ECON 2P42 Economics of Sports Assignment Due: Tuesday, December 3 in Prof. Koehn’s assignment box located outside Department of Economics. Your assignment is to analyze the assignment article using the economic concepts and theories covered in ECON 2P42. You may use any style you prefer, such as MLA, APA, etc. You can use other resources in your answer, but they must be cited properly. Your assignment should be 1000 words. Question 1: Discuss team goals and how they influence behavior (Max. Profit or Win) Profit Maximizing Teams Profit Formula = πi = R(wi) – C(wi) = Typically maximizing wins = strategy = Revenues increase at a decreasing rate – assume that they can “buy” wins – get wins until they are at a max → Wins increase until the Total Revenue (TR) curve is above the Total Cost (TC) curve as far as possible, then wins decrease → Fans do not want to see teams win all the time → Maximum profit is when MR=MC Ex. Kansas City Royals; may not have the top players to get them wins; do not incur as many costs Win Maximizing Teams – Cannot ignore profit because could go bankrupt Ex) 2003 Senators had best record then went bankrupt – Maximize wins when P=MC=AC – To win, must spend more money on salaries to get better players Ex) NYY – More Wins = More Revenue & Desire for more wins = Better Team = More Costs **All else equal, win maximizing teams win more than profit maximizing teams and **profit maximizing teams earn more than win maximizing teams Question 2: What is Monopsony & how it works, Reserve Clause, Salary Caps, Bilateral Monopoly (how they try keep wages low) Monopsony = Monopoly in the buyer’s market (Monopoly is in seller’s market); sole buyer of a good/service – Players can sell their labour only to the monopsony employer – Only one buyer for desired goods/services for a Monopsony, so they have control over the price players are given because there is only one buyer to take deal, so buy at lower price than what actual value is – Maximize profits by restricting quantity of transactions relative to a perfectly competitive industry (when Marginal Benefit = Marginal Expenditure) → Lower output and consumption impose a dead weight loss on society – Marginal Expenditure: cost of buying additional units → Greater than costs of additional purchases, so they must spend more – Marginal Expenditure Curve lies above supply curve – charging price (demand curve), paying price (supply curve) – Reserve Clause before 1970’s, allowed teams to own players contracts for as long as services were desired and so they could not negotiate with other teams to offer better salaries (Value of last player is 1000, but paid 800) Reserve Clause: owners had rights to entire rosters services for a long period of time, even if the contract was only for a single season (MLB) = Clause violated anti-trust laws – Player restricted to contract plus an additional year if the team chose to renew – With no competition; salaries decreased – In 1968 Major League Baseball Players Association (MLBPA) negotiated first Collective Bargaining Agreement – Player Associations are examples of unions Bilateral Monopoly: when Monopoly Union confronts Monopsony Employers – Wage falls to indeterminate range between union and monopsony wage, pay depends on sides bargain power – Nash: bargaining power stems from ability to step away from the table (lockouts) → Threat Point: value of each sides alternative; greater the bargaining power, more favourable solution achievable All-Or-Nothing Demand Curve – Monopolies have the power to set prices and quantity it sells; but cannot do both at once → If monopolist sets price, consumers buy as much as they want → If monopolist sets quantity, consumers will determine how much they want to pay → However some circumstances they can do both (Foot-long hotdogs, more than consumer wants) (Goal of producer to extrapolate as much CS) – Salary Caps: Players don’t get everything they ask for = most restrictive power from owners – To restrict level players get paid and keep costs down, also maintains competitive balance – NHL (soft cap), NBA (softer), and MLB (no cap). NHL was locked out in 2004 because owners wanted to implement one. – Doesn’t always limit what teams do, 1 NFL, 24 NBA, 11 NHL teams exceeded cap in 2010 Question 3: How Athletes fight Monopsony: Unions, Free Agency, Agents, Arbitration National Labour Relations Act (NLRA): criteria in which workers can act collectively through association – Right to form a Union – Right to Bargain Collectively & in Good Faith – Right to Use Pressure Tactics Unions: organization of workers acting collectively to improve wages and work conditions – Try to push up wages – In 4 major sports = paid more now because of unions, gave players a voice – Sports unions do not engage in wage negotiations, but bargain over general framework within individual players and their agents negotiate with teams – GOAL: to counter market power of team owners exercised on players to reduce competiton for the job Craft Unions = workers share common skill (resembles sports unions), raise pay by restricting labour supply as shown below Industrial Unions = players work for particular employer (resembles sports unions), collective bargaining with employers who hire & fire. Push wages up through CB & threat of strike. Workers act like a monopoly (below) Collective Bargaining: process of negotiation between employers and group of employees aimed at agreements to regulate working salaries – includes duration of agreement, potential extensions – any issues to