THE INDUSTRIAL ORGANIZATION OF SPORTS Consumer surplus Monopoly Deadweight loss Price discrimination Antitrust DEMAND FOR PANTHER TICKETS Four Carolina Panther fans 45 40 willing to pay Debbie 40 Bill 20 Jeff 10 Kathleen 0 35 30 25 20 15 10 This is really a small demand curve MEASURING CONSUMER SURPLUS 45 Suppose the price is 20 then 40 consumer surplus is 20 35 15 Suppose the entry is free then 10 consumer surplus is 70 5 0 Debbie Bill Consumer Surplus D 0 quantity Bill Jeff Kathleen SIMILAR FOR PRODUCER SURPLUS price Assume competitive market so add supply curve Similar rule area above supply curve and under price Benefit of market to producers AKA profits Kathleen price Benefit of market to consumers Rule area under demand curve Debbie and above price Jeff MANY MORE CONSUMERS Same rule area under demand curve and above price 30 Suppose the price is 10 then 25 consumer surplus is 40 20 5 S Consumer Surplus Producer Surplus D quantity APPLY TO MONOPOLY Assume monopoly market so no supply curve MC AC no fixed cost Profit maximizing MR MC price CS D profit MC AC Smaller consumer surplus bigger profit restrict output MR quantity COMPARE COMPETITION WITH MONOPOLY price Cost Benefit Analysis competition monopoly difference consumers A B C A B C producers none B B A B C A B C total A pm B pc C is called deadweight loss because nobody gets it in the monopoly market Monopoly is inefficiency LEAGUES AND MARKET POWER Economics case for antitrust Baseball s National League set mold on uncompetitive practices Monopoly Power D C MC AC supply MR quantity territorial rights restrict entry Monopsony Power monopsony single buyer of player talent Reserve Clause bound players to teams APPLY TO STADIUM PRICING SUGAR BOWL COST BENEFIT ANALYSIS NATURAL MONOPOLY a 100 tickets consumer surplus green red pink producer surplus yellow blue orange turquoise total green red pink yellow blue orange turquoise b max profit c perfect competition green green red pink yellow blue purple red yellow orange orange turquoise grey green red yellow orange green red pink yellow blue purple orange turquoise grey Cost structure of sports franchises high fixed costs low marginal costs Cover high costs with high prices Breaking up monopoly only drives prices up higher Antitrust pointless ticket 100 90 Demand 80 Marginal Revenue 70 Marginal Cost 60 Average Costs 50 40 30 20 10 tickets 0 0 20 40 60 80 100 120 140 160 180 200 UNNATURAL MONOPOLY BARRIERS TO ENTRY TV has become a key barrier Can save a weak league MONOPOLISTS AND PRICE DISCRIMINATION Simple pricing ABC NBC saved AFL in 1960s Consumers value differently but pay same price Can also kill a league WFL 1973 5 USFL 1983 7 ABL 1996 8 lacked network contract XFL 2001 due to bad ratings Leagues also block entry by strategic location Local market not big enough for competing entrant NFL s strategy against AFL in 1960s What if producer charges different prices Forms of Price Discrimination 1st degree producer knows everything 2nd degree quantity discounts 3rd degree separate consumers into groups Dallas Minnesota 1st DEGREE PRICE DISCRIMINATION Perfect price discrimination Know what everyone is willing to pay Make a take it or leave it offer to capture all consumer surplus different to each consumer PERFECT PRICE DISCRIMINATION price Monopolist makes consumer a take itor leave it offer Single payment green Hard to do in practice MC Single quantity Q MR 1st and 2nd Round of March Madness 2006 143 each for three games Q quantity 2nd DEGREE PRICE DISCRIMINATION Quantity Discounts 3rd DEGREE PRICE DISCRIMINATION Category 2012 Price SNOWBIRD SEASON PASSES Adult Tram Chairs Pass Lift ticket D 2013 Price One Day 92 each 10 Days 63 each 1 199 00 Midweek Tram Chairs Pass 999 00 College Tram Chairs Pass 599 00 K 12 Tram Chairs Pass 438 00 Senior Midweek Tram Chairs Pass 669 00 Senior Midweek Chairs Only Pass 599 00 A SPORTS APPLICATION PERSONAL SEAT LICENSES Pay for right to buy season tickets at lower price first used by Carolina Panthers ANTITRUST LEGISLATION THE SHERMAN ACT 1890 Two basic clauses 1 Every contract combination in the form of a trust or otherwise or conspiracy in restraint of trade or commerce among the several states or with foreign nations is hereby declared to be illegal 2 Every person who shall monopolize or attempt to monopolize any part of the trade or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations shall be deemed guilty of a misdemeanor Puzzling just changes form of payment does not change willingness to pay or quantity might capture more of the consumer surplus Runnin Ute tickets must join Crimson Club in order to buy Similar example high cover charge with a low drink price THE CLAUSES BASEBALL S ANTITRUST EXEMPTION Only industry with a blanket exemption Clause 1 prohibits cartels or trusts firms cannot cooperate to set monopoly price Clause 2 attacks monopoly itself does not matter how monopoly formed Suits based on clause 2 highly publicized Microsoft in the 1990s typically unsuccessful THE FEDERAL LEAGUE CASE Kennesaw Mountain Landis presiding judge reputation as a trustbuster once ruled against Standard Oil FL didn t know he was a huge baseball fan Landis sat on case for a year FL folded before Landis ruling One FL owner appealed to Supreme Court not regulated like other natural monopolies not good for a limited time like patents Curt Flood Act 1997 does limit power but applies only to labor relations union must disband before suing Exemption comes from lawsuit by Federal League tried to form 3rd major league in 1914 15 charged MLB under both parts of Sherman Act THE SUPREME COURT Reached Supreme Court in 1922 Ruling Baseball a public exhibition not commerce Bizarre opinion subsequently denied exemption to other sports some say due to Black Sox scandal Justices afraid to further damage sport others note Chief Justice Taft played ball at Yale cousin to Phillip Wrigley owner of Cubs CONTRAST WITH NFL Denied exemption in 1957 Radovich decision no legal monopoly power no legal monopsony power Tried to retain monopsony power Gentleman s Agreement until early 1960s when that broke down Rozelle rule successful antitrust suit in 1970s by John Mackey Players Association negotiated deal that allowed RR to continue Got limited exemption for TV contract Sports Broadcasting Act 1961 OTHERS FAR LESS STABLE Oakland Raiders sue NFL 1980 challenged NFL s right to block move to