Problem Set 3 1 Suppose that the demand curve for tickets to see a football team is given by Q 100 000 100p and marginal cost is 0 a How many tickets would the team be able to sell ignoring capacity constraints if it behaved competitively and set p MC b How many tickets would it sell and what price would it charge if it behaved like a monopoly Hint In this case the marginal revenue curve is given by MR 1000 0 02Q a If the team sets prices at competitive levels p MC with MC Answer 0 Plug p 0 into the demand equation Q 100 000 100p so Q 100 000 If the team acts like a monopoly it will set MC MR b MR 1000 0 02Q 0 MC Q 50 000 P 500 2 Why was the limited exemption form antitrust laws so crucial to the development of the NFL The limited exemption allowed the NFL to act as a monopolist over Answer one of its most important sources of revenue broadcast rights The monopoly position granted by the limited exemption meant that teams would not undercut one another in negotiations with television networks The agreement also had the effect of galvanizing the owners into a unified group rather than a loose collection of teams that competed both on and off the field The off field cooperation brought about by the joint television contracts and the sharing of resulting revenues significantly strengthened the league 3 Suppose that all St Louis Rams fans feel the same as Jane who values every game at 28 regardless of the opponent Can the Rams increase profits by bundling the Rams Bears game with three others Why or why not Bundling will not increase team revenues in this case Product Answer bundling works when firms take advantage of differing demand across products In this case however the demand is the same for all games so product bundling will be ineffective 4 Suppose the typical Buffalo Bills fan has the following demand curve for Bills football games P 120 10G where G is the number of games the fans attends a If the Bills want to sell the fan a ticket to all eight home games what price must they charge What are their revenues b Suppose the Bills have the chance to offer a season ticket that is good for all eight home games a partial season ticket that is good for four home games and tickets to individual games What price should they charge What is their revenue a If the Bills want to sell tickets to all 8 games by selling Answer eight individual tickets they have to set the price P 120 10 8 120 80 40 This yields revenue of 40 8 320 from each fan b If the Bills practice second degree price discrimination they can effectively charge P 120 10 1 120 10 110 for single games P 110 100 90 80 380 95 ticket for a 4 game package and P 110 100 90 80 70 60 50 40 600 75 ticket for an 8 game package Revenues are clearly much higher for the price discriminating example than one where the team wishes to sell as many as 8 tickets to some fans but must sell tickets individually 5 An athletic director was once quoted as saying that he felt his school spent too much on athletics but that it could not afford to stop Use game theory to model his dilemma This is an example of the prisoners dilemma If all schools Answer either spend a lot or spend a little they compete evenly The problem arises because no school wants to suffer the consequences of being outspent by others Thus high spending is the dominant strategy See the matrix below School B High Spending Low Spending School A High Spending Even competition with high costs A dominates A s additional revenues exceed the higher spending B loses revenue Low Spending B dominates B s additional revenues exceed the higher spending A loses revenue Even competition with low costs 6 Baseball has not been convicted of violating the Sherman Antitrust Act because a b c d baseball is the national pastime baseball was the first sport to institute the Reserve Clause the Sherman Antitrust Act does not apply to sports baseball has been exempt from the Antitrust laws d Thanks to the 1922 Federal Baseball ruling baseball received Answer an exemption from antitrust laws that was later denied to other sports While the Curt Flood Act now limits the exemption baseball still has much greater freedom from antitrust legislation than the other sports 7 The monopoly power that the NCAA held over TV networks fell apart due to a b c d the prisoner s dilemma the winner s curse the outlawing of the reserve clause the entry of new schools into the NCAA a Many cooperative arrangements fall apart because of the Answer prisoner s dilemma as each agent feels that it would be better off acting alone as long as the others continue to follow the agreement When all agents act on these sentiments however everyone becomes worse off is shared by all major professional sports is not shared in any way by other professional sports is shared to a limited extent by the other professional sports is limited to baseball s dealings regarding television and broadcast rights 8 The antitrust exemption that Major League Baseball enjoys a b c d Answer from antitrust laws that baseball has they have had limited exemptions from antitrust laws These limited exemptions have allowed the leagues to negotiate broadcast rights or to merge with rival leagues c While other sports have long been denied the blanket exemption 9 Some economists argue that cooperation between franchises should not be considered in violation of antitrust laws What argument do they use Some economists regard leagues as multiplant firms According to this Answer view sports franchises are members of a single entity rather than competing firms Their cooperation should not be considered any less normal than a single firm s individual departments getting together Major League Soccer in particular is organized as a single entity league where each team is considered an individual branch of the main company In Fraser v MLS 2002 the U S Court of Appeals upheld the league s organizational structure as legal