The Economics Of Sports 7th Edition By Michael Leeds, Peter Von Allmen, Victoria Matheson SOLUTIONS

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THE ECONOMICS OF SPORTS 7TH EDITION BY MICHAEL LEEDS, PETER VON ALLMEN, VICTOR MATHESON SOLUTION MANUAL Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 1 Economics and Sports  Outline Introduction 1.1

The Organization of the Text

1.2

Babe Ruth and Comparative Advantage Opportunity Costs Absolute and Comparative Advantage

Biographical Sketch: Babe Didrikson Zaharias Summary, Discussion Questions, Problems

 Teaching Tips and Additional Examples A unique challenge in teaching a course in the economics of sports is refining student expectations for the class. Indeed, some professors and departments have been reluctant to offer a course in this field over worries that it will attract students wishing to take a “blow-off” course or that the topic of sports cannot be made rigorous enough to be included in a college curriculum. Therefore, it is important from the very beginning of the class to emphasize that the course is first and foremost an economics class and that sports merely supplies the context in which to study economics. As noted by a colleague, “Expectations can sometimes be seriously off track for those students who may have chosen the course more because they saw the word ‘sports’ in the title rather the word ‘economics.’ ” As you go over the syllabus, it is important to emphasize the economic theories that you look forward to covering as opposed to the sports events and history. As the prerequisites for this course vary greatly from school to school, as does the intended audience, it may be worthwhile to collect information from each student about past coursework in economics and math in order to tailor the class to the ability level of the students enrolled.

It may be helpful to stress that economics is an incredibly flexible subject that can be applied to just about any facet of life. In this respect, as the course progresses it is often useful to remind the students some parallel application to the current topic. The key is to show that the economic principles (and therefore the rigor) does not change even if the application of those principles do. This is particularly important if the class is offered as a lower level elective with minimal prerequisites but ends up attracting an audience primarily made up of senior economics majors. With a diverse distribution of students, the emphasis on the application of economics will help teach the principles to those who may be seeing these concepts for the first time, and reinforcing them to the more advanced students.

It may also be worthwhile to poll students about their favorite sports and teams, again to tailor the class to the interests of students in class. For example, when teaching competitive balance one can draw examples from any league, and using a sport for which students in class have expressed a preference is likely to keep students more interested in the topic even as the technical details of measuring competitive balance are explained. Similarly, a class with a large number of foreign students, for example, is likely to express

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA more interest in soccer over the “big four” American leagues. In this respect the inclusion of more international sports as the editions progressed should benefit the student body.

As Chapter 1 of the text notes, the text explores sports as it applies to three major areas of economics: industrial organization, public finance, and labor. As an opening exercise, you might consider asking the class to give examples of how economic forces impact professional and major amateur sports without first prompting them about the three areas. Once they have accumulated a good list on the board, see if they can divide those issues into the three areas. Some issues, such as those related to competitive balance, will be addressed in more than one area—you can note that as you go along.

Chapter 1 spends a significantly time on comparative advantage, so be prepared to dive right in on the first day of class. A fun exercise that utilizes students’ sports knowledge while reinforcing the idea of comparative advantage is to identify other multi-sport athletes and examine their career choices. Charlie Ward, the 1993 Heisman Trophy winner, chose an NBA career over the NFL, Baseball Hall-of-Famer, Dave Winfield was drafted by the NBA, ABA, NFL, and MLB, and Hale Irwin, a 3-time U.S. Open winner and the all-time winningest player on the Senior PGA tour, was a top defensive back for the University of Colorado. Deon Sanders and Bo Jackson were other multi-sport stars. Byron “Whizzer” White, ultimately chose a law career over an NFL career even after leading the league in rushing in 1938.

White eventually became a Supreme Court Justice.

 Additional Sources Throughout the course students will need to keep abreast of current events. Fortunately, this requires nothing more than access to the Internet. For each chapter this manual includes examples of quality Web sites that provide lots of information regarding the sports industry. For the instructor, there are several additional sources that are worth considering.

Film, Television, and Radio: If you like to supplement your classes with film, we recommend the Ken Burns series Baseball. It is divided into 18 episodes (“top of the first” through “bottom of the ninth”).

Each one considers a different topic in the development of professional baseball in the United States.

Burns addresses everything from attempts to form rival leagues to the history of the reserve clause to discrimination. Bill Littlefield’s Only a Game, is an informative and amusing weekly radio show appearing on National Public Radio. Check your local listings for times.

Trade Publications: Street & Smith’s Sports Business Journal. This weekly publication provides interesting profiles of specific sports, data on attendance, articles, and commentaries on the business aspects of sports. While a normal subscription is not cheap, a far less expensive semester-long student subscription is available. For more information, check their Web site at http://www.sportsbusinessjournal.com/.

Podcasts: Podcasts are segments, or episodes that are organized via a digital media outlet. They can be listened to over the internet or oftentimes downloaded on many smartphones. Finding relevant and reliable podcasts can be very beneficial; two sources can be found at www.econtalk.org and www.freakonomics.com . A good starting point may be an interview by sports economist Roger Noll on EconTalk on August 27th, 2012. Slate magazine’s ‘Hang up and Listen’ podcast is another useful source.

Academic Journals: The Journal of Sports Economics remains the “must have” journal for all instructors of a course in sports economics. For subscription information, go to the Sage Publications Web site at http://www.sagepub.com. Other high quality, sports-themed academic journals with frequent economic content include International Journal of Sports Finance, Journal of Sport Management, Journal of Sport

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA and Social Issues, European Sport Management Quarterly, International Journal of Sport Management and Marketing, and Journal of Quantitative Analysis in Sports.

On-line Sources: www.sportsbusinessnews.com provides good information and reactions to what is happening in sports from a business perspective. You can even elect to receive their “daily dose” of sports business news. www.thesportseconomist.com is a blog written by a group of the top economists in the field and consistently provides interesting economic analysis of current issues in sports.

