The Business of Sport

Business of Sport

• Sports markets are experience-driven and unpredictable, unlike traditional markets that are more stable and controlled.
• The sports market has a fixed supply with limited stadium seats and controlled league expansion.
• The sports market is impacted by emotional demand where fans stay loyal regardless of performance.
• Since game outcomes vary, the sports market has an unpredictable product which affects value.
• In the sports market, TV and streaming media deals yield major profits.
• Revenue in the sports market comes from media rights and monopoly behavior where leagues control competition and limit new teams.
• Compared with sports markets the traditional market includes flexible supply, rational demand, and predictable products, and revenue from sales and ads.
• In the traditional market, companies can produce based on demand.
• Consumers in traditional markets switch products rationally based on quality and price.
• Businesses control product quality and consistency in traditional markets.
• Businesses profit from selling goods and services and there is open competition.

Demand for Sport

• The demand curve represents existing market information and is static.
• Demand shifters cause shifts in the demand curve, as price changes will move along the existing curve, and new market information moves the entire curve
• The demand curve is driven by Willingness to Pay (WTP).
• Increased demand shifts the demand curve outward (right), so more of a good is demanded at each price point.
• Decreased shifts in demand causes demand curve shifts inward (left) so less of a good is demanded at same price.
• Demand curves are always downward-sloping and change when new information appears.
• Lower prices increase the quantity demanded, while higher prices decrease it.
• The demand does not change when price changes, but quantity demanded does change.
• Quantity demanded only changes based on the price
• Demand for sports includes demand for tickets, viewership, and merchandise.
• All aspects of sports exhibit different WTPs from consumers

Consumer Surplus

• At a given price, some consumers are willing to pay more, they receive consumer surplus
• Consumers earn utility from paying less than what they are willing to spend

Further on Willingness to Pay

• A demand curve can be produced by graphing every person's WTP in a market.
• Willingness to pay is the amount a consumer or person is willing to pay for a certain good
• The demand curve is driven by WTP and sports can be consumed by buying tickets, watching tv, buying merchandise, and following teams or players.

Demand Curve Formula

• P = -m (Q) + b
• P: price
• Q: quantity demanded
• m: slope of the demand curve and the rate at which price decreases as quantity increases
• b: intercept, the point where the demand curve crosses the Y axis

Demand Curve Example

• The demand for stadium seats is 𝑃 = −0.002𝑄+100.
• At 20,000 seats, the tickets should be set at $60 to sell every seat
• If the tickets are going to be sold for $80, then 10,000 seats will be sold.

Shifts in Curves

• Demand curves shift with changes in income (tax breaks, stimulus checks, etc.)
• They also shift with tastes or preferences such as If a sport becomes more or less popular
• Changes in the price of substitutes or complements will also shift the demand curve
• Expectations about future availability or price may shift demand up or down respectively.
• Changes in the population and demographics influences shifts in the demand curve
• Changes in team performance also influence demand

Scarcity

• Because want is greater than the existing goods, resources are finite and have to be allocated efficiently in scarcity.
• Scarcity in sports exists demonstrated by factors such as limited "good" QBs in the NFL, only a few cities with NFL teams, high-quality baseball being limited to MLB, and competitive games sometimes being rare

Types of Goods

• Normal goods have increased demand when incomes increase, like cars, houses, and luxury goods.
• Inferior goods increase in demand when incomes decrease such as ramen and items from dollar stores.
• Sports consumption is mostly a normal good, where demand increases as income rises for tickets, merchandise, and subscriptions

Complements and Substitutes

• Complements are goods that go together, like hot dogs and hot dog buns, movies and popcorn.
• If the price of one complement like good C rises, quantity demanded of C will decrease
• Demand for the other item like good D will decrease as fewer people can or want to consume both items
• One example could be sports viewership and purchasing sports equipment, Super Bowl Halftime
• Substitutes are goods can act as substitutes for other goods such as Hot dogs & Hamburgers, Coke & Pepsi.
• If the price of good A increases, quantity demanded for Good A will decrease.
• Demand for Good B will increase, when People substitute Good B for Good A

Supply Curve

• The stadium seats supply curve is set vertical since amount of stadium seats is fixed.
• This means no matter how much price of tickets increases, number of seats stay the same
• When the supply curve is not fixed: sporting goods, players, athletic clothing, and gyms also have a supply curve

Elasticity Calculations

• Percentage Change = (New # - Old #) / (Old #)
• Elasticity = (%∆ Quantity Demanded) / (%∆ Price)
• The components of elasticity equation are ((New quantity demanded –Old quantity demanded) / (old quantity demanded) )
• the equation is the price changes in (New price -Old price) / (Old price)

Elasticity of Stadium Attendance

• Elasticity of Stadium Attendance Demand = (% △ Attendance Demand) / (%∆ Ticket Price)
• Elasticity is measured by = (New attendance demanded –Old attendance demanded) / (old attendance demanded) )
• Elasticity of Stadium Attendance is also based on the price (New price -Old price) / (Old price)

