The Business of Sport and the Demand for Sports

Economic Valuations and the Business of Sport

  • The Financial Magnitude of Professional Sports:

    • Sports represent a massive sector of the global economy. In 2023, among the 100 most-watched programs in the United States, 96 were sporting events; significantly, all 96 of those programs were football games.

    • The Dallas Cowboys: Currently the most valuable sports club in the world, with an estimated valuation of 9.0×1099.0 \times 10^9 dollars.

    • League Valuation vs. Public Companies:

      • The NFL: If the NFL were a publicly traded company, it would rank within the top 100 most valuable companies globally. This ranking would place it ahead of major corporations such as Verizon, Comcast, Netflix, Morgan Stanley, Wells Fargo, AT&T, and Starbucks.

      • The NBA: If public, it would rank in the top half of the Fortune 500, placing ahead of Allstate, Dell Technologies, and Prudential.

      • The MLB: Would qualify for the Fortune 500, ranking ahead of eBay, Kellogg, Delta Air Lines, and Tyson Foods.

      • European Soccer Leagues:

        • English Premier League (EPL): Would rank on the Fortune 500 ahead of Paramount, Live Nation, Campbell Soup, and Marathon Oil.

        • La Liga: Would rank on the Fortune 500 ahead of CarMax, Caesars Entertainment, American Airlines, and News Corp.

  • Historical Trends in Athlete Compensation:

    • The 1919 Era: Shoeless Joe Jackson, the era's premier baseball player, earned 6,0006,000 playing for the Chicago White Sox. Adjusted for modern inflation, this is approximately 111,000111,000.

      • Comparison: At that time, the average farmer made approximately 675675 per year, while the average factory worker earned 1,1481,148.

    • Modern Era: Cristiano Ronaldo, for the previous year, earned 123.0×106123.0 \times 10^6 dollars (with 46.0×10646.0 \times 10^6 coming directly from his clubs).

      • Comparison: The average salary in Portugal is approximately 32,00032,000.

  • The Appreciation of Sports Franchises:

    • The sentiment that players are "overpaid" often stems from the massive increase in team valuations over the last century.

    • New York Yankees Case Study:

      • 1915: Purchased by Jacob Ruppert and Tillinghast L'Hommedieu Huston for 463,000463,000 (equivalent to 14.0×10614.0 \times 10^6 today).

      • 1973: George Steinbrenner purchased the team for 8.8×1068.8 \times 10^6 (equivalent to 61.0×10661.0 \times 10^6 today).

      • Current Value: The Yankees are now estimated to be worth 7.1×1097.1 \times 10^9 dollars.

Factors Driving Growth in Sports

  • Enhanced Quality and Professionalism:

    • The overall quality of sports products has improved significantly due to better nutrition, advanced gym equipment, and personalized training for athletes.

  • Media Accessibility:

    • While sports appeared on radio and TV as early as the 1930s, true widespread accessibility is a recent phenomenon.

    • The NBA Finals were not broadcast live in their entirety until 1982.

    • Internet and Streaming: These platforms have made following teams easier than ever, creating massive branding opportunities.

  • Internationalization:

    • Sports have become global affairs. Leagues like the NBA possess prestigious international reputations.

    • Athletes representing at least 20 different countries currently play in both NBA and NFL games.

  • Growth of Sports-Adjacent Industries:

    • There has been substantial growth in the merchandise, athletic wear, and related equipment sectors.

  • Primary Recipients of Capital in Sports:

    • Players and Coaches.

    • General Managers (GMs) and front office personnel.

    • Agents.

    • League personnel (e.g., NFL and NBA staff).

    • Governing organizations (e.g., FIFA, IOC).

Demand Principles in Sports

  • The Uniqueness of Sports Consumption:

    • Demand for consumer goods is usually reflected through direct purchase (e.g., buying a Coke).

    • Sports consumption is multifaceted, including: ticket purchases, television viewership, merchandise buying, and following entities on social media.

    • Consumption vs. Fandom: Identifying "true" fans is difficult. Does non-ticket-buying mean one isn't a fan? Does watching a single TV game constitute fandom?

  • Difficulty in Measuring Demand:

    • Stadium seating is physically limited.

    • Fans do not necessarily follow every game (especially in high-frequency leagues like MLB or NBA).

    • The "Water Cooler" Effect: Non-fans receive information about teams through social discourse, giving sports an even broader audience than direct purchasers.

  • Economic Scarcity in Sports:

    • Definition: Scarcity exists when wants exceed available resources, necessitating efficient allocation.

    • Scarcity of Talent: There is a finite number of "good" quarterbacks in the NFL relative to the number of teams.

    • Scarcity of Access: Only a few cities host NFL teams. High-quality baseball is essentially centralized within the MLB. Competitive, high-stakes games are naturally limited.