 Solutions to Back-of-Chapter Problems 1.1 Use an appropriate economic theory to explain why LeBron James might employ someone to answer his fan mail even if he can read the letters and type the responses more quickly than the person he employs?

Answer:

If LeBron were able to answer his fan mail more quickly than someone he hires; this would imply LeBron has an absolute advantage in answering fan mail. LeBron is still likely, however, to have a comparative advantage in playing basketball, and therefore he should specialize in playing basketball and hire someone else to answer his fan mail.

1.2 Is the following statement true or false? Explain your reasoning. “I am attending college on a full athletic scholarship, so the opportunity cost of attending college is zero for me.”

Answer:

False. The student is also giving up his or her time. A prime example of this is players who leave college early to enter the pros. The opportunity cost of attending college for a top basketball player is the lost chance to play in the NBA.

1.3 From 1946 through 1967, the placekicker for the Cleveland Browns, Lou Groza, was successful on 54.9 percent of his field goal attempts. In 2021, the Browns’ kicker was Cody Parkey, who was successful on 84.6 percent of his attempts. Use the theory of comparative advantage to explain the massive improvement in the Browns’ kicking game.

Answer:

While Groza was best known for his kicking, he also played offensive tackle for most of his career. In the modern game, players are able to specialize, thereby improving their skills. This can result in higher field goal percentages for more recent players like Cody Parkey.

1.4 The term “figure skating” refers to the shapes that skaters used to trace in the ice as part of skating competitions. In the 1970s, this aspect of the sport was deemphasized and eventually eliminated. Use the theory of comparative advantage to show why eliminating this part of the competition has led skaters to perform much more difficult and sophisticated jumps and spins.

Answer: The elimination of tracing figures allows skaters to specialize in other techniques such as jumps and spins that most fans find more exciting. It also encourages more athletic skaters with a comparative advantage in these skills to enter the sport.

1.5 Rose Lavelle is widely considered one of the best midfielders in women’s soccer. She is also an effective attacker, scoring three goals in the 2019 Women’s World Cup. Based on the theory of comparative advantage, what position should Lavelle play?

Answer: Based on the theory of comparative advantage Lavelle should play midfielder. Lavelle may have an absolute advantage in playing midfielder and attacker over many players but she clearly has the comparative advantage in midfielder. Therefore, specializing in midfield would yield a better team outcome.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

1.6

Athletes in the US are more likely to specialize in a specific sport today at a much earlier age than a generation or two ago when it was much more likely for high school or college students to be multisport athletes. What economic factors could explain this shift?

Answer: One potential explanation for the phenomenon is due to comparative advantages and specialization. The earlier athletes can specialize, the more sport-specific training they will receive, which will likely make them more competitive in that sport, compared to multisport athletes who do not specialize until much later. On the other hand, early specialization is also often driven by incentives due to tournaments and superstars and can present significant negative externalities to young athletes.

1.7 In July 2021, the NCAA modified its policy on athletes profiting from their name, image, or likeness (NIL) allowing college athletes for the first time to earn money from endorsements, appearance fees, monetizing Instagram/Twitter/TikTok accounts, coaching, or selling autographs.

Use the concept of opportunity cost to explain whether this change in policy is likely to encourage athletes to stay in college and complete their degrees.

Answer: For a top student athlete, the opportunity cost of attending college is the lost chance to play in professional leagues. Such opportunity cost is effectively lowered when student athletes are allowed to profit from NIL. As a result, NCAA’s new policy will likely provide stronger incentives for student athletes to stay in college and complete their degrees.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 2 Review of the Economist’s Arsenal

 Outline Introduction Learning Objectives 2.1 The Supply and Demand Model Demand, Supply, and Equilibrium Changes in Supply and Demand Elasticity Explaining the Differences in Card Prices Supply, Demand, and Government Policies Price Ceilings and the Economics of Ticket Resale Markets 2.2 Output and the Production Function A Note on the Definition of Output The Production Function 2.3

Market Structures: From Perfect Competition to Monopoly Perfect Competition Monopoly and Other Imperfectly Competitive Market Structures The Impact of an Increase in Costs

2.4

The Rise of Professional Sports

Biographical Sketch: Mark Cuban Summary, Discussion Questions, Problems Appendix 2A: Utility Functions, Indifference Curves, and Budget Constraints 2A.1 Constrained Maximization 2A.2 Using Indifference Curves and Budget Constraints: The Rise of Soccer and Baseball Appendix 2B: Regression Analysis in Brief

 Teaching Tips and Additional Examples Chapter 2 contains a fairly extensive review of general economic principles which has been expanded in the latest edition. The amount of time that you will need to spend on this chapter depends on the backgrounds of the students in your class. If the majority of your students have had intermediate economics, you may want to skim the body of the chapter entirely and focus on the appendixes.

Alternatively, you could briefly skim through the theory but present some of the examples in the chapter as a continuing introduction to the use of economics to explain the behavior of owners, players, and consumers in the sports industry. If your students have had only one semester of economics—or even no prior courses—you will need to devote some significant class time to this material, as it is used throughout the remainder of the text. Additionally, this course is usually taught as an “Applied Microeconomics” course, thus there is greater focus on intro to microeconomic principles.

The opening discussion explaining the workings of the economist’s models is worth an overview for every type of student body. The appendix on regression is not essential, but recommended, as students will have a much greater appreciation for the models if they understand the regression-based analysis that is so prevalent in the literature.

