Professional Sports: Are Players Overcompensated? PDF

Professional Sports—What is the Real Score? October 2024 Housekeeping Reminder: Test #2:: Next Tuesday–covering Crime, Education, Pro Sports and Going Global Location?? Return in class exercise and KWL Reminder #2.. Meet with your TLAF team this week & plan your Think Like a Freak pro...

Professional Sports—What is the Real Score? October 2024 Housekeeping Reminder: Test #2:: Next Tuesday–covering Crime, Education, Pro Sports and Going Global Location?? Return in class exercise and KWL Reminder #2.. Meet with your TLAF team this week & plan your Think Like a Freak problem-solving techniques presentation  Economics of Professional Sports ► A “fun” social issue ► And it shows the challenge of making ‘imperfect competition’ perfect—and helps explain different compensation levels ► ► Let’s go to espn.com ► What’s the news? ► To understand the sports headlines, we’ll look @… ► How is the pro sports market organized? ► How is it different from other businesses? ► How do cartels operate? ► What are product & resource markets? ► Do professional athletes earn their pay? ► Essential Question for Today: What do you think?? ► Professional Athletes are Worth Every Penny? OR Ridiculously Overcompensated?  More Professional Sports “Business” https://howmuch.net/articles/sports-leagues-by-revenue Year Last Recent Average League Teams Founded Contraction Attendance National Football 1920 32 1952 68,400 League Major League 1869* 30 1899 30,168 Baseball1 National Basketball 1946 30 1954 17,347 (2013) Association National Hockey 1917 30 1978 17,720 (2013) League Major League 1994 20 2002 21,692 Soccer2 NASCAR ($3.0 B) Premier League—England/Wales ($5.3 B)  The Pro Sports Business ► Size of the “business”?  The Pro Sports Business ► Size of the “business”? ► “multi-billion $ business that provides?  The Pro Sports Business ► Size of the “business”? ► “multi-billion $ business that provides? ► ENTERTAINMENT to millions of fans each year  The Pro Sports Business ► Size of the “business”? ► “multi-billion $ business that provides? ► ENTERTAINMENT to millions of fans each year ► Organizational Structure ► While history differs, structure is similar--‘franchise system” ► What’s a franchise?  The Pro Sports Business ► Size of the “business”? ► “multi-billion $ business that provides? ► ENTERTAINMENT to millions of fans each year ► Organizational Structure ► While history differs, structure is similar--‘franchise system” ► What’s a franchise? ► Exclusive right to produce & market specific commercial goods & services within a specified geographic territory Business Structure Relationship #1 Teams 🡪🡪 Leagues ► Leagues do what? Relationship #1 Teams 🡪🡪 Leagues ► Leagues do what? ► Determine annual schedule & playoffs ► Make & enforce game rules ► Set guidelines for hiring new players** Relationship #1 Teams 🡪🡪 Leagues ► Leagues do what? ► Determine annual schedule & playoffs ► Make & enforce game rules ► Set guidelines for hiring new players** ► Make new ‘franchises’, which are? Relationship #1 Teams 🡪🡪 Leagues ► Leagues do what? ► Determine annual schedule & playoffs ► Make & enforce game rules ► Set guidelines for hiring new players** ► Make new ‘franchises’, which are? ► Teams with “exclusive right to produce and market specific commercial goods & services within a specified geographic territory”. Relationship #1 Teams 🡪🡪 Leagues ► Leagues do what? ► Determine annual schedule & playoffs ► Make & enforce game rules ► Set guidelines for hiring new players** ► Make new ‘franchises’, which are? ► Teams with “exclusive right to produce and market specific commercial goods & services within a specified geographic territory”. ► Teams are “contractually obligated” to one another—league assures they ‘PLAY FAIR’ Relationship #1 Teams 🡪🡪 Leagues ► Leagues do what? ► Determine annual schedule & playoffs ► Make & enforce game rules ► Set guidelines for hiring new players** ► Make new ‘franchises’, which are? ► Teams with “exclusive right to produce and market specific commercial goods & services within a specified geographic territory”. ► Teams are “contractually obligated” to one another—league assures they ‘PLAY FAIR’ ► These factors all have economic implications for the individual teams (club) members (which are league franchises).  Relationship #2 Teams 🡪🡪 Players ► What is different about the team/player relationship compared to other employee/employer relationships?  