Class Notes For Sports Economics, 1st Edition

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1BerriChapter 1It’s Just Supply and DemandObjectivesTo appreciate the importance of math in sports economics by applying the MarshallianMethod.To understand the fundamentals and the contributing variables of the Marshallian Cross,the standard supply and demand model.To differentiate between deductive reasoningand inductive reasoning and to understandwhen it is appropriate to useeach methodologyand howthe two methods work intandem.OutlineI.Chapter objectivesII.Insports, perception and realitydon’t always matchIII.The Marshallian MethodIV.Marshall and the demand curvea.Use mathematics as a shorthand languagetill your model yields conclusions.b.Translate into English and illustrate by examples that are important in real lifeV.Just a matter of timeVI.The Marshallian CrossVII.What determines ticket prices?VIII.“The Decision” teaches us how marketimpediments have unintended consequences

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2IX.Whatis the “right” price?X.The many lessons “The Decision” teachesXI.Deductive versus inductive reasoningTeaching TipsIn sports, perception and reality don’t always matchCreating Student InterestSince this will, in many cases, begin the course, start by askingallstudentsto tellabout their sports interests. What sports have they played,and what teams dothey follow?Alternatively, consider asking students to name an economic issuepertaining to sports. Use the topics they bring up such as stadium funding, playersalaries and ticket prices to identify areas of the sports economics literature.Pointout that economic theory and empirical methods better inform the discussion.Presenting the MaterialHighlight the history of sports and the transition from being a leisure good of the wealthy to oneconsumed by all classes.Because sports are so popular, many people have opinions aboutsports, such as the relationship between ticket prices and players’ pay. As economists, we havetools to analyze these thoughts for accuracy.Emphasize the use of empirical methods to testotherwise purely theoreticalsports economics hypotheses.(e.g. Did the salary cap help or hurtthe NFL as a sport?)The Marshallian MethodCreating Student InterestAsk the students to name a figure from history andexplainwhat they learnedfrom him or her. Is itimportantto learn from those who went before us?

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3Presenting the MaterialThis section presents a good opportunity to introduce some of the key people ofeconomic thought and to convey the notion that the study of sports economics isderived from the basic principles of the discipline.In ourstudy of sports, we needto stand on the shoulders of these great thinkers who went before us.This coursewill requirestudents to interpret manynumbers and formulae. The MarshallianMethodillustratesthe importance of math as a tool to help us understand what weobserve.Marshall and the demand curveCreating Student InterestAsk a coupleofstudents to name something that they buy frequently. Ask themwhat would happen if the price ofthis item doubled.What other factorswouldinfluence whattheybuy and how muchtheybuy?Presenting the MaterialUsing the answers given by the students, translate thisinformationinto adownward-sloping demand curve.Emphasize thatceteris paribus, the demandcurve represents the relationship between own price and quantity demanded basedon aperson’s decisions about what is best for them, given their preferences, pricesand income.Show that the demand curve can also be written as an equation.After theinverserelationship between price and quantity is understood, transitioninto the other factors that influence demand: population, income, and quality.Explain how these elements are present in the demand for sports as well. Reviewhow these elements shift the demand curve.

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4Just a matter of timeCreating Student InterestIf possible, bring a baseball card to show your class. Ask them what expensesthe card manufacturer had in producing the card. Ask them the retail price ofbaseball cards at a store. Then ask:if the price of the cards doubled, would themanufacturer have an incentive to produce more cards?Presenting the MaterialUsing the answers by the students, construct an upward-sloping supply curve.Show how this can be written as an equation. Describe the Law of Supply.Usingthe Honus Wagner example, show what a fixedsupply curve looks like.Emphasize that the supply curve is the upward sloping part of the Marginal (unit)cost of production curve of the firm.The Marshallian CrossCreating Student InterestAsk the students if anyone ever owned a replica jersey of a professional athlete.Which player,and why that player? Have them think about whether they werealone in buying that type of jersey or if other people did so as well. Ask themwhich NFL and NBA players’ jerseys would sell the most.Presenting the MaterialThe buying and selling of a jersey bring together buyers and sellers. Using theTim Tebow jersey example, review what a market looks like using a Marshalliansupply and demand graph. Continue this example and show the shift in supplythat would occur if both Reebok and Nike sold his jersey. Emphasize the

