The Economics of Sports The sports industry provides a seemingly endless set of examples from every area of microeconomics, giving students the opportunity to study economics in a context that holds their interest. Thoroughly updated to reflect the current sports landscape, The Economics of Sports introduces core economic concepts and theories and applies them to American and international sports. Updates for this sixth edition include: More coverage of international sports, including European football; A revised chapter on competitive balance, reflecting new techniques; A brand-new chapter on mega-events such as the Olympics and World Cup; New material on umpire bias; A completely redesigned chapter on amateur competition that focuses exclusively on intercollegiate sports. This chapter is also now modular, enabling instructors who wish to intersperse it with the other chapters to do so with greater ease. This accessible text is accompanied by a companion website which includes resources for students and instructors. It is the perfect text for advanced undergraduate and graduate courses on sports economics. Michael A. Leeds is Professor and Department Chair of Economics at Temple University, Philadelphia, PA, USA, and a research associate at IZA, USA. He has published numerous articles in labor economics and the economics of sports, and was co-editor of the Handbook on the Economics of Women in Sports. He has won departmental, college, and university awards for his teaching. From 2007 to 2009, he was an Assistant Dean at Temple University, Japan. Peter von Allmen is Professor at the Department of Economics, Skidmore College, Saratoga Springs, NY, USA. He previously served as the president of the North American Association of Sports Economics, and his primary research area is sports economics, with a particular focus on compensation schemes, incentives, and monopsony power. Victor A. Matheson is Professor of Economics at the College of the Holy Cross, Worcester, MA, USA. He is co-editor of the Journal of Sports Economics and has written over 80 journal articles and book chapters. In addition, he worked as a soccer referee for 30 years and has officiated matches in Major League Soccer as well as over 400 Division 1 college games. The Economics of Sports Sixth Edition Michael A. Leeds, Peter von Allmen and Victor A. Matheson Sixth edition published 2018 by Routledge 711 Third Avenue, New York, NY 10017 and by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2018 Taylor & Francis The right of Michael A. Leeds, Peter von Allmen and Victor A. Matheson to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. First edition published by Pearson Education 2001 Fifth edition published by Pearson 2014 Library of Congress Cataloging-in-Publication Data A catalog record for this book has been requested ISBN: 978-1-138-05216-1 (hbk) ISBN: 978-1-315-16794-7 (ebk) Typeset in Corbel and Myriad Pro by Apex CoVantage, LLC Visit the companion website: www.routledge.com/cw/Leeds Brief Contents List of Figures List of Tables Preface Part One: Introduction and Review of Economic Concepts 1 Economics and Sports 2 Review of the Economist’s Arsenal Part Two: The Industrial Organization of Sports 3 Sports Leagues and Franchises 4 Monopoly and Antitrust 5 Competitive Balance Part Three: Public Finance and Sports 6 The Public Finance of Sports: Who Benefits and How? 7 The Public Finance of Sports: Who Pays and Why? 8 Mega-Events Part Four: The Labor Economics of Sports 9 An Introduction to Labor Markets in Professional Sports 10 Labor Market Imperfections 11 Discrimination Part Five: Sports in the Not-for-Profit Sector 12 The Economics of Intercollegiate Sports References Index Detailed Contents List of Figures List of Tables Preface Part One: Introduction and Review of Economic Concepts 1 Economics and Sports Introduction 1.1 The Organization of the Text Special Features and Additional Resources 1.2 Babe Ruth and Comparative Advantage Opportunity Costs Absolute and Comparative Advantage Biographical Sketch: Babe Didrikson Zaharias Summary, Discussion Questions, Problems 2 Review of the Economist’s Arsenal Introduction Learning Objectives 2.1 The Supply and Demand Model Demand, Supply, and Equilibrium Changes in Supply and Demand 2.2 Output and the Production Function A Note on the Definition of Output The Production Function Price Ceilings and the Economics of Scalping 2.3 Market Structures: From Perfect Competition to Monopoly Perfect Competition Monopoly and Other Imperfectly Competitive Market Structures The Impact of an Increase in Costs 2.4 The Rise of Professional Sports Biographical Sketch: Mark Cuban Summary, Discussion Questions, Problems Appendix 2A: Utility Functions, Indifference Curves, and Budget Constraints 2A.1 Constrained Maximization 2A.2 Using Indifference Curves and Budget Constraints: The Rise of Soccer and Baseball Appendix 2B: Regression Analysis in Brief Part Two: The Industrial Organization of Sports 3 Sports Leagues and Franchises Introduction Learning Objectives 3.1 Open versus Closed Leagues 3.2 The Economics of Team Behavior Maximizing Profits or Maximizing Wins? 3.3 Closed Leagues: Revenue and Cost in North American Sports Revenue and Cost Revenue Is Determined by Demand A Detailed Look at Revenue Costs League Size, Opportunity Cost, and Team Movement 3.4 Open Leagues: Revenue and Cost in European Soccer Profit Maximization in Soccer 3.5 Single-Entity Ownership Biographical Sketch: Bill Veeck Summary, Discussion Questions, Problems 4 Monopoly and Antitrust Introduction Learning Objectives 4.1 What’s Wrong with Monopoly? Monopolists and Deadweight Loss Do Monopolies Always Charge Monopoly Prices? Promotion, Relegation, and Monopoly Power in Open Leagues 4.2 Strategic Pricing Variable and Dynamic Ticket Pricing Bundling Price Discrimination and Two-Part Pricing 4.3 What’s Right with Monopoly? 4.4 Strategic Barriers to Entry 4.5 Society’s Response to Monopoly: Antitrust Laws An Important Anomaly: Baseball’s Antitrust Exemption Leagues That Lack an Antitrust Exemption Limited Exemptions: The NFL and Television Biographical Sketch: Alvin “Pete” Rozelle Summary, Discussion Questions, Problems 5 Competitive Balance Introduction Learning Objectives 5.1 Why Study Competitive Balance? The Fans’ Perspective The Owners’ Perspective The Effect of Market Size