Relationship #2 Teams 🡪🡪 Players ► What is different about the team/player relationship compared to other employee/employer relationships? ► Visible productivity  Relationship #2 Teams 🡪🡪 Players ► What is different about the team/player relationship compared to other employee/employer relationships? ► Visible productivity ► Instant stats ► Televised performances ► Constantly monitored & compared & ranked  Relationship #2 Teams 🡪🡪 Players ► What is different about the team/player relationship compared to other employee/employer relationships? ► Visible productivity ► Instant stats ► Televised performances ► Constantly monitored & compared & ranked ► Inconsistent (& controversial) salaries among team members  Relationship #2 Teams 🡪🡪 Players ► Why is this relationship different than any other employee/employer combo? ► Visible productivity ► Instant stats ► Televised performances ► Constantly monitored & compared & ranked ► Inconsistent (& controversial) salaries among team members ► Team’s have “property rights” to players  Relationship #2 Teams 🡪🡪 Players ► Why is this relationship different than any other employee/employer combo? ► Visible productivity ► Instant stats ► Televised performances ► Constantly monitored & compared & ranked ► Inconsistent (& controversial) salaries among team members ► Team’s have “property rights” to players ► Players work within league rules specifically put in place to thwart any attempt to hoard the best players Market Types… an important (added) market economy complexity Pro Sports… an Unusual Exceptional Situation: Gotta like that! (and hopefully learn from it) Market Types… an important (added) market economy complexity ⦿ Teams operate in imperfect markets Market Types… an important (added) market economy complexity ⦿ Teams operate in imperfect markets ◼ Clubs sell their services (entertainment, t-shirts, tickets, etc.) in which market? Economic Analysis & Pro Sports ⦿ Teams operate in imperfect markets ◼ Clubs sell their services (entertainment, t-shirts, tickets, etc.) in which market? The Product Market… ⚫ Exists where buyers & sellers engage in the exchange of final goods & services Economic Analysis & Pro Sports ⦿ Teams operate in imperfect markets ◼ Clubs sell their services (entertainment, t-shirts, tickets, etc.) in which market? The Product Market… ⚫ Exists where buyers & sellers engage in the exchange of final goods & services ◼ Clubs hire their players (labor) in which market? Economic Analysis & Pro Sports ⦿ Teams operate in imperfect markets ◼ Clubs sell their services (entertainment, t-shirts, tickets, etc.) in which market? The Product Market… ⚫ Exists where buyers & sellers engage in the exchange of final goods & services ◼ Clubs hire their players (labor) in which market? The Resource Market Market Types… an important (added) market economy complexity ⦿ Teams operate in imperfect markets ◼ Clubs sell their services (entertainment, t-shirts, tickets, etc.) in which market? The Product Market… ⚫ Exists where buyers & sellers engage in the exchange of final goods & services ◼ Clubs hire their players (labor) in which market? The Resource Market… ⚫ Exists where buyers & sellers engage in the exchange of the factors of production.  Product Market ► Key Economic Factors that impact ► the Professional Sports “Product” ► Cooperation among teams ► Cartels ► Coordinated behavior ► Pricing for output & broadcast rights ► Number & location of teams  Cooperation among teams ► What is the essence of sports?  Cooperation among teams ► What is the essence of sports? ► COMPETITION… but where is the competition?  Cooperation among teams ► What is the essence of sports? ► COMPETITION… but where is the competition? ► On the playing field, NOT in the market place.  Cooperation among teams ► What is the essence of sports? ► COMPETITION… but where is the competition? ► On the playing field, NOT in the market place. ► If not??  Cooperation among teams ► What is the essence of sports? ► COMPETITION… but where is the competition? ► On the playing field, NOT in the market place. ► If not?? ► More successful clubs—sell more tickets & merchandise—hire better players—get more popular—sell more stuff—hire better players.  Cooperation among teams ► What is the essence of sports? ► COMPETITION… but where is the competition? ► On the playing field, NOT in the market place. ► If not?? ► More successful clubs—sell more tickets & merchandise—hire better players—get more popular—sell more stuff—hire better players ► Force weaker teams into bankruptcy & bore the fans to tears. Motivated to Cooperate! ► Each clubs economic decision-making interrelated to other clubs’ decisions Motivated to Cooperate! ► Each clubs economic decision-making interrelated to other clubs’ decisions ► And how do they deal with this “interrelatedness”? Motivated to Cooperate! ► Each clubs economic decision-making interrelated to other clubs’ decisions ► And how do they deal with this “interrelatedness”? ► Coordinate economic decision making through LEAGUE rules & guidelines i.e. “they cooperate” Motivated to Cooperate! ► Each clubs economic decision-making interrelated to other clubs’ decisions ► And how do they deal with