  • Barriers to Entry and Monopoly Behavior:

    • The NFL acts as a monopoly, controlling the number of teams and successfully crushing rival leagues (All-American Football Conference, World Football League, USFL, XFL).

    • Other Barriers: Scarcity of talent, massive up-front costs, branding requirements, infrastructure/facilities, and the time required to build a legacy.

  • Historical Longevity (English Premier League Club Founding Dates):

    • Nottingham Forest F.C.: 1865.

    • Aston Villa F.C.: 1874.

    • Wolverhampton Wanderers F.C.: 1877.

    • Everton F.C. and Manchester United F.C.: 1878.

    • Fulham F.C.: 1879.

    • Manchester City F.C.: 1880.

    • Burnley F.C. and Tottenham Hotspur F.C.: 1882.

    • Luton Town F.C.: 1885.

    • Arsenal F.C.: 1886.

    • Brentford F.C. and Sheffield United F.C.: 1889.

    • Liverpool F.C. and Newcastle United F.C.: 1892.

    • West Ham United F.C.: 1895.

    • AFC Bournemouth: 1899.

    • Brighton & Hove Albion F.C.: 1901.

    • Chelsea F.C. and Crystal Palace F.C.: 1905.

Demand Theory and the Demand Curve

  • Willingness to Pay (WTP): The core driver of demand modeling. The demand curve is the aggregation and graphing of every individual's WTP in a market.

  • Downward-Sloping Nature: Demand curves are always downward-sloping.

  • Quantity Demanded vs. Demand:

    • Price Change: Causes a movement along the static curve, referred to as a change in "quantity demanded."

    • Lower Price (P↓P \downarrow) leads to higher Quantity Demanded (QD↑Q_D \uparrow).

    • Higher Price (P↑P \uparrow) leads to lower Quantity Demanded (QD↓Q_D \downarrow).

    • Market Completeness: The curve reflects all current information known by consumers.

  • Example Experiment:

    • In a classroom of 70 students, demand for men's basketball might reach 70 tickets at a price of 2020. However, for those same 70 students to buy women's basketball tickets, the price would have to drop to 1010.

Demand Shifters

  • Definition: Factors that cause the entire demand curve to move (inward or outward) rather than a movement along it. This occurs when new information enters the market.

    • Outward Shift (Right): More goods demanded at the same price (Increase in demand).

    • Inward Shift (Left): Fewer goods demanded at the same price (Decrease in demand).

  • The Seven Primary Shifters:

    1. Income:

      • Normal Goods: Demand increases as income increases (e.g., luxury sports, houses, Porterhouse steak).

      • Inferior Goods: Demand increases as income decreases (e.g., ramen, dollar stores).

    2. Tastes and Preferences: Shifts outward if a sport becomes more popular; shifts inward if it falls out of fashion.

    3. Price of Substitutes: If Goods A and B are substitutes, and the price of Good A increases, the demand for Good B increases.

    4. Price of Complements: Goods that go together (e.g., hot dogs and buns). If the price of Good C increases, demand for the complement Good D decreases. In sports, viewership and equipment or Super Bowl events and halftime shows serve as complements.

    5. Future Expectations: Demand may shift if consumers expect future rarity, price increases, or performance changes (e.g., changes in demand for Alabama, Washington, or Arizona football tickets based on performance outlook).

    6. Demographics: Specific groups have different demand levels. For instance, cricket demand is high in Indian-American communities; baseball and golf are significantly more popular among men than women.

    7. Changes in Population: A growing city population generally increases demand for its local sports teams.

  • Performance as a Shifter: Unique to sports; demand increases with winning and decreases with losing.

Special Topics in Sports Demand

  • Women’s Sport:

    • Historically, demand for women's sports (tickets, merch, views) ranks below men's.

    • Economists attribute this to "tastes and preferences," influenced by perceived quality, game characteristics, or sexism. However, this gap is currently closing.

  • Market Size Dynamics:

    • Large Markets (NYC, LA, Chicago): Collect more revenue due to larger population bases and better free-agent appeal.

    • Small Markets (Pittsburgh, Buffalo, Milwaukee): Smaller draws, but can succeed (e.g., Green Bay).

    • Star Effect: Players like LeBron James (Cleveland) or Patrick Mahomes (Kansas City) can expand a team's fanbase far beyond its city limits.

  • Consumer Surplus:

    • The utility gained when consumers are willing to pay more than the actual market price.

    • Mathematical Calculation: Measured as the area of the triangle between the price line and the demand curve.

    • Consumer Surplus=12×Quantity×(Demand Intercept−Price)Consumer\,Surplus = \frac{1}{2} \times Quantity \times (Demand\,Intercept - Price)

Elasticity of Demand

  • Definition: A measure of how sensitive the quantity demanded is to a change in price (the steepness of the curve).