players, free agency, minimum wages, player location issues, arbitration, mediation issues – owners and players have individual salary rights – owners can negotiate player rights/trades → Players with high tenure have more control over trades Strikes: when workers act together to remove labour input from production process; tactic to induce owners Lockout: when the management of the firm does not permit the labour input to operate Owners: act through leagues, deal with players, unions and associations, and do not need to negotiate collectively, look to squeeze economic rent (above what willing to play for, like MRPL) Commissioner: large role in collective bargaining, elected by owners and act in their best interest Agent: represents players best interest (usually wages/contracts) – limited in collective bargaining process – owners will only deal with union certified agents Free Agency: the right of a player to sign with any team that offers a contract, to test the market – 1976: The 4 major sports leagues got free agency, pushing against reserve clause – Awarded to players after certain time in league – Unrestricted Free Agents: a player can sign with any team that makes them an offer, no strings attached – Restricted Free Agents: free to solicit offers from other teams, but not sign with them → Right of First Refusal: if player signs offer with other team, original team can retain player by matching the offer, player doesn’t truly decide where = owner maintains monopoly power! Salary Arbitration: when cannot agree contract = player exercises right to have 3rd party make deal and player must agree to their decision – player aims for highest possible salary – compare value to other players based on comparable stats – 3rd Party must be fair in decision making and chooses one offer Binding Arbitration: In NHL & MLB, both sides commit to accepting the ruling of the arbitrator Question 4: Teams as Public Goods, how teams benefit, how influenced by externalities, multiplier effect, tax benefits (How powerful are these arguments?) Teams as Public Goods – when teams become closely integrated into their communities, enjoy team without going – public good: available to everyone, and one person’s consumption does not prevent another’s consumption – people take great pride in sports franchises; regardless of how they perform – Sports and Society: Glasgow Rangers (Protestants) VS Glasgow Celtics (Catholics) – Ethnic Minorities and separatism: Montreal Canadiens (French Canadians, Richard Riot), FC Barcelona (Catalans VS the rest of Spain) How Teams Benefit – New Stadium/Stadium Renovations → additional seating, increases fan attendance & increases spending → additional profits from luxury boxes → Honeymoon effect: new stadium impact fades → eventually stops disguising a team’s quality → Special Events like the World Cup can may see renovated stadiums and infrastructure – governments help subsidize the cost Positive and Negative Externalities – Positive Externality: a party not directly involved in a transaction receives unintended benefits from a transaction → worker’s incomes from construction projects relating to the arena, this disposable income is likely to be spent in the city – Negative Externality: when a party bears unintended costs from a transaction for which they do not receive compensation → traffic and pollution caused by people who attend sports games – interfere with market’s ability to allocate resources Multiplier Effect: spill over of added income and spending into the broader economy – Money spent at sporting events has indirect impact on city’s economy – Direct impact of spending spreads throughout the city’s economy – Effect fades each spend because people don’t spend all their additional income – Marginal Propensity to Consume/Save (MPC/S): fraction of additional dollars consumers spend/save → MPS + MPC = 1 – Multiplier Effect: relatively direct increase in incomes can have a huge impact on the well-being of a city → Can be inaccurate → Closed Economy: one that does not engage in trade → Open Economies: trade extensively with other cities/countries Ramsey Rule: sales taxes should be levied in inverse proportion to the price elasticity of demand for the good/service in which the government places the tax; minimizes DWL → more elastic: low tax → less elastic: high tax – Vertical Equity: tax falls most heavily on those with greatest ability to pay; less on those with low income – Horizontal Equity: treats equals equally Question 5: Labour Markets & How Athletes are paid and what do to get paid, PEDs Labour Supply: standard supply curve – firm purchases services of a person, measured in units of time – upward sloping curve indicates a worker responds to higher wages by offering more work time to employers – people choose how much to work based on the wage and the value of leisure – when wage is low, opportunity cost of not working is low – when wage is high (1) substitution effect, (2) income effect → Substitution Effect: increased cost of not working; sacrifice higher earnings when purchasing leisure → Income Effect: increased purchasing power from increased wages Labour Demand – Marginal Revenue Product (MRP): extra revenue created by an additional worker – assumes markets are perfectly competitive – due to law of diminishing marginal returns, downward sloping curve because the more workers hired, the less each worker adds to output – players input is important to the production to wins and is measured
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