Supply and Demand You can open with a general class discussion and ask the class to consider a typical competitive market with many buyers and sellers. Have the class list everything that would change how much buyers want to buy. First on the list should be the price of that product. This is the answer to the question “what changes quantity demanded?” and can be explained in more detail with the Law of Demand. Everything else on that list is the answer to the question “what changes demand”. Then try to place each specific answer into the following groups: o Change in taste o Change in related goods (substitutes and complements) o Change in income (normal goods and inferior goods) o Change in the number of buyers o Change in buyers’ expectations A similar discussion can follow about things that would change what sellers want to sell. Price would again be an obvious factor and this answers the question “How do you change quantity supplied?” and explains the Law of Supply. Everything else shifts the supply curve and can be summarized into the following groups: o Change in technology o Change in the price of a necessary resource o Change in the number of sellers o Change in sellers’ expectations At this point apply the general information to the specific example in the book about baseball cards (why the Mantle and Aaron cards sell for different prices). Take note this is not a competitive market (as there may not be many sellers) but the model developed is still a useful one. In addition, a discussion about Michael Lewis’ The Blind Side (and the change in demand for the left tackle position) may be useful for those who saw the movie or read the book. Later discussions in the book about ceilings and floors, and the discussion of the economics of ticket scalping may fall right into place at this point.

Illustrating Elasticity: A Warning The equation used for elasticity in the textbook is ε = %Q/%p. Depending on their past classes, students may have learned to calculate % as either (New – Old)/Old or (New – Old)/Average. This first method is used in the examples in the book but has the disadvantage of resulting in a different elasticity depending on which price and quantity combination is considered the starting point. The second method results in

the same elasticity whether prices are increasing or decreasing but is less intuitive and harder to calculate.

Under either method, the elasticity calculated may be different for a large change in price compared to a small change in price.

Output and the Production Function The discussion of what exactly constitutes output (Q) is worth some discussion as this question is reoccurring throughout this course. In this section the text settles on output being the number of wins produced per season, but it could just as easily be attendance, television appearances (or revenue), games played, popularity, etc… Regardless, as the semester progresses healthy discussions of what constitutes the market will lead to the proper definition of output (which will change as we discuss different products). The time spent on the other main themes in this section (the production function, total product of labor, marginal product of labor, diminishing returns, marginal cost, etc…) should be a function of the class background distribution. If the students are not used to these concepts slowing down quite a bit may be a good investment for the class.

A Discussion on Market Power It could be said that the most reoccurring theme in this course will be the ability for individuals and firms to flex their monopoly and monopsony power. This in turn helps explain why the sports world has such an unusual economic landscape. With that in mind it may be useful to take your time with the section on market structures and highlight the monopolist ability to restrict output in order to maximize profits.

 Solutions to Back-of-Chapter Problems 2.1 Some cities in England have several teams in the Premier League (the country’s top soccer league).

Explain how the presence of multiple teams affects the monopoly power of those teams compared to if there were only one such team in each city, as is typically the case in the US. The presence of another team in the same city reduces each team’s monopoly power since the other team(s) provides a substitute for the team’s product. Manchester United, for example, cannot charge too much for their tickets for fear of fans abandoning the team and becoming fans of Manchester City instead.

2.2 The marginal cost of admitting an additional fan to watch the Sacramento Kings play basketball is close to zero, but the average price of a ticket to a Kings game is about $60. What do these facts tell you about the market in which the Kings operate? Justify your answer.

Answer:

Answer:

The Kings must have some degree of monopoly power since under perfect competition firms set P MC while the Kings set P MC.

2.3 During the 2016 NFL season, television ratings suffered until the November elections, after which they rebounded. Use the supply and demand model to explain why this may have occurred.

Answer:

The 2016 presidential election (and debates that preceded the election)drew a lot of public attention. While the debates occurred the demand for the 2016 NFL games decreased as more viewers watched the election coverage. After the election the demand for NFL games went back to normal along with the TV viewership.

2.4 Use supply and demand to show why teams that win championships typically raise their ticket prices the next season.

Answer:

Since fans typically like winning and since their good memories persist for at least one season, championship teams generally experience an increase in demand for their product. An increase in demand shifts the demand curve to the right leading to an increase in equilibrium prices.

2.5 Use a graph with attendance on the horizontal axis and the price of tickets on the vertical axis to show the effect of the following on the market for tickets to see the Vancouver Canucks play hockey. (a) The quality of play falls, as European players are attracted to play in rival hockey leagues in their home countries. (b) Vancouver places a C$1 tax on all tickets sold. (c) A recession reduces the average income in Vancouver and the surrounding area. (d) The NBA puts a new basketball franchise in Vancouver.

Answers:

In each case, the student should show a supply and demand graph, with the appropriate shift of the correct curve. (a) Demand shifts left, price decreases, equilibrium quantity decreases. (b) This can either be shown as a leftward shift of the demand curve or a leftward shift of the supply curve. In either case, if a fixed (per unit) tax is placed on tickets the vertical distance between the new and old curves should equal the tax. (c) Demand shifts left, price decreases, equilibrium quantity decreases. (d) Demand shifts left, price decreases, equilibrium quantity decreases.

2.6 Use the concepts of production and cost from section 2.2 to explain why NASCAR teams might have to spend far more to move up from an average finish of second to first than from 20th to 19th.

Answer: Marginal cost increases at an increasing rate. Therefore, the cost of increasing from 20th to 19th may not incur a large cost. Yet the cost on the margin of moving from second to first is very high.

2.7 Use a graph to show how the marginal product of offensive labor in the NFL might change if wide receivers in the NFL are no longer allowed to use gloves that make it easier to catch the ball on cold days.

Answer: When we assume the product is wins then decreasing the WR effectiveness would decrease the position’s marginal product. On a graph we should see the MP decrease yet still see signs of diminishing returns.

2.8 Suppose that the WNBA’s Los Angeles Sparks raise ticket prices from $50 to $60 per seat and experience a 5 percent decline in tickets sold. What is the elasticity of demand for tickets?

