Wednesday, September 12, 2007

Something Fun for Once

Patrick Rishe takes on pro sports salaries on his ProfCorner Blog. It's always dangerous to criticize a professor, but I've got a few nits to pick with his methodology.

Rishe starts out strong, noting that nobody holds a gun to your head forcing you to consume mass quantities of pro sports entertainment:

No one puts a gun to my head when I sit on my BLEEP for 6 hours at a sports bar to watch the opening day of the NFL season.

No one is twisting my arm to shell out marked-up prices for sporting events on Stubhub.

Free's a BLEEP sometimes isn't it.

Pro athletes, no different from highly paid movie stars and music icons, entertain the masses, and possess the rare attributes to do it or not.

If I had a body like Matthew McConaughey and taught my econ courses shirtless and simulcast to an audience of millions worldwide that expected to gain Alan Greenspan-like wisdom from merely watching me speak, I'd be a millionaire to.[sic]
Then Rishe derails. If the customers are buying entertainment, what does Rishe say the players are producing? could argue that NBA players deserve more compensation because one player's marginal contributions to production (i.e. wins) is more significant.
Oops. I've got news for the professor: in every game, there is a winner and a loser. You can't have one without the other; the losing team is just as productive as the winning team in producing a "win".

The true product is the one that the customer consumes: entertainment. While Rishe may contend that the losing team's product is inferior to a winning team's, in doing so he would deny the existence of the "die hard fan." In other words, the quality (and value) of the entertainment product is purely in the eye of the beholder.

In fact, an individual consumer of pro sports entertainment could very well be ambivalent about the winner or loser of a specific game and still place a very high value on the entertainment. Additionally, if the consumer doesn't particularly care for a rival team, an individual consumer may place a higher value on a loss by that team.

Given that, the only accurate value judgments one could make about an individual customer are that, assuming the consumer is a fan of the team in question:

1) that customer values the entertainment of a winning season over a losing season;
2) that customer values the entertainment of specific superstars over other superstars, and;
3) that customer therefore values the entertainment of a winning season with the preferred superstars over a losing season with or without the other superstars.

The method one would use to aggregate individual consumers into a market demand necessarily varies from one market to another. Due to a whole host of variances from market to market, you can not determine aggregate demand in Milwaukee the same way as in Los Angeles or even Charlotte. Those markets demand entirely different equations.

Which leads to another problem with Rishe's analysis:

The Biggest Misnomer in Sports

Higher ticket prices are not caused by higher salaries.


Truth is, teams raise prices either because they feel they can or they feel they must. If a team believes that demand for their product is sufficiently high and that raising prices will not cost the team lost attendance, then prices will increase...irrespective of team payroll.
First, the revenue equation is price times attendance, not price plus attendance. Revenue maximization depends on the elasticity of demand not (necessarily) filling the bleachers. Second, this is a sure case where, due to locality effects, a rising tide floats all boats.

If, by raising the amount they are willing to bid for contracts (salaries), Anaheim is able to attract the talent with a broad enough appeal to decrease the elasticity of demand for Angel's tickets, then indeed the higher salaries cause an increase in ticket prices. Even if Anaheim is not revenue-maximizing, scalpers sure will be. Additionally, if Padres and Dodgers tickets are the next best use of entertainment dollars, ticket prices will also go up in San Diego and LA (otherwise there will, again, be a demand surplus that scalpers will fill).

Note, those are both "if"s. Another "if" is that if the salaries are raised and the elasticity of demand is unaffected or increased, then raising ticket prices will decrease attendance and revenue. The point to be made is not that higher salaries have to cause increases in ticket prices, it's that they may.


Practically speaking, many teams have set their ticket prices for the upcoming season before knowing what their payroll for that season will be. So again, this fact partially debunks the myth.
There is no way to set ticket prices without at least a, wait for it, ballpark payroll figure. That's why, I'm sure, that owners employ a small army of accountants, economists, and market research firms like Sportsimpacts to prognosticate.

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