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5importance of finding the equilibrium price and quantity using supply anddemand.What determines ticket prices?Creating Student InterestWith a show of hands, take a survey of the class’s opinions about an importantquestion in sports economics:do tickets to a sporting event cost a lot because ofplayers’ salaries,or are players paid high salaries because of the high ticketprices?Presenting the MaterialUsing a fixed supply curve, such asthatshown inFigure 1.3, illustrate how ticketprices for a team can be found by finding the equilibrium. Next, show how anincrease in demand will increase ticketprices. Mention that since this is demanddriven and not cost driven, the students who said that players are paid highsalaries because of the high price of tickets were right.“The Decision” teaches us how market impediments have unintended consequencesCreating Student InterestIf possible, show a clip fromYouTubeof LeBron James announcing his decisionto take his talents to South Beach. Ask the students why they think he made thischoice and if they think he made a good decision.Would they make the samechoice?Ask if a star high school athlete deciding on which college to attendwould in any way be similar to what James faced.Presenting the Material

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6Tie togetherTable 1.1 withFigure 1.7 by illustrating how a salary cap limits themarket’s ability to reach an equilibrium.With pay limited by external forces,discuss the non-price competition teams faced in trying to sign James. See if thestudents can describe non-price competition faced by colleges in recruitingathletes.Be careful to point out that you are assuming a competitive market forplayers. In fact the market for players’s is not competitive and you have a fewbuyers facing several different sellers (players).History of the NPF History of the NPFWhatis the “right” price?Creating Student InterestWhen LeBron James moved to Miami, he was paid $14.5 million that nextseason. Ask your students if he was underpaid. Was he exploited by the NBA?How does society justify paying an athlete that much money? Is his salary anindication of the values of our society? Why or why not?Presenting the MaterialThe field of sports is ripe for opinion. Sports radio seemingly exists to giveopinions about athletes and what teams should or shouldn’t do. Discuss thedifference between positive economics andnormative economics. Point out to thestudents how easy it is to slip from positive to normative. The study of sportseconomics tries to remain in the positive realm and objectively describe whatexists.The many lessons “The Decision” teachesCreating Student Interest

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7Let the students know that understanding markets can also help us understandother aspects of sports: profit maximization, competitive balance,player salaries,player productivity and labor markets, discrimination based on race and gender,college sports, publicly owned venues, and measuring player performance.Presenting the MaterialThis section is a preview of the topics covered in the rest of the text. You mightwant to note how many of the topics are interrelated and can affectoneanother.Deductive versus inductive reasoningCreating Student InterestThe character ofSherlock Holmes was famous for using deductive reasoning.Imagine you were Sherlock Holmes;how would you deduce that LeBron Jameswouldleave for Miami?Presenting the MaterialAside from differentiating between deductive and inductive reasoning, it isimportant to point out that economics isaworld of logicand empirical facts-notone of merely opinion.Common Student StrugglesMost students will have been exposed to supply and demand in their principles ofeconomics courses. For some, it will have been several semesters since they last worked withthe model. As a result, many students will need more than just a casual refresher of the variablesthat affect the demand and supply curves. How the curves shift and that shape, in the case of thefixed supply curve, will need to be reviewed. A mastery of supply and demand will pay off forstudents as the course progresses.

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8Talking about sports and studying sports are two different things. Some students willneed to understand that economic models and theories will be used heavily to understand whatwe observe in the sports world. Conversely, some students will seeSection 1.4and the mentionof OPS+ and wonder if they’ve gotten in over their head. Those students need to be reassuredthat there will be several productivity measurements interspersed in the text but that they areincluded simply as another tool to help us understand what we observe in the sports world.During the discussion of topics in class, students may slip into normative analysis. Thatis natural because that is what they are exposed to in sports broadcasts. Draw them back towardpositive analysis to explore the world we observe.Additional ResourcesBerri, D., Schmidt, M., & Brook, S. (2006).The wages of wins: Taking measure of the manymyths in modern sport.Palo Alto, CA:Stanford University Press.Drayer, J., Shapiro, S. L., & Lee, S. (2012). Dynamic ticket pricing in sport: Anagenda forresearch and practice.Sport Marketing Quarterly,21(3), 184–194.Harrington, D. E.(2012). Uncapping ticket markets.Regulation,33(3).LeBron James Makes His Decision: Miami:https://www.youtube.com/watch?v=RTeCc8jy7FILewis, M. (2004).Moneyball: The art of winning an unfair game. New York: W.W.Norton.Marshall, A. (1890).Principles ofeconomics(8th ed.).London: Macmillan.NBA Player Salaries:http://www.espn.com/nba/salaries