Answer:

First we compute the percentage change in price, then compare this number to the 5%decline in tickets. To compute the percentage change in price we find the price changed by [(60-50)/((60+50)/2)] = 18%. To compute the elasticity of demand we take the percentage change of QD over the percentage change in price. In this problem the elasticity of demand comes out to (.05/.18) = 0.275.

2.9 Since the 1990s, many Major League Baseball teams have moved to new stadiums that are far smaller than the ones they have replaced. Assuming no change in demand, use an appropriate graph to show how such a change impacts ticket prices.

Answer:

Starting with a regular supply and demand graph, a reduction in the number of seats shifts supply to the left. Keep in mind each of the supply curves (the old and the new stadiums) should be perfectly inelastic. Equilibrium prices rise.

2.10 Suppose the Tampa Bay Rays baseball team charges $10 bleacher seats (poor seats in the outfield) and sells 250,000 of them over the course of the season. The next season, the Rays increase the price to $12 and sell 200,000 tickets. (a) What is the elasticity of demand for bleacher seats at Rays games using the point method? (b) What is the elasticity of demand for bleacher seats at Rays games using the arc method? (b) Assuming the marginal cost of admitting one more fan is zero, is the price increase a good idea?

Answer:

(a) For the point method, we follow the approach outlined in the textbook to compute percentage change as (New – Old)/Old. We have ε=%Q/%p=((200,000250,000)/250,000)/((12-10)/10)=-1. Since |ε|=1, the demand is unit elastic based on the point method. (b) The arc method is also called the midpoint method, i.e., the percentage change is computed as (New – Old)/Average. We have ε=%Q/%p=((200,000250,000)/225,000)/((12-10)/11)=-1.22. Since |ε|>1, the demand is elastic based on the arc method. (c) The price increase is not a good idea. Total revenues have fallen from $2,500,000 (250,000)(10) to $2,400,000 (200,000)(12). Anytime elasticity is greater than one, an increase in prices will result in a drop in total revenue.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 3 Sports Leagues and Franchises  Outline Introduction Learning Objectives 3.1 3.2

Open Versus Closed Leagues The Economics of Team Behavior Maximizing Profits or Maximizing Wins?

3.3

Closed Leagues: Revenue and Cost in North American Sports Revenue is Determined by Demand A Detailed Look at Revenue Costs League Size, Opportunity Cost, and Team Movement

3.4

Open Leagues: Revenue and Cost in European Soccer Profit Maximization in Soccer

3.5

Single-Entity Ownership

Biographical Sketch: Bill Veeck Summary, Discussion Questions, Problems

 Teaching Tips and Additional Examples There are significant changes in the seventh edition of the text. Figures have been updated to reflect the current state of the industry. In addition, the chapter has been reorganized. The text broadens the scope of the sports industry and begins a discussion on the difference between closed leagues (like a typical North American league) vs. open leagues (such as European soccer leagues). Drawing a link between closed leagues and monopoly power is helpful and that task begins here. As the text points out this structure often leads to different objectives for the clubs. Closed leagues often lead to more profit maximizing objectives while open leagues lead to win maximizing leagues.

An important distinction that is often lost on students is the actual (economic) profitability of a team, versus the profits that are reported using Generally Accepted Accounting Principles. Andrew Zimbalist’s book, The Bottom Line, collects ten years of his editorials from publications such as Sports Business Journal and the New York Times. Many of the essays provide lively accounts of how difficult it can be to evaluate a team’s actual profitability. You could either assign articles from the book to students or walk them through the numbers with a spreadsheet.

Many regard Bill Veeck as one of the most delightful characters to grace the world of sports. Consider taking time out to “personalize” the material by talking about Bill Veeck’s wild marketing ploys (such as the infamous Disco Demolition Night) and his use of the marketplace to advance broader causes (such as integrating the American League). Reading books like Veeck as in Wreck or The Hustler’s Handbook are

both fun and valuable sources of background information. You should also be alert for current stories about his son, Michael Veeck, and his antics as an owner of the minor leagues’ St. Paul Saints.

Of course, the most famous of all sports economics books (later turned into a movie) marketed to the general public is Michael Lewis’ Moneyball. While this book likely needs no introduction, students continue to find this an interesting inside look at baseball that highlights important economic issues such as competitive balance, revenue sharing, and marginal revenue product. In a 2006 article in the Journal of Economic Perspectives, Jahn Hakes and Skip Sauer analyze the Moneyball effect and what has happened to it in the wake of the book’s widespread publication. A special issue of the International Journal of Sport Finance is also dedicated to the applications of the Moneyball Hypothesis to other sports. For a more advanced look into the issue of team sports (and much more advanced) look at Stefan Kesenne’s The Economic Theory of Professional Team Sports: An Analytical Treatment.



Additional Sources

1.

Regular reports in Forbes on franchise profits and values.

2.

Zimbalist, Andrew, The Bottom Line: Observations and Arguments on the Sports Business, Philadelphia, PA: Temple University Press, 2006.

3.

Veeck, Bill and Ed Linn, Veeck – As in Wreck: The Autobiography of Bill Veeck, University of Chicago Press, 2001.

4.

Veeck, Bill and Ed Linn, The Hustler’s Handbook, Simon and Schuster, 1989.

5.

Lewis, Michael, Moneyball: The Art of Winning an Unfair Game, W. W. Norton, 2004.

6.

Hakes, Jahn K. and Raymond D. Sauer, “An Economic Evaluation of the Moneyball Hypothesis,” Journal of Economic Perspectives, Vol. 20:3, Summer 2006.

7.

Bill Gerrard and Dennis Howard, eds. International Journal of Sport Finance, Vol. 2:4, Fall 2007.

8.

Kesenne, Stefan, The Economic Theory of Professional Team Sports: An Analytical Treatment, Edward Elgar Publishing, 2007.

 Solutions to Back-of-Chapter Problems 3.1 Suppose that you are the owner of a professional baseball team in a major city, and MLB allows a second team to locate in your city. Describe and show using a graph the potential impact on your attendance.