  • Calculation:

    • η=%ΔQ%ΔP=Q2−Q1Q1P2−P1P1\eta = \frac{\%\Delta Q}{\%\Delta P} = \frac{\frac{Q_2-Q_1}{Q_1}}{\frac{P_2-P_1}{P_1}}

    • Elasticity is always negative because price and quantity demanded move in opposite directions.

  • Categorization:

    1. Elastic (\eta < -1): Small price changes cause large changes in quantity demanded (e.g., luxury goods, brand-name items).

    2. Inelastic (\eta > -1): Large price changes cause small changes in quantity demanded (e.g., water, gasoline, power).

    3. Unit Elastic (η=−1\eta = -1): Price change causes an equal percentage change in quantity demanded.

  • Elasticity in Sports:

    • Minor league teams are usually elastic (price sensitive).

    • High-profile teams (Dallas Cowboys, UGA Football) and playoff games are inelastic (price insensitive).

  • Determinants of Elasticity:

    • Substitutes: More substitutes available leads to higher elasticity.

    • Value: Higher value/cost items tend to be more elastic.

    • Necessity: Items necessary for survival are less elastic.

    • Brand Loyalty: More loyal fans lead to less elastic demand.

    • Time: Goods become more elastic over longer time horizons.

  • Approximations of Sports Elasticities:

    • MLB Attendance: −0.65-0.65

    • Golf Games: −0.50-0.50

    • Premier League Attendance: −0.20-0.20

    • NFL Attendance: −0.58-0.58

    • Gym Memberships: between −0.97-0.97 and −2.20-2.20

    • (Comparison) Coca-Cola: −3.8-3.8; Gasoline: −0.09-0.09; College Education: −0.02-0.02; Hard Alcohol: −1.5-1.5.

Mathematical Modeling of Demand, Supply, and Revenue

  • Linear Demand Equation:

    • P=−mQ+bP = -mQ + b

    • bb is the y-intercept (where the curve crosses the price axis).

    • mm is the absolute value of the slope.

    • Algebraic rearrangement to solve for QQ: Q=−1mP+bmQ = -\frac{1}{m}P + \frac{b}{m}.

  • Application Example:

    • Demand: P=−0.002Q+100P = -0.002Q + 100

    • Stadium capacity: 20,00020,000 seats.

    • To sell all seats: P = -0.002(20000) + 100 = -40 + 100 = $60.

    • To find seats sold at price P = $80: 80=−0.002Q+100→−20=−0.002Q→Q=10,00080 = -0.002Q + 100 \rightarrow -20 = -0.002Q \rightarrow Q = 10,000 seats.

  • Supply in Sports:

    • The supply curve is upward sloping based on the "willingness to sell."

    • Fixed Supply: In many sports scenarios (stadium seats or games in a season), the supply curve is vertical.

    • Variable Supply: For sporting goods/gyms, the curve is upward sloping (higher prices attract more sellers).

    • Supply Shifters: Changes in league/stadium structure, technology (e.g., synthetic fibers), input prices (e.g., cheaper rubber), and population (immigration broadening the athlete pool).

  • Revenue Functions:

    • Revenue(R)=Price(P)×Quantity Sold(Q)Revenue (R) = Price (P) \times Quantity\,Sold (Q)

    • Substituting price: R=(−mQ+b)Q=−mQ2+bQR = (-mQ + b)Q = -mQ^2 + bQ.

    • Marginal Revenue (MR): The revenue gained from selling one additional unit. This can be expressed in terms of elasticity as: MR=P×(1−1∣η∣)MR = P \times (1 - \frac{1}{|\eta|}).

Price Discrimination in Sports

  • Definition: Segmenting and separating consumers by their Willingness to Pay (WTP). This is legal and not related to social discrimination.

  • Types and Examples:

    • First-Degree: Silent or one-bid auctions (paying exactly your valuation).

    • Second-Degree: Bulk discounts or "pay-what-you-want" pricing.

    • Third-Degree (Segmentation): Student, elderly, or child discounts (lower disposable income leads to lower prices).

    • Two-Part Tariff: Fixed fee plus a per-unit fee (e.g., razors/blades).

    • Specific Sports Applications: Seat reservations based on quality, peak/off-peak pricing for travel to games.

  • Personal Seat Licenses (PSLs):

    • Common in the NFL; called "debentures" in Europe.

    • An option to buy season tickets for a specific seat in perpetuity.

    • Helps finance expensive stadiums by capturing WTP above the season ticket price.

  • Requirements for Success:

    • Identification: Identifying segments via ID cards or booking patterns.

    • Preventing Arbitrage: Ensuring those with high WTP cannot "cheat" and pay the low WTP price.