this “interrelatedness”? ► Coordinate economic decision making through league rules & guidelines ► A league then resembles? Motivated to Cooperate! ► Each clubs economic decision-making interrelated to other clubs’ decisions ► And how do they deal with this “interrelatedness”? ► Coordinate economic decision making through league rules & guidelines ► A league then resembles? ► A cartel ► Group of firms that formally agree to coordinate production/pricing decisions in manner that maximizes joint profits. Requirements of a successful cartel ► 1. Cartel must control a large part of industry output ► if you control the output… >you have power ► League can prevent new competitors… forbid or merge Requirements of a successful cartel ► 1. Cartel must control a large part of industry output ► >if you control the output… >you have power ► Prevent new competitors… forbid or merge ► 2. Homogeneous output (i.e., fan entertainment) Requirements of a successful cartel ► 1.Cartel must control a large part of industry output ► >if you control the output… >you have power ► Prevent new competitors… forbid or merge ► 2. Homogeneous output (i.e., fan entertainment) ► 3. Ability to divide the market into territories Requirements of a successful cartel ► 1. Cartel must control a large part of industry output ► >if you control the output… >you have power ► Prevent new competitors… forbid or merge ► 2. Homogeneous output (i.e., fan entertainment) ► 3. Ability to divide the market into territories ► 4. Ability to prevent cheating ► Commissioner can levy fines… So why not “cartel”? It sure sounds good to maximize joint profits… wouldn’t it be great to “keep it in the family”? think Carnegie, Rockefeller, Cartier… =) So why not “cartel”? ► Anti-trust laws (arose out of the late 1800’s… Robber Baron’s choke hold on the emerging industrial economy) Made it illegal, in MOST cases, for firms to monopolize an industry through formation of a cartel. So why not “cartel”? ► Anti-trust laws ► Make it illegal, in MOST cases, for firms to monopolize an industry through formation of a cartel. ► Exception? So why not “cartel”? ► Anti-trust laws ► Make it illegal, in MOST cases, for firms to monopolize an industry through formation of a cartel. ► Exception? ► 1922: Federal Baseball Club of Baltimore v. the National League of Professional Baseball Clubs. Coordinated Behavior ► In what areas do teams “coordinate”? ► Coordinated Behavior ► In what areas do teams “coordinate”? ► Joint marketing ► Revenue sharing ► Sources of Revenue ► 1. Ticket & concession sales ► 2. Merchandising rights for team souvenirs ► 3. Online, radio & television broadcast rights** BIGGEST SOURCE of REVENUE! ► Pro sports cooperate in these areas via? Coordinated Behavior ► In what areas do teams “coordinate”? ► Joint marketing ► Revenue sharing ► Sources of Revenue ► 1. Ticket & concession sales ► 2. Merchandising rights for team souvenirs ► 3. Online, radio & television broadcast rights** BIGGEST SOURCE of REVENUE! ► Pro sports cooperate in these areas via? ► League organizations (cartels)  Broadcast Pricing and Output for a “Cartel” lllustrates that a cartel can sell fewer at a higher price & collectively, make more money. Which sounds like a pretty sweet deal… Price ($000) 100 D 90 MC 80 A 70 60 D 50 40 30 20 10 1 2 3 4 5 6 7 8 Quantity per unit of time  Broadcast Pricing and Output for a “Cartel” lllustrates that a cartel can sell fewer at a higher price & collectively, make more money. Which sounds like a pretty sweet deal… Price ($000) 100 D 90 MC C 80 A 70 60 B D 50 40 30 20 MR 10 1 2 3 4 5 6 7 8 Quantity per unit of time  The Number & Location of Teams… A Controversial Issue ► A Successful cartel must be able to divide the market between members & share profits ► What’s in their best interests when it comes to new franchises?  The Number & Location of Teams… A Controversial Issue ► A Successful cartel must be able to divide market between members & share profits ► What’s in their best interests when it comes to new franchises? ► RESTRICT NEW ENTRANTS & be slow to expand ► If allowing an expansion team in, they can charge fees to new league entrants to compensate for “lost market share”  The Number & Location of Teams… A Controversial Issue ► A Successful cartel must be able to divide market between members & share profits ► What’s in their best interests when it comes to new franchises? ► RESTRICT NEW ENTRANTS & be slow to expand ► If allowing an expansion team in, charge fees to new league entrants to compensate for lost market share ► Consequences of these incentives?  