Answer:

Another team’s locating in your city would dilute your monopoly power. This will greatly impact the demand for attendance for your team, and will shift the demand curve to the left. The resulting marginal revenue curve will also be lower than the original one, leading to a lower price that your team will charge.

3.2 Draw a graph that shows the demand for seats at an NFL stadium. Show how each demand would be affected if: (a) The prices of parking and food at the games increase. (b) Televised games switch from free TV to pay-per-view only. (c) A new league forms with a team that plays nearby. (d) The quality of the team decreases dramatically. (e) The length of the season increases.

Answers:

(a) Increase in the price of a complement; demand shifts leftward. (b) Increase in the price of a substitute; demand shifts rightward. (c) Decrease in the price of a substitute (as the new league decreases the cost of viewing an alternative game); demand shifts leftward. (d) The quality of the good falls, and fans’ taste for seeing the team declines. Demand shifts leftward. (e) The availability of possible games increases, creating more substitutes for each individual game; demand shifts leftward.

3.3 True or false; explain your answer: “If all teams are of equal quality, it doesn’t matter whether they share gate receipts or not—revenue will remain unchanged.”

Answer:

False. Revenue for each team is determined by more than simply team quality. For example, teams with the biggest venues will receive more revenue from home games if they do not share gate receipts than if they do. Conversely, small venue teams will benefit from revenue sharing, as they stand to gain a share of the larger gate receipts enjoyed by other teams. The same holds true for market size. Large market teams that have high average attendance figures will be net losers under revenue sharing.

3.4 Some researchers argue that revenue sharing is like socialism in that it removes the incentive to outperform rivals. Do you agree with this statement? Why or why not?

Answer:

Students should be able to apply the concepts presented in this chapter to formulate their response. For example, there may be limits as to how much better an owner may want his or her team to be relative to its rivals if the existence of a single “super team” causes attendance around the league to fall due to a perceived lack of competition. This is especially true if building the team would require significantly higher payroll costs, as in the Rangers/Islanders example. On the other hand, leagues are stable only when the teams that belong to that league are also financially stable. Thus, a certain level of revenue sharing may be necessary for the financial health of the league (and also the long term profitability of each member).

3.5 Suppose that each team in a league has a demand curve for generic advertising (a league-wide nonteam–specific campaign) equal to Q 1,000 5p. If there are 20 teams in the league, and ads cost $175 each, how many ads will the teams want to purchase as a group?

Answer:

This problem can be solved in two ways. Because league-wide marketing campaigns are nonrival in consumption, we could add the demand curves vertically (the intercept is multiplied by 20).

Each team’s demand function is p

200

0.2Q

Thus, the market demand curve is p When p

4000

4Q

175, the equilibrium quantity of ads purchased is 175 Q

4000 4Q 956.25

Alternatively, one can assume that the price each individual firm will pay for an advertisement is p $175/20 $8.75.

Q Q

1000 5p 956.25

1,000

5(8.75)

3.6 Use the marginal revenue and marginal cost curve from the theory of clubs to explain why the NFL has 32 teams while the Bundesliga-1, the top German soccer league, has only 20 teams.

Answer: Because Germany is a smaller country than the United States, the marginal revenue from adding new teams into the league is less than in the United States. Therefore, the optimal number of firm (clubs) is lower in Germany than in the United States.

3.7 How can it be that the weakest teams in the National League from a wins-losses perspective are among of the most profitable?

Answer:

There are two potential reasons for this. First of all, there is not a perfect correlation between winning and revenues. While good teams tend to generate higher ticket sales, there are other contributing factors as well. For example, it could be that the team just moved into a new stadium which may be generating high revenues despite their poor performance. In addition, weak NL teams may have a poor record because of a low payroll. In this case, while weak teams produce low revenues, theyalso enjoy low player costs. Revenue sharing may also play a large role in the story. If teams share a great deal of revenue, then individual team performance is not as important as individual team profit.

3.8

Suppose that teams in the major European leagues shared all revenue equally (less a contribution to parachute payments). How might this impact the quality of teams?

Explain the likely impact on the teams from that league that qualify for the Champions League. Would they be more or less successful?

Answer:

If all European leagues shared all revenue equally, this would decrease the incentive for teams to move to a more lucrative league, e.g., through promotion to a higher tier league or qualification for the Champions League. The European leagues would effectively look similar to the NFL, where there is no promotion or relegation but more year-to-year turnovers within the standing.

3.9 Why might a league favor a single entity ownership model? Explain the differences in the risks and rewards of such a system compared to a franchise owner system.

Answer: A single entity structure reduces economic competition among rival teams which lowers the cost of, for example, acquiring players. One risk of a single-entity structure is the real concern with on-field competition. For sports to be successful, it is necessary that the impression of intense on-field competition is maintained. This feeling may be lost when all teams are owned by the same company. This is especially a concern late in the season when playoff positions are on the line.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 4 Monopoly and Antitrust

 Outline Introduction Learning Objectives 4.1

What’s Wrong with Monopoly?

Monopolists and Deadweight Loss Do Monopolies Always Charge Monopoly Prices?

Promotion, Relegation, and Monopoly Power in Open Leagues

4.2 Strategic Pricing Variable and Dynamic Ticket Pricing Bundling Price Discrimination and Two-part Pricing 4.3

What’s Right with Monopoly?

4.4

Strategic Barriers to Entry

4.5

Society’s Response to Monopoly: Antitrust Laws An Important Anomaly: Baseball’s Antitrust Exemption Leagues That Lack an Antitrust Exemption Limited Exemptions: The NFL and Television

Biographical Sketch: Alvin “Pete” Rozelle Summary, Discussion Questions, Problems

 Teaching Tips and Additional Examples The seventh edition of this chapter is slightly reorganized. Discussion of the NCAA and Game Theory are tabled for later chapters while they continue to discuss in more detail some international sports such as European Soccer.