Elastic and Inelastic Summary

• Elasticity examines how sensitive quantity demanded is to a change in price steepness of the demand curve.
• The higher the steepness the less sensitive or elastic
• Elasticity is always negative
• "elastic" refers to a good or service where altering changing the price leads to a relatively large change in the quantity demanded
• Smaller sports teams like minor league baseball are more elastic, where small changes in price drastically alter quantity demanded
• "inelastic" describes a good where a price alter results in only a small change in the quantity demanded
• Examples of "inelastic" goods are popular teams like Dallas Cowboys, UGA football since prices can rise without altering number of seats sold.
• Games are inelastic with factors that influence: regular season may be elastic, playoff games are often inelastic

Demand Determinants

• Elasticity < -1 means highly elastic, where small changes in price cause large changes in quantity demanded ex: Luxury / brand goods
• Elasticity > -1 means highly inelastic, where large changes in price causes small changes in quantity demanded ex: Power, water, gasoline
• Elasticity = -1 means unit elastic, where equal changes in price cause an equal change in quantity demanded (rare)

Elasticity Factors

• Elasticity depends on many factors such as the sport, team, and situation.
• If substitutes are available, the good is more elastic, a higher value of the good makes it more elastic.
• If a good is a necessity that promotes survival, it will be less elastic.
• If consumers are more loyal, the good is less elastic, and elasticity increases over time.

Market Size and its effect on Teams

• Large-market teams generate more revenues due to larger fan bases.
• Large-market teams are more valuable but are often not more profitable because of their higher costs, such as higher wages and rent.
• For instance they are Located in major metropolitan areas (e.g., New York, Los Angeles, Chicago), attract more lucrative TV deals and sponsorships
• Small Market Teams have lower costs but their revenue is proportionally smaller, usually relying on drafting, player development, and salary cap strategies.
• Small teams May struggle to retain superstar players due to these financial limitations, such as Milwaukee Bucks (NBA), Green Bay Packers (NFL), Kansas City Royals (MLB).
• Large-Market teams may not be able to build fanbases around the city (Los Angeles Chargers)
• Despite size, smaller teams can still find success (Green Bay Packers)
• Star players expand the fan base beyond the city like LeBron James in Cleveland, and Patrick Mahomes in Kansas City.

Revenue Formula

• Revenue = Price * Quantity Sold
• Revenue can also be written 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃𝑄 =(−𝑚𝑄 + 𝑏) Q = −𝑚𝑄^2 + 𝑏𝑄

Profits

• Profit = Total Revenue - Total Cost.

Accounting Profit vs Economic Profit

• Accounting Profit = Profit = Total Revenue - Total Cost
• Economic Profit = Total Revenue - Total Cost - Opportunity Cost +/- externalities

Marginal Revenue

• Marginal Revenue refers to the revenue gained from selling one more good
• The formula is 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = −2𝑚𝑄 + 𝑏
• Marginal Revenue is also linked to Elasticity, as written in 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 to Elasticity = 𝑃 (1− (1/𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦))

Types of Costs

• Fixed Costs are paid regardless of how many, or how few items are sold.
• Variable Costs vary based on how many items are sold, as more goods sold translates to higher variable costs.
• Total Costs are the sum of fixed and variable costs given by TC = TFC + TVC,.
• Opportunity Cost: The result of Giving up the next best option that is for another option.
• Marginal Cost : The cost of one more unit produced, or reaching one more customer.

Maximizing Vs. Satisficing utility

• Both concepts describe how decisions are made but the focus on different goals
• Utility Maximizing to make the best possible decision that gives the highest benefit, this requires the evaluation of all possible choices and picking one the best In sports a Utility maximization Example is a Sports team spending on high level free agents to secure greater chance of winning a championship and players train yearround to be the best at their sport.
• Satisficing to make a decision that is ‘good enough’ rather the best solution;This requires selecting for an option that meets a minimum standard and an example in sport is where sports sign cheaper star players to stay within budget.

Price Discrimination

• Sports team can segment and divide curves that are in demand for that with lower, and higher WTP to be less
• Segment and dividing consumers (differing between different consumers) is a process for discriminating prices of products

Criteria to Price Discriminate

• To price discriminate successfully, they must identify different segments
• identification includes student id and social security for enforcement to ensure the higher WTP segments cannot pay the lower WTP
• An Advantage to price discrimination results in higher revenues for firms
• It some Consumers pay below an amount that is less than standard market Price
• It is known to have questions of fairness, and may lead to predatory pricing or real discrimination
• Administration has to do a certain amount of Cost due to the increased enforcement that differs pricing

Artbitrage

• The ability to "cheat" segmented markets and pay less than WTP with taking the prices and paying less for profit

Broadcasters

• Broadcaster pay to host games as they fear losing viewership
• Games draw advertising revenue through the appeal of prestige
• Some games are nationally broadcast, while others are only broadcast to the local market.
• Since 1990’s outer market sports has let viewers see games outside of the area through NFL network, extra inning of baseball, and NBA league
• More views in sports creates increased advertising and more money

Ads

• When increased amount of people see Tv Ads, ads are more expensive to sell and broadcasters gain a lot more money
• Companies and leagues that market through ads and have very good broadcasters that promote to others
• Targeted Ad : Ads that may allow the access of being in loyal customer and keep them.