The Number & Location of Teams… A Controversial Issue ► A Successful cartel must be able to divide market between members & share profits ► What’s in their best interests when it comes to new franchises? ► RESTRICT NEW ENTRANTS & be slow to expand ► If allowing an expansion team in, charge fees to new league entrants to compensate for lost market share ► Consequences of these incentives? ► Incentive for existing teams to relocate to new markets ► Shortage of teams—so?? market price goes up or down?  The Number & Location of Teams… A Controversial Issue ► A Successful cartel must be able to divide market between members & share profits ► What’s in their best interests when it comes to new franchises? ► RESTRICT NEW ENTRANTS & be slow to expand ► If allowing an expansion team in, charge fees to new league entrants to compensate for lost market share ► Consequences of these incentives? ► Incentive for existing teams to relocate to new markets ► Shortage of teams—so market price goes up or down? ► UP!  The Stadium Controversy ► How many professional sports team stadiums were built between 2000 & 2014?  The Stadium Controversy ► How many professional sports team stadiums were built between 2000 & 2014? ► 45… Taxpayers supported what % of the cost? ►  The Stadium Controversy ► How many professional sports team stadiums were built between 2000 & 2014? ► 45… Taxpayers supported what % of the cost? ► Over half (out of almost $28 billion spent) ► WHY?  The Stadium Controversy ► How many professional sports team stadiums were built between 2000 & 2014? ► 45… Taxpayers supported what % of the cost? ► Over half (out of almost $28 billion spent) ► WHY? ► Satisfy local public demand for sports entertainment ► “major league” status for the community however… low pay jobs, substitution effect, & small spending contribution by “stars” hinder “econ boost”  The Stadium Controversy ► How many professional sports team stadiums were built between 2000 & 2014? ► 45… Taxpayers supported what % of the cost? ► Over half (out of almost $28 billion spent) ► WHY? ► Satisfy local public demand for sports entertainment ► “major league” status for the community however… low pay jobs, substitution effect, & small spending contribution by “stars” hinder “econ boost” ► Actually it’s a kind of a “Small Business”(WSU=$340 m. vs. NFL franchise avg. revenue = $381 m.)) Moving to “Resource Markets” ► Factors that impact leagues when they buy their “inputs of production” (players) ► Monopsony ► Monopsonistic profit ► Free agency ► Labor disputes The Employment of Players ► Most visible rules involve what? The Employment of Players ► Most visible league rules (they even televise it) involve what? ► Procedures to allocate new players among league clubs… “The DRAFT” ► Goal? The Employment of Players ► Most visible rules involve what? ► Procedures to allocate new players among league clubs. ► Goal? ► Parity… Balance between teams & prevent hoarding talent. How is this accomplished? The Employment of Players ► Most visible rules involve what? ► Procedures to allocate new players among league clubs. ► Goal? ► Parity… Balance between teams & prevent hoarding talent. How is this accomplished? ► Via “The Draft”, new major league players become “property” Monopsony ► Definition: Market with only one buyer or employer Monopsony ► Market with only one buyer or employer ► For example, MLB, NHL, NBA & NFL are THE places to play these respective sports Monopsony ► Market with only one buyer or employer ► For example, MLB, NHL, NBA & NFL are THE places to play these respective sports ► No one else offers the same quality of employment opportunity for elite athletes. Monopsony: on 2 levels ► Market with only one buyer or employer ► For example, MLB, NHL, NBA & NFL are THE places to play these respective sports ► No one else offers the same quality of employment opportunity for elite athletes. ► Once drafted, only one club has the right to contract with a specific player ► Club becomes a monopsony from the player’s perspective Wage and Employment Determination for a Monopsonist Wage ($000) 1000 S 900 800 C 700 600 500 400 300 MR 200 100 MRP = D 1 2 3 4 5 6 7 8 Labor hired per unit of time Wage and Employment Determination for a Monopsonist Wage MCL ($000) 1000 A S 900 800 C 700 600 B 500 400 300 MR 200 100 MRP = D 1 2 3 4 5 6 7 8 Labor hired per unit of time Monopsonistic Profit ► Difference between the worker’s contribution to a monopsonistic firm’s receipts and their wages. ► Is this usually positive for the sports franchise? ► Monopsonistic Profit ► Difference between the worker’s contribution to a monopsonistic firm’s receipts and their wages. ► Is this usually positive for the sports franchise? ► Yep… this is the additional profit earned by the ball club because of its monopsony power. Monopsonistic Profit ► Difference between the worker’s contribution to a monopsonistic firm’s receipts and their wages. ► Is this usually positive for the sports franchise? ► Yep… this is the additional profit earned by the ball club because of its monopsony