Boston University EC385 Economics of Sports Solutions Professor Todd Idson Spring 2018 Midterm 1 Instructions Answer all questions below in your blue books be sure to show all of your calculations Please label all parts of your diagrams and draw them large enough so that all aspects can be readily assessed 1 Discuss the central issues raised in the Krautmann Anthony and David J Berri Can We Find It at the Concessions Understanding Price Elasticity in Professional Sports and their key theoretical results Be sure to work out their analytic model in detail not just describe in words their results Answer more than is needed for full points Many studies have shown that teams price their tickets in the inelastic range of demand which implies that teams are not profit maximizing The authors attempt to explain these results by considering the complementarity between tickets sold and concessions P Elasticity 1 Elasticity 1 Elasticity 1 MR D Q As you can see in the above figure if teams price their tickets in the inelastic elasticity is less than 1 range of demand marginal revenue is less than zero Note that profit maximizing team should satisfy the condition of MR MC But marginal cost cannot be negative and it means that the team which price their tickets in the inelastic range of demand is not profit maximizing Using the fact that marginal revenue for teams include both revenue from tickets and concessions they derived the relationship between the profit maximizing price and the ticket only price Model Let the team s demand for tickets be given by i e Then the ticket revenue is Let the team s total cost TC be given by where is the marginal cost MC of admitting another fan into the stadium and is the fixed costs of the team Then we can find the optimal quantity and price for ticket only case as follow Since team does not set ticket prices in the inelastic range of demand marginal revenue is also positive and it means that profit maximizing Now also consider concession revenues i e total revenue is sum of ticket revenues and concession revenues Let concession revenues be given by where is the marginal revenue of concession Then total revenue is Thus marginal revenue is Note that profit maximizing team satisfies the optimal condition of MR MC i e Rearranging above equation then the profit maximizing team can set the price such that If the inelastic range of demand Moreover if we assume that cost of admitting another fan into the stadium is zero then the marginal revenue of i e marginal i e in ticket is always negative since price in the inelastic range of demand is positive i e profit maximizing team set the Solving above equation for the profit maximizing quantity and price we get and As we can see above the profit maximizing price is less than the ticket only price since inelastic range of demand if they also consider concession revenues as their total revenues is positive In other words profit maximizing teams can set their price in the Not necessarily The restriction will break a vertical integrated firm into separate 2 Answers upstream and downstream components This may actually worsen the well being of the consumer because the downstream firm will buy at an inflated monopoly price P up below from the upstream firms and treat this as the marginal cost and then price accordingly charging P down If it was vertically integrated i e one firm in the bottom diagrams then the media outlet would cost the games at marginal cost i e P up would be treated as the MC at the second stage and hence charge a lower price for the broadcast 3 4 Omitted variable misspecification is when a variable is not taken into account i e included in the regression but it does affect the dependent variable This will bias the estimated effect of any included variables that are correlated with the omitted variable The example focused on in this paper is estimating an attendance function Turnover was always ignored in the earlier models when we estimate attendance function However fans care about roster stability i e form attachments to players Attendance is negatively correlated with turnover Thus turnover should belong in the regression So firstly the author measure the degree of roster turnover different ways to measure this but they opt for weighting by salary to give name players a greater weight importance and tests whether they have a statistically and quantitatively significant effect on attendance As a result the coefficient of turnover is negative and significant Then author pointed out if we omitted the turnover variable it will cause misspecification problem here 1 winning percentage has a positive effect on attendance 2 roster turnover has a negative effect on attendance and 3 winning percentage and roster turnover are negatively correlated As a result if you omit roster turnover from the attendance regression the effect of roster turnover on attendance will be partly reflected in the estimated winning percentage effect of turnover acting to upwardly bias the estimated effect of winning percentage on attendance To see this note that low turnover yields higher attendance and low turnover is associated with higher winning percentage and higher winning percentage leads to higher attendance i e part of the estimated positive effect of winning percentage on attendance will also be reflecting the fact that when winning percentage is high turnover tends to be low which in itself is exerting a positive effect on attendance If turnover was included in the regression then the estimated winning percentage effect would fall More specifically consider simple estimation model as follow True model Misspecification Note that is negative is also negative and is always positive i e is positive and it means that the coefficient of winning percentage is upwardly biased if turnover is omitted in the regression