Chapter 37 If We Build It,Will They Come? And Other Sports QuestionsChapter OutlineYou Are HereThe Problem for CitiesThe Economic Impact of a Sports TeamsWhy are Stadiums Publicly Funded?The Problems for OwnersRate of Return and Capital GainsThe Sports Labor MarketThe NegotiationNecessary VocabularyThe Various SportsSlide 13Strikes and LockoutsMotor Sports and MonopolyChapter 37If We Build It,Will They Come? And Other Sports Questions Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin37-2Chapter Outline•THE PROBLEM FOR CITIES•THE PROBLEM FOR OWNERS•THE SPORTS LABOR MARKET•THE VOCABULARY OF SPORTS ECONOMICS37-3You Are Here37-4The Problem for Cities•If a city wants a team should it–wait for expansion?•Cities that succeeded with expansion–Football»Jacksonville, Charlotte, Cleveland*, Houston*–Baseball»Miami, Tampa, Denver, Phoenix–lure a team from another city?•Cities that succeeded with luring others–Football»St. Louis, Nashville, Oakland-LA-Oakland, Baltimore37-5The Economic Impact of a Sports Teams•Are lures to sports franchises the same as lures to other business?–Most economists, argue that sports teams do not offer much economic impact. The reasons are•Few home games (8 in football up to 81 in baseball)•Local substitution: the effect of the substitution of one economic activity for another within a community, so the net effect is zero. Money spent at the stadium is mostly money that would have been spent in the city anyway.37-6Why are StadiumsPublicly Funded?•The external benefits to a city that exist because a team is in the town. People in a city may enjoy following a local team and be willing to pay higher taxes to experience that enjoyment.37-7The Problems for Owners•To Move or to stay–Owners often threaten to move to get better stadiums or luxury boxes added to existing stadiums. •To Win or to Profit–Small market teams rarely succeed in baseball because the bulk of revenue is locally derived (local TV deals) whereas this is not a factor in football because the revenue is generally shared.37-8Rate of Return and Capital Gains•owners often claim an operating loss on their teams•history suggests that owners make a significant profit on the sale of their franchise•the capital gain more than makes up for the loss•the annual real rate of return on franchise sales has been 10% to 20% for recent sales37-9The Sports Labor Market•To economists all firms compare the revenue they gain by having an employee, their marginal revenue product, with what that employee gets in wages and benefits. •Sports is no different except there are often limits on what players can do. They can not–pick the team they want to play for.–agree to a lower salary than league minimums–make so much that their team violates a salary cap.37-10The Negotiation•The wage for any player will be between the most they are worth (their marginal revenue product) and the least they will accept, their Reservation Wage ( the least amount that a player will accept because it is the next best offer)•Where the negotiation ends up depends greatly on the institutional framework of the sport.37-11Necessary Vocabulary•Free Agent: A player that is able to offer services to the highest bidder•Draft: The process by which new talent is assigned to teams•Salary Cap: the maximum in total payroll that a team can pay its players•Revenue Sharing: the process by which some revenues are distributed to all teams rather than simply the teams that generate them•Reserve Clause: a clause that requires that players resign with the team to which they belonged the previous year•Strike: an action by labor to deny employers the services of the employees•Lockout: an action by employers to deny employees access to their jobs37-12The Various Sports•Team Sports–Football•League minimum salaries•Limited free agency after several years of service•Salary cap–Baseball•League minimum salaries•Binding arbitration after 3 years•Free agency after 6 years•No salary cap–Basketball•League minimum salaries•Free agency after several years•Salary cap–Hockey•2004-2005 Lockout resulted in a salary cap•League minimum salaries37-13The Various Sports•Individual Sports–In golf, tennis etc. talent is paid appearance fees and winnings.–In motor sports (NASCAR, CART, IRL, F1) talent is paid a salary and a share of winnings.37-14Strikes and Lockouts•There have been repeated strikes and lockouts in the team sports and none in the individual sports.•The fundamental economic reason for this is that there is a direct relationship between pay and performance in individual sports and no such relationship in team sports.37-15Motor Sports and Monopoly•NASCAR, IRL and F-1 are family-owned enterprises •NASCAR, IRL and F-1 own monopolies in their respective aspects of racing•All set race dates that are in their own interest (rather than drivers’, fans’, teams’ or track owners’ interest)•All have substantial market