power. ► Hiring result for a monopsony? Monopsonistic Profit ► Difference between the worker’s contribution to a monopsonistic firm’s receipts and their wages. ► Is this usually positive for the sports franchise? ► Yep… this is the additional profit earned by the ball club because of its monopsony power. ► Hiring result for a monopsony? ► Hires fewer workers than a competitive firm and pays a lower wage. This situation is called? Monopsonistic Profit ► Difference between the worker’s contribution to a monopsonistic firm’s receipts and their wages. ► Is this usually positive for the sports franchise? ► Yep… this is the additional profit earned by the ball club because of its monopsony power. ► Hiring result for a monopsony? ► Hires fewer workers than a competitive firm and pays a lower wage. This situation is called? ► EXPLOITATION Ways to Maintain “Monopsony Power” ► 1. Immobility of new players who have been drafted ► Must sign contracts binding them to team for a certain # of years ► 2. Employ those with highly specialized talents & skills ► Athlete has invested years in training… ► Very specific skills & not readily transferable to other employment. Ways to Fight “Monopsony Power” ► Labor Unions ► Formal organization of workers that bargains on behalf of members over terms & conditions of employment ► Strikes ► work stoppage initiated by labor ► Lockouts ► work stoppage initiated by management Fighting Exploitation: The Move to “Free Agency” ► In the olden days… “the reserve clause” ► Contract reserved the right of the employing ball club to perpetually hold exclusive rights to a player’s services. “exploitation” Fighting Exploitation: The Move to “Free Agency” ► In the olden days… “the reserve clause” ► Contract reserved the right of the employing ball club to perpetually hold exclusive rights to a player’s services. “exploitation” ► 1975… compromise in MLB ► Player could declare “free agency” & sell his services to highest bidder after a # of years. ► MLB 6 years, NFL 5 yrs. Fighting Exploitation: The Move to “Free Agency” ► In the olden days… “the reserve clause” ► Contract reserved the right of the employing ball club to perpetually hold exclusive rights to a player’s services. “exploitation” ► 1975… compromise in MLB ► Player could declare “free agency” & sell his services to highest bidder after a # of years. ► MLB 6 years, NFL 5 yrs. ► Impact of free agency on wages? Fighting Exploitation: The Move to “Free Agency” ► In the olden days… “the reserve clause” ► Contract reserved the right of the employing ball club to perpetually hold exclusive rights to a player’s services. “exploitation” ► 1975… compromise in MLB ► Player could declare “free agency” & sell his services to highest bidder after a # of years. ► MLB 6 years, NFL 5 yrs. ► Impact of free agency on wages? ► Good news or bad news for players… an illustration So… Do Professional Athletes “Earn” their Pay? How did you vote? ► Worth every penny OR ► ridiculously overcompensated? So… Do Professional Athletes “Earn” their Pay? How did you vote? ► Worth every penny OR ridiculously overcompensated ► “salaries of professional athletes reflect their contribution to the club’s revenue” ► i.e. worth every penny! (even “exploited”) So… Do Professional Athletes “Earn” their Pay? How did you vote? ► Worth every penny OR ridiculously overcompensated ► “salaries of professional athletes reflect their contribution to the club’s revenue” ► i.e. worth every penny! ► The following is true for all workers in a market economy… ► “Pay” is not a function of contribution to public’s health or overall well-being…just your Marginal Revenue Product! ► And fans are “willing to pay” to access this skilled entertainment Consider… The Case of U. S. Major League Soccer ► Think about this… MLS Its a single-entity league Consider… The Case of U. S. Major League Soccer ► Think about this… MLS Its a single-entity league ► All teams (hence all players) are owned by a single “MLS’ corporation ► Investor-operators buy “stock” in MLS to host a team ► Broadcast rights, licensing, merchandizing centrally controlled by league ► Employment contracts are between player and league ► League then allocates players to teams ► Is MLS a monopsony? For next time... Exit Ticket.. what did you learn today? Today we started with a question : Are Pro Sports Players A) worth every penny or B) ridiculously overcompensated? Using at least 2 of the economic concepts presented today, think like an economist and write about what you thought the answer was, what you learned and how you would now answer that question. Thursday...Going Global …. discussion materials (video, articles, slides) available … Homework: Prep for Global Discussion due 30 minutes before class starts on Thursday (submit online but be able to access in class) ◼ Any questions?