity for dynamic ticket pricing than hockey (or other sports?)
- larger stadiums don’t necessarily sell out
- weather is a factor
Name the four major input categories on why tickets change as season unfolds
- seasonal time factors
- opponent factors
- stadium factors
- social factors
What were the top four drivers for dynamic ticket pricing?
a. Days until the game
b. Time of the game
c. Daily home team tweet count
d. Opponent previous season playoff status
e. Opponent franchise value
f. Current month/week
What financial impact occurred when Federal league declared itself a major league and started to compete against the American and National league?
-substantial legal fees, elevated player salaries, on-field competition
How did the AL and NL monopolize pool of talent?
By tying up players to team for their entire career (Reverse clause), ultimately making it difficult for federal league to from competitive teams
How was the situation resolved between AL, NL, and Federal league?
Through peace negotiations that FL would end operations in exchange of $450,000 from major leagues
What did Baltimore object to and what were the results?
Baltimore did not receive anything under deal, results were establishing baseball’s antitrust exemption
Why would it be difficult for a rival league to bring a monopolization lawsuit against the MLB?
- confrontation of baseball’s antitrust exemption
- Monopolizing an industry does not violate Sherman Act, major leagues must engage in some exclusionary conduct that unfairly prevents rivals from entering industry in order to be found to be monopolizing
Why have some fighters filed antitrust lawsuit against UFC?
Fighters have no bargaining leverage with MMA leagues therefore they get paid low wages with strict restrictions
-players believe they have been denied free agency and name, image, and likeness rights
What is the ‘Champions Clause’
Fighters cannot negotiate contract when they win a championship, instead it extends their current contract
What is the ‘Exclusivity Clause’?
Allows UFC to match offers received by fighters from other MMA leagues even after the fighter’s UFC contract has expired
What is the ‘Ancillary Rights Clause’?
Grants UFC exclusive name, image, and likeness rights for merchandise, video games, and broadcasts
What is a monoposony?
Those selling a service are stuck selling those services to one main buyer; the buyer can set low prices and impose other restrictions on the sellers who know that other buyers aren’t significant enough to offer better prices
What is the ‘non-statutory labor exemption’?
Employment restrictions created through collective bargaining are exempt from Section 1 of Sherman Act which prohibits competitions from conspiring to impose unreasonable restrictions on players earning power
What are 4 defense UFC is likely to use?
- Contracts are voluntary
- Practices are promoted by capitalism
- Found nothing unlawful in 2011-2012 investigation
- Forcing change would harm elite professional fighting
Explain the two ways MLB violated Sherman Act:
- Cable packages don’t allow fans ability to choose teams/games they’d liked to purchase
- Cable packages blackout games on locally broadcast stations
In what three ways have lower courts interpreted the ruling in Flood v. Kuhn?
Shields:
- entire business of baseball
- only reserve clause
- baseball’s unique characteristics/needs
What are three primary sources of disagreement in regards to the impact of market size on competitive balance?
- how we measure success
- how to define market size
- how to measure impacts of policies
Why does winning have a bigger impact in a larger market?
More people in larger market which results in more revenue of all kinds
How does diminishing marginal returns promote competitive balance?
Prevents teams from stock piling players. After a certain amount of starters, outputs will start to decline because i you add another player they will have less of an impact on wins but still cost as though they have a large impact
What formula is used to measure competitive balance over a span of time?
HHI
What four methods have the Big-4 leagues developed to promote competitive balance?
- Free Agency
- Revenue Sharing
- Salary Cap and Luxury Taxes
- Reverse Order Draft
Explain the binomial distribution and how it applies to competitive balance
More games played, more likely to gravitate towards mean, so we find ideal standard deviation.
Why do many economist believe that free agency has not reduced competitive balance?
invariance principle, player is going to go to the team in which they are valued most
What is the goal of revenue sharing and when does it break down?
- the goal is to mitigate market size
- breaks down when revenue goes into owners pockets instead of spending it on buying talent
What is a salary cap?
Range of upper and lower payrolls, applies to the entire league in which x amount of money must be spent but can’t go over a certain amount
How does a luxury tax differ from a salary cap?
It doesn’t prohibit big payrolls
How does a luxury tax work?
Penalizes team whose total payroll exceeds a previously established amount
How easy is it for a team to reset their tax rate?
Avoiding the luxury tax for just one year resets the team’s tax rate
How is the tax money spent?
50% = player benefits 25% = baseball development in countries without HS baseball 25% = industry growth fund
What teams qualify for the CBL?
10 smallest market teams, 10 lowest revenue teams
How are the lottery odds determined?
Based on each teams previous season’s winning percentage
When does the CBL take place?
End of first and second round
What are some conditions/limitations to trading lottery picks?