Blackout and Bundling

• Blackout is when a game cannot be watched at a local tv, but is encouraged with live attendance
• There are certain Bundling tactics which allow only some views or shifting of demand
• Some Examples include MLB/NFL and NBA broadcasting to multiple networks

Market Power

• With increased amount of views or wealth across network this prevents other Rival league formation
• It Is Likely NFl is More Inelastic of markets than the regular demand of a normal network
• Bundling also allows other consumers to test and trial brands through the purchasing experience.

How power influences the Market

• Firm markets and Market standards are the most common industry characteristics
• There are also High Barriers due to High entry Costs to enter or gain access.
• Brands Are know to increase scales making increased profit and strong market influence
• There are also Strong regulations like patents for government
• Factors of production limit from new firms to enter, which may require rare natural resource or a Specialized labour.

Monopoly

• Monopoly has one seller in which the monopolist firm sets high prices and sustains profit for the market, with companies like WaterUtility, air force exchange, and standard oil for examples.
• Very High and inelastic barriers of entry are related towards monopoly in industry, the costs are very high creating laws to prevent entry or restrictions that have economic advantage.
• Monopoly has influence in sport, such as baseball minor league, US minor league which limits access or rule sets on MLB
• There has also being an NFL antitrust.
• Monopoly has crushed new potentially competitive competition by collecting broadcasting fees.

Monopsony

• Related to monopoly (single seller) where monopoly is (single buyer) in which all other firms exist to buy or influence a price, Walmart And Amazon have some of that power
• There Are NFL NBA and MLB who have more influence in power due to monopsony power like the need for a specific minimum salary.

Competitive Balance influence

• Efforts of college have been a contract to create more equal competitive balance
• There are always restrictions player trade with also an increased focus on sports
• Competitive and non competitive balances may or may not have factors for fair winning chance or improvement

Competitive measuring

• Can improve competitive balance by measure that influence unequal measure in the form of an imbalance of gini coefficient or statistic measure
• Teams with zero gini coefficient have all teams go 0.50 % chance to win at all or most sports.
• The lack of an equal competitive balance makes the viewership predictable and low
• Higher viewed viewership has come from Closer games or Higher Tv time

Standard Competition levels between Europe and the Americas

• There are certain European styles that maximize incentives and promote the sport to an audience
• Consequences is that a richer sport game often cause more payroll

Leagues

• Leagues can form a rival by being successful and establishing a foothold in where major league does have access to.
• Drawing more viewers means more product
• Leagues are always made of all star players and make new Innovations to stand out.

Short run vs long run

• With short run, there come net profits with normal Market.
• Long Run has Fixed cost to be changed when renegotiated
• The flexibility in long run, makes diversification possible over the lifetime to change the table overall.

Types of Long Run with each set of Cost

• Long term : Is over the long term for a decade set on teams as a shop.
• The set amount contract: for example player can only be changed in price only if the player is a free agent
• Relocations : Give owners more and more change and profit
• Expansion: has low views but grows the viewers in the long run

Mechanisms of expansion

• Some of that is from costs (the stadium) and the combination to the overall fixed costs or a subsidy from the city
• Mechanisms and Rules are set to enforce teams of competitiveness
• The schedule and early team selection would make more crowd or games come to their own home

Regulations and actions between early schedules

• To ensure single entry, many key rules in decentralized games need to be used as balance for teams that has led to innovation like the nba shot
• The champion league has to make decisions on how its champion is selected out individual franchises
• The owner have the right to relocate their own individual franchises with the oversight across owners.

Commissioners Enforcement

• Territories Are important in the process and commissioners have the right in that situation such relocating Franchises will ensure market power.
• Owners are going to always want a franchise

Cheating

• Weighing the cost, allows for rational decisions to limit crime by change the behaviours of an entity through punishment or the likelihood of convicting their crime.

Game Theory

• Actions and strategies of teams leads to game theory where must consider what others entities and individuals will do
• The Set Actions leads actions that play on set, to ensure that teams will win with the set pure amount such the amount of passes in football

Mixed Strategy

• Teams must analyze opponents based on the probability
• It is used in mixed strategy in many games
• If a action is not predictable it would be random

Wages

• In markets that are non bias, then marginal product and revenue matter (MRP) That increased revenue must equal more than wages in contracts for the player.

Screening and marginal revenue

• Consumers can screen sellers for more great info and in depth with contracts.
• The main Idea is to screen data before providing data.
• Revenue must ensure that consumers have access from a stadium (ticket and game sales)

Aspects, products of Asymmetric

• The consumer is highly emotional and it is volatile between Revenue
• Media and Sponsorship also ensure that the consumer is more heavily dependent on access.

Learn about the unique characteristics of sports markets, including their experience-driven nature and unpredictable outcomes. Explore the fixed supply, emotional demand, and the impact of media rights on revenue. Compare sports markets to traditional markets, highlighting differences in supply, demand, product predictability, and revenue sources.