As part of your discussion of monopoly power, it is useful to make a direct comparison to the competitive solution and the effect of entry barriers on market power. In addition to the material in this chapter, you can refer back to the section on limiting entry in Chapter 3. All professional leagues, and teams within those leagues, maintain their monopoly power through strictly enforced entry barriers.

This chapter relies heavily on Industrial Organization, which in turn relies heavily on the legal system to help explain how monopolies are created and sustained. The discussion of antitrust law is critical since antitrust exemptions (limited or full) are the source of professional sports monopoly and monopsony power. Think of real life examples of collusion taking place in the business world and think of how seriously the federal government takes these cases. The movie The Informant is an excellent recent example. Yet the Yankees and Red Sox are two for profit businesses that are able to get together as members of a cartel by MLB. This ability is what separates the sports franchises from the typical business.

Illustrating Consumer Surplus: Further examples You can illustrate the concept of consumer surplus and personal seat licenses by asking the class if anyone is a particularly big fan of one of your school’s teams, such as basketball. For those that raise their hands, ask what they would be willing to pay for a ticket (per game). Then ask if there is someone who likes the team, but would not be willing to pay quite as much. Repeat the process a few more times so that 3–5 students have offered a decreasing series of prices. Suppose the results follow this pattern: Student

Pay Offer for Seat

Alex

$55.00

Brenda Carl David

$50.00 $30.00 $20.00

Eleanor

$10.00

Naturally, your results will differ from these, but you can follow the general pattern. If you feel theatrical, you can have them come to the front of the class and stand in the order of their willingness to pay. Plot the points as if you are plotting a demand curve and connect the dots. In this example, announce that the market price is $20.00 and draw a horizontal line at the market price. Ask Alex whether he would be willing to buy a ticket and ask him how he feels. Repeat for Brenda. Get her to compare her feelings with Alex’s. Illustrate the difference for Alex and Brenda by drawing vertical lines from the market price to the points for Alex and Brenda. These lines represent the extra pleasure—the consumer surplus—that each consumer receives from buying a sandwich. Repeat for the others. Get David to acknowledge that he does not care whether he buys a ticket; illustrate this by showing that his consumer surplus is exactly zero. Get Eleanor to say that she does not want to buy one and show that her “surplus” is negative.

 Additional Sources 1.

http://baseball1.com/bb-data/congress is an entire Web site devoted to Congressional action regarding antitrust issues in baseball.

2.

Dixit, Avinash and Barry Nalebuff, Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life, (New York: W.W. Norton, 1993). This book is a painless introduction to strategic behavior and game theory.

3.

Edmonds, Edmund “The Curt Flood Act of 1998: A Hollow Gesture After All These Years?”

Marquette Sports Law Journal, vol. 9, no. 2, Spring 1999, pp. 315–345. This reading provides a lawyer’s-eye view of the Curt Flood Act, the first Congressional attempt to limit baseball’s antitrust exemption.

 Solutions to Back-of-Chapter Problems 4.1 Use a standard monopoly firm graph to show and explain how the monopoly power of a team changes when another team locates nearby.

Answer: When another team locates to a nearby city, the monopoly power of the local team goes down. Its demand curve and the corresponding marginal revenue curve would shift to the left, leading to lowered profit-maximizing price and quantity.

4.2 You are the commissioner of the National Hockey League. You have been called to testify on an antitrust case against the NHL. Argue that: (a) The NHL is not a monopoly. (b) Even if it is a monopoly, it is a natural monopoly.

Answers:

(a) To argue that the NHL is not a monopoly requires that the NHL have many substitutes.

For example, college hockey, minor league hockey, other sports, even non-sports forms of entertainment might compete for the same consumer expenditures on entertainment. (b) To argue that the NHL is a natural monopoly, one needs to establish that the high fixed costs associated with the startup and maintenance of a team that, when combined with the low marginal costs of operating a franchise, would make it inefficient to have multiple teams/leagues operating in the same market, similar to the Detroit Lions example in the text.

4.3 Why can’t a Premier League team like Arsenal exert as much monopoly power as the NFL’s Chicago Bears?

Answer:

First of all, London is home to Arsenal as well as 5 or 6 other English Premier League soccer teams. If Arsenal charges too much for tickets or provides a poor product on the field, soccer fans can simply go across town to Tottenham Hotspurs, Charleton Athletic, Chelsea, or Fulham.

More importantly, however, is the fact that the NFL can restrict entry into the Chicago market, while the EPL is an open league with promotions and relegations. If Arsenal was making a lot of monopoly profits, this would give the incentive for other people to start football clubs in London. If the market could support multiple clubs, it is likely that the high revenues earned by the startup clubs would allow them to spend sufficiently on payroll such that the team would eventually earn promotion to the Premier League and become a full competitor to Arsenal. In fact, most of England’s largest cities, including Birmingham, Liverpool, Manchester, and London, generally have more than one team in the EPL in any given season.

4.4 Suppose that the demand curve for tickets to see a football team is given by Q  100,000  100p and marginal cost is 0. (a) How many tickets would the team be able to sell (ignoring capacity constraints) if it behaved competitively and set p  MC? (b) How many tickets would it sell – and what price would it charge – if it behaved like a monopoly.

(Hint: In this case the marginal revenue curve is given by MR  1000  0.02Q.) (c) Which pricing strategy generates more revenue, the monopoly price or the competitive price? (d) Compute the deadweight loss and decrease in consumer surplus in the change from competitive to monopoly pricing.