- Can’t be sold for cash
- Can only be traded once, only team that wins a pick can trade it
- Only dealt during season
What three brackets is ‘all revenue’ divided into and what precent do players receive from that bracket?
- League Media
- NFL ventures/Post Season
- Local
What percent of the Salary Cap must the NFL spend/ each team?
Each team = 90%
What is the Top 51 Rule?
Only the top 51 player salaries for a team count against the salary cap during the off season
What does it mean to ‘back-load’ a contract and how does the 30% rule help mitigate back-loading?
- To back load a contract means to push all the heavy money towards the end of the contract
- The rules says that contracts cannot have an annual increase of more than 30% each year
What are drawbacks to backloading contracts for players?
Player may be released before reaching big money part of contract
What are incentives to for players to sign a backloaded contract?
Signing bonuses
How do signing bonuses impact the salary cap?
Signing bonuses are part of the salary cap, the signing bonus will be prorated over the length of the contract
What are voidable years?
If meet certain goals, may be able to be free agent before contract is up
What’s the difference between ‘likely to be earned’ and ‘not likely to be earned’ cash incentives and how to each impact the salary cap?
likely to be earned is in the salary cap because there is a high probability of being earned, most likely earned last season
What is the Barry Sanders rule?
- if player quits there is cap relief
- player pays back signing bonus
What is the competitive balance ratio?
actual standard deviation/ ideal standard deviation
What is accounting profit?
Revenue - expenses
What is economic profit?
Accounting profit - opportunity costs
ERA #1 1900-1923
Stadium Names: Park, Field, reflect team owner
Shape: Unique, design to fit in city grid
* NFL rented space because not popular enough for own
ERA #2 1960-1991
Names: "Stadium" City begins to pay for them Stadiums become multipurpose Can't fit in city block SHAPE : cookie cutter, too big for baseball too small for football
ERA #3 1992-PRESENT
Stadium Names on who bought naming rights (companies)
SHAPE: single use facilities
SHAPE: Return to unique shape
What are external benefits from funding a stadium?
-puts the city on the map (stories/news)
What are problems with funding a stadium?
-it’s hard to profit from
What are sports subsidies?
- infrastructure (water, electricity, trash collections)
- operating (attendance targets, operations subsidized)
- construction (demolition)
What is the difference between direct and indirect economic benefits?
direct: happens at the stadium
indirect: happens as a result of stadium spending
What are arguments against public finance?
Money could be spent in better areas,
*think FLINT and HOCKEY STADIUM
How do teams benefit from new facilities?
- attract new people
- MLB sees largest increase
- avg increase is 33%
What is the honeymoon effect?
- new attendance only last 10 max years
- NEW STADIUM CANNOT MASK THE QUALITY OF PLAY
- people will go there once to see new facility
Why build a new stadium?
- attract talent
- luxury boxes (premium seating)
When does a new facility increase wins?
- teams have greater incentive to win
- no incentive to reinvest additional revenues to increase wins
- new venues are not associated with more wins
When are teams considered a public good?
When teams become integrated into the community,
non-excludable, good that is not rivalrous
What are negative externalities of sports?
pollution, cops at intersections for bike races ($), social cost *think Stella’s and Griffins
What are the two forms of spending?
- New spending
2. Exporting
_________ is not new spending
Substitute spending
Conduits
destination but money goes, athletes rent living areas but send money to home city,
items in concessions is generally made elsewhere therefore that money is going out
Why are athletes high savers?
Their career is short lived
How do we identify win maximizing teams?
-go after wins right away, operating income will be super negative but will shine later
Who profits more? Win-maximizers or profit maximizer?
Profit
Who does not have a salary cap?
MLB
Free Agency:
assigns property rights to the players, can se talent to those who value them most
What is the goal of revenue sharing?
To prevent teams from buying talent
Teams must spend ___ of hard cap?
90%
NBA Cap MIN/MAX salaries?
6yr= 25% or 9 mill
7-9 yrs = 30% or 11 mil
10+ years = 35% of cap or 14 mill
What is the Derek Rose rule?
Allow you to go to the next tier but must hit some criteria
Does NBA have hard or soft cap?
Soft
What are the three categories to the MLE of the NBA?
- non tax player
- tax player
- room level
What is the Larry bird exception?
Allow team to exceed their cap on their own free agent,
basically shouldn’t be punished for signing veteran plaeyr
What is the early bird exception?
2 years with team and have to be free agent (LEBRON)
What is the non-bird exception?
Would qualify for bird exception but was used for another player
What makes up for the MLB not having a salary cap?
Luxury tax, 22.5% for first time offenders
The _____ the standard deviation, the more competitively balance it is
smaller
What is more competitively balanced . 067 or .054?
.054