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9“The Original Decision” Shaq to LA:https://www.youtube.com/watch?v=-Fak_wv3uoMVeblen, T. (1899).Thetheory of theleisureclass. New York: Macmillan.Handout 1-1Date_________Name____________________________ Class________ Professor________________Years before LeBron James left Cleveland for Miami, Shaquille O’Neal left Orlando for LosAngeles. In 1996, Shaq turned down a seven-year,$119 million deal to go play for the Lakers.Using a Marshallian Cross, analyze why O’Neal left Orlando. (Hint: use two demand curves,one for Orlando and one for Los Angeles.) Why would there be a difference in the demandcurves?

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10Answer: The Lakers were able to offer O’Neal more money by manipulating their roster tocreate available money under the salary cap. The Lakers play in a much larger market thanOrlando,and so their demand curveis greater than that ofOrlando. This demand curve isreflected in the team’s willingness to pay a higher salary for a star player. But as we’ll see inChapter 2, a larger market does not always mean a larger demand.

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11Handout 1-2Date_________Name____________________________ Class________ Professor________________Each year before the Super Bowl,it seems there are always news reports about how muchscalpers are getting paid for tickets to the game. Use a Marshallian Cross to analyze this market.How does the concept of a price ceiling help describe the market for Super Bowl tickets? Whatrole do scalpers play in restoring the market to equilibrium?

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12Answer: The concept is similar to that seen inFigure 1.7. If the price initially offered for ticketsby the NFL is too low, then a price ceiling is created. In this case, there is a fixed supply oftickets to the game. Scalpers (or firms like Stubhub) will offer tickets at prices higher than theinitial price. As the price rises, thenumberof people willing to buy tickets decreases, until themarket equilibrium is found. Thus, scalpers help the market move to an equilibrium.

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1BerriChapter 2Market Size and WinsObjectivesTo examine the relationship between market size and outcomes using a deductiveapproach.To examine the relationship between market size and outcomes using an inductiveapproach.To be able to interpret and explain wins in sports.To begin to develop an understanding of the criteria for evaluating statistical models.OutlineI.From the Law of Demand to team revenueII.Debating team costsIII.Why do the Yankees dominate?IV.Market size and wins: The data from MLBV.Modeling market size and wins in professional sportsVI.Modeling payroll and wins in professional sportsVII.A basic model of wins in professional sportsVIII.A simple guide to evaluating empirical modelsa.The theoretical foundation of the modelb.Specifying the modelc.Statistical significance and economic significanced.Explanatory power

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2e.Robustness of resultsf.Prior beliefs?Teaching TipsFrom theLawof Demand to team revenueCreating Student InterestAsk some students if they have a favorite professional sports team. Then, askthem if this team was completely their choiceorwasalso a favorite of theirparents or family. Ask if thatteam would have a large or small demand fortickets to see theteamplay. Ask if they can identify which variables might affectthe demand for that team.Try to direct the discussion toward market size, teamquality, and stadium size.Presenting the MaterialBegin with a review of a demand equation. Extend that into atotal revenueequation,and then discusshow maximizing revenue would be of interest to ateam.Remind students that the key assumption here is that teams have marketpower. That is why price is a function of quantity. Also mention that this team isa simple monopolist who charges a single price to all customers. Teams oftencharge different prices for general admission, club seats and luxury box seats.Mention that the model can be extendedto deal with a discriminating monopolist.Table 2.1 shows how total revenue grows and then falls as price continues to fall.Once total revenue is determined,move to the determination of marginal revenue.Debating team costs

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