Answer:

(a) If the team sets prices at competitive levels, p  MC, with MC  0. Plug p  0 into the demand equation, Q  100,000  100p, so Q  100,000. (b) If the team acts like a monopoly, it will set MC  MR. MR  1000 – 0.02Q  0  MC Q  50,000 P  $500

(c) Under competitive pricing, the team’s revenue is given by 100,000∙$0=$0. Under Monopoly pricing, revenue is given by 50,000∙$500=$25,000,000. So monopoly pricing generates more revenue, as expected. (d) The deadweight loss associated with the monopoly is given by the area of triangle (100,000-50,000) ∙$500∙1/2=$12,500,000.

4.5 Why was the limited exemption from antitrust laws so crucial to the development of the NFL? Answer:

The limited exemption allowed the NFL to act as a monopolist over one of its most important sources of revenue—broadcast rights. The monopoly position granted by the limited exemption meant that teams would not undercut one another in negotiations with television networks. The agreement also had the effect of galvanizing the owners into a unified group rather than a loose collection of teams that competed both on and off the field. The off-field cooperation brought about by the joint television contracts and the sharing of resulting revenues significantly strengthened the league.

4.6 Suppose that all Los Angeles Rams fans feel the same as Jane, who values every game at $28, regardless of the opponent. Can the Rams increase profits by bundling the Rams–Bears game with three others? Why or why not?

Answer: Bundling will not increase team revenues in this case. Product bundling works when firms take advantage of differing demand across products. In this case, however, the demand is the same for all games, so product bundling will be ineffective.

4.7

Suppose that most fans prefer Sunday afternoon baseball games (regardless of opponent) to all other types of games. Describe two pricing strategies that a team could use to increase profits based on this difference in demand.

Answer:

4.8

First, the team could bundle Sunday afternoon tickets with tickets to games played on unpopular days such as Tuesday. Second, the team could simply engage in third-degree price discrimination by charging different prices on different days.

Suppose you were granted the next MLS expansion franchise and the right to locate the team anywhere in North America. Explain the factors you should consider in choosing a profit-maximizing location. What would be the relative costs and benefits of choosing a city that already has a team compared to a smaller city that has no existing team?

Answer: This is an open-ended question. Some factors to consider include population, convenience of travel, existence of rival teams/leagues, support from the local government in terms of stadium financing/leasing, or even weather/state income taxes (which could affect the recruitment of star players). Choosing a city that already has a team, as opposed to a city with no existing team, will reduce your monopoly power, but the rivalry with the same-city team could lead to more competitive games and fans’ attention, in turn resulting in more profits.

4.9 Suppose that Mahesh is a typical Buffalo Bills fan, whose demand curve for Bills football games is P  120  10G where G is the number of games the fan attends. (a) If the Bills want to sell him separate tickets to all eight home games, what price must they charge? What are their revenues? (b) Suppose 30,000 Bills fans have the same demand as Mahesh. What would total revenue be at a price that sells all eight games to every fan? How would your answer change if, instead of charging a single price, the Bills perfectly price discriminate and charge the maximum that each fan would pay for the first game, second game and so on through game eight?

Answer:

(a) If the Bills want to sell separate tickets to all 8 home games, they will need to charge a price P=120-10(8)=$40. This yields a revenue of $40∙ 8=$320 from each fan. (b) If there are 30,000 identical fans, then the total revenue for the Bills by selling all 8 games to these fans is given by $320∙ 30,000=$9,600,000. If the Bills can perfectly price discrimination, for a representative fan like Mahesh, they can charge an individual price for each game up to his willingness to pay. The resulting revenue that the Bills can generate from Mahesh is given by his consumer surplus at G=8, or the area of the triangle ($120-$40) ∙80∙1/2=$3,200. And the total revenue from 30,000 identical fans becomes $3,200∙ 30,000=$96,000,000.

4.10 Suppose that instead of price discriminating, the Bills are able to charge a two-part price including a fixed fee for entry and a price per game. If the marginal cost of attendance is $0, what is the optimal fixed fee per fan (again assuming that all have the same demand curve)?

Answer:

Under two-part pricing, the optimal fixed “entrance fee” for the 8-game package for each fan will be the same as the corresponding consumer surplus, or $3,200, as illustrated in the previous question.

4.11 Suppose that, in order to protect Ronaldo from his adoring fans, soccer teams that host Manchester United must hire extra security, and security costs go up as the number of fans at the game goes up.

When a team such as Chelsea hosts ManU, how do these extra costs affect the price of a ticket for that game compared with the price of a ticket when they host any other team? Is this price discrimination by Chelsea? Why or why not?

Answer:

The cost of security rises when the number of tickets sold rises. This makes the cost of security a variable cost. If, for example, the security cost per fan is $1, then the marginal cost of admitting a fan rises by $1. Assuming that the marginal cost without security guards is zero, then the marginal cost curve rises as shown in Figure 4.2.

Figure 4.2 Without security guards, the marginal cost, MC0, fits our standard assumption of being zero until reaching the capacity of the facility (Qc), at which point it becomes vertical.

With the guards, the marginal cost rises to $1 until reaching the capacity, too, becomes vertical at Qc. Because the cost of providing admission to the game is higher with security guards, the difference in price reflects higher costs rather than price discrimination.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 5 Competitive Balance

 Outline Introduction Learning objectives 5.1

Why Study Competitive Balance?

The Fans’ Perspective The Owners’ Perspective The Effect of Market Size The Influence of Diminishing Returns A Brief History of Competitive Balance

5.2

Measuring Competitive Balance Within-Season Variation Between-Season Variation Illustrating Competitive Imbalance

5.3

Attempts to Alter Competitive Balance The Invariance Principle Revenue Sharing Salary Caps and Luxury Taxes The Reverse-Order Entry Draft Schedule Adjustments in the NFL Promotion and Relegation

Biographical Sketch: Bud Selig Summary, Discussion Questions, Problems

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

 Teaching Tips and Additional Examples The seventh edition introduces Behavior Economics and more specifically prospect theory in this chapter.

