Chapter 6 The Public Finance of Sports The Market for Sports Franchises Solutions to Back of Chapter Problems 6 1 Use the all or nothing demand curve to explain why the IOC is unlikely to accept a bid by Los Angeles to host only the track and field events in its bid for the 2016 Summer Olympics Answer In Figure 6 1 below the deadweight loss that results from a simple monopoly price is area abc When the monopolist sets price p and quantity at Q the deadweight loss is transferred to the monopolist s revenue and is not a loss to society The consumer loss that is created aec is not a deadweight loss but a transfer to the monopolist as well Thus efficiency improves but of course equity is adversely affected from the consumers standpoint In the case of the Los Angeles Olympic bid in effect the city is forced to purchase more events that it would normally choose such as say equestrian rifle rhythmic gymnastics and in homage to Saturday Night Live men s synchronized swimming in order to get the events it wants such as men s basketball and track and field 6 2 Use the rent gradient to show why New York is not like to build a new stadium for the Yankees in midtown Manhattan 56 Leeds von Allmen Economics of Sports Third Edition Answer The city would not likely build a new stadium for the Yankees in the middle of town due to the relative value of the land that would be required a high value of the rent gradient The land that lies on the outskirts of town is less valuable than the land at the center That is one reason why Yankee Stadium and Shea Stadium were built in the outer boroughs of Bronx and Queens Similarly in 2005 New York City s bid to host the 2012 Olympics faltered when public support for a new upper West Side stadium for the NFL s Jet s an integral piece of the city s Olympic bid waned due to estimated construction costs that exceeded 1 1 billion mainly due to the cost of the land required for the project 6 3 Critics of referenda often complain that this method of determining expenditure often results in the community spending more than it really wants to Do they have a point Explain your answer Answer The referendum itself is likely to bias expenditure upwards due to the all or nothing nature of the choice Voters do not get to decide on the precise public commitment If they view it as better than nothing they will support it Additional overspending can occur for several additional reasons First the referendum may commit the city to building a stadium that subsequently suffers significant cost overruns for which the city may be responsible Second once a referendum is approved it may increase the bargaining strength of the team with respect to the details of the stadium amenities which may also increase the cost to the city as was the case in Cleveland Finally because the benefits from the project are concentrated in the hands of a few owner and players while the costs are small and diffuse spread over many taxpayers political economy suggests the owners will have an advantage over the taxpayers The owner has the incentive to commit significant resources to campaigning while no individual taxpayer has a strong incentive to strongly oppose the plan Therefore stadium proponents typically outspend opponents on election lobbying by a wide margin 6 4 What happens to a city s bid to host the Olympics if a Stadium construction costs rise Answer If stadium construction costs rise the costs to the city will increase by that amount as the IOC imposes an all or nothing demand curve Once committed the city must build the venues regardless of cost b The city s NFL franchise offers to buy the Olympic stadium after the Games Answer The city s expected surplus increases as it builds in the revenues that will come from the sale of the stadium If this occurs before the bid is submitted it increases the maximum that the city is willing to bid to the Games c Interest rates rise from 5 percent to 10 percent Answer When the interest rate increases it increases the cost of borrowing and reduces the value of future benefits as they are discounted back to the present using the interest rate Thus the net benefits to the city fall 6 5 While football and baseball teams have gone from multipurpose to football and baseball only facilities basketball and hockey continue to share arenas Why Answer Basketball and hockey still typically share arenas because unlike football and baseball they utilize surfaces that are similar in shape and size Although a basketball court is slightly smaller than the ice surface both sports can be accommodated in a single building without seriously compromising the views of fans in either case As shown in Figures 6 5 and 6 6 baseball and football are poor complements as stadium partners Chapter 6 The Public Finance of Sports The Market for Sports Franchises 57 6 6 Suppose that New Orleans wants to host the Super Bowl Arrange t he following in order of their impact on the price that New Orleans is likely to pay Answer Monopsony power allows the NFL to increase the price it charges cities such as New Orleans in the form of stadium improvements free hospitality etc thereby claiming some of New Orleans consumer surplus In fact the NFL has explicitly used the lure of the Super Bowl and a carrot to prod otherwise reluctant cities to build new stadiums often at significant taxpayer expense Can you think of any other reason why the NFL would want to put the Super Bowl in less than glamorous winter locales at Detroit 2006 or Jacksonville 2005 Both all or nothing demand and winner s curse rely on monopoly power to extract still more consumer surplus Since the Super Bowl is a single event the NFL can automatically exploit the all or nothing demand curve so it can charge a higher price This price will in the limit reflect the value of the Super Bowl to New Orleans and hence extract all of its consumer surplus Finally the winner s curse may cause New Orleans to bid more than the Super Bowl is worth to the city Frankly I m not really sure about which one of these is most important but one potentially ordering is c b a 6 7 Why does the fact that the NFL does not have a franchise in Los Angeles give its teams greater leverage with their host cities than teams in the other sports have Answer Los Angeles has the second largest fan base and second largest media market The potential profit from the Los Angeles market gives NFL franchises a more lucrative alternative market for franchises that are