If this is a topic you feel comfortable discussing this may be the time to bring it up. The reliance on math in this chapter is heavy, so testing your students’ skills can be useful at this point. Specifically, it may help to gauge their understanding of standard deviation, which will determine how quickly you can dive into competitive balance after discussing the topic in a broad way.

Two items related to calculating competitive balance are also worth emphasizing. First, in calculating the standard deviation of win percentage, the sum of squares is divided by N, the number of teams in the league. Students of statistics may remember calculating standard deviation by dividing the sum of squares by (N-1). When calculating the standard deviation of win percentage, one uses the equation for the standard deviation of a population rather than the standard deviation of a sample. Students must also be careful in this regard when using programs such as Excel to calculate the standard deviation of win percentage.

Second, measures such as the HHI for championships and the frequency of championships cannot be used to compare leagues with a different number of teams. For example, one would expect teams in the Big Ten (with its paradoxical twelve teams) to win championships more frequently than teams in the 32-team NFL.

Moneyball This section examines Moneyball and the success of Billy Beane’s Oakland A’s in the late 1990s and early 2000s. As noted previously, the most famous of all sports economics books marketed (later turned into a movie) to the general public is Michael Lewis’ Moneyball. While the book is now becoming slightly dated, students continue to find this an interesting inside look at baseball that highlights important economic issues such as competitive balance, revenue sharing, and marginal revenue product. Jahn Hakes and Skip Sauer analysis of the moneyball effect and what has happened to it in the wake of the book’s widespread publication in 2006 makes an interesting case study. A special issue of the International Journal of Sport Finance is also dedicated to the applications of the moneyball hypothesis to other sports.

A Case for Home Field Advantage?

To expand the content of this chapter begin by asking the students to read the article “The Demand for Major League Baseball: A Test of the Uncertainty of Outcome Hypothesis” (specified in footer number 4 on page 129 of the text). The article discusses how the expected outcome of the game affects the attendance in MLB games. They find if the home team is expected to win 60% of the time this would maximize attendance. This opens a discussion in many directions. For starters what should the role of the league be in light of this study? Should parks play in idiosyncratic ways that favor the home team?

Illustrating Competitive Balance from the Fans Point of View—In-Class Simulation The Setup Divide your class randomly into four or five groups of students of roughly equal size. Give each group a number i.e., 1, 2 ... 5. Prepare several sealed slips of paper that have the group number on them 1, 2, 3 4 & 5. For the first round four of the five slips should have the same group number, say Group 3. Winners are to be determined by a random drawing of a slip from a hat. Prizes in each round may be a point of

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA extra credit for each member of the winning group, a candy bar, a quarter etc. Post a record of which group wins each round on the board.

Round 1: Have one of the students pick a slip from the hat. The odds are four to five that it will be group number 3. Award each member of the winning group the prize (extra credit, candy or whatever you have decided to give away).

Round 2: Begin by throwing away the old slips of paper and put a new set of paper slips into the hat/bag.

Once again four out of five slips contain the number 3. Hold another drawing and award a prize to the winning group.

Round 3–5: Repeat the process outlined above until most students become disgruntled about the good fortune of Group 3.

Round 6: Play another round this time with the number of slips rigged such that Group 1 wins.

Round 7–9: Repeat round six with the slips rigged so that the groups that have not won have a strong chance at winning the round.

Lessons from the Game Ask students how they felt about rounds 1–5 and Group 3’s dominance. Next ask them how they felt about rounds 6–9.

Next ask the members of Group 3 how they felt about the first five rounds and the last few rounds.

Responses of the class typically include sore feelings about Group 3’s success by everyone except the members of Group three.

Conclude by asking the class if they see any parallels in sport. Then ask them as a fan (of a non-dominant team) whether they would prefer competitive balance or dominance by a few teams?

Finally ask the class whether a competitively balanced league is more likely to raise league wide revenues compared to a league in which a few teams dominate the league?

Conclusions  Competitive balance is preferred by the fans of all teams except the perennial powerhouses.  Competitive balance may hurt the profitability of a few perennial winners but is generally good for the league  Finally, having demonstrated that competitive balance is integral to the prosperity of American leagues present your class with the following fact: “In the English Premier (soccer) league over the past ten years the league has been dominated three teams (Arsenal, Manchester United, and Chelsea). However, league attendance has remained strong. Why?” Allow for some discussion. Some of the reasons are that some clubs are content just to play at the premier level in a system that relegates the bottom finishers.

Other fans enjoy the role of spoiler. They cost some of the top teams a championship by defeating the best teams in key games late in the season.

 Additional Sources 1.

Lewis, M., Moneyball, New York: Norton, 2003. 5. Lewis, Michael, Moneyball: The Art of Winning an Unfair Game, W. W. Norton, 2004.

2.

Hakes, Jahn K. and Raymond D. Sauer, “An Economic Evaluation of the Moneyball Hypothesis,” Journal of Economic Perspectives, Vol. 20:3, Summer 2006.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA 3.

Gerrard, B. and Howard, D., eds. International Journal of Sport Finance, Vol. 2:4, Fall 2007.

4.

Zimbalist, A., Competitive Balance in Sports Leagues: An Introduction. Journal of Sports Economics, 3(2), 111–121, 2002.

5.

Schmidt, M., and Berri, D., Competitive balance and attendance: The case of Major League Baseball.

Journal of Sports Economics, 2(2), 145–167, 2001.

6.

Sutter, D., and Winkler, S., NCAA Scholarship Limits and Competitive Balance in College Football.

Journal of Sports Economics, 4(1), 3–18, 2003.

7.

Trandel, G. A. & Maxcy, J.G. (2011). Adjusting Winning Percentage Standard Deviations for Home Advantage. Journal of Quantitative Analysis in Sports. 7 (1)

 Solutions to Back-of-Chapter Problems 5.1 Suppose, as an owner, you could leave the highly competitive league (in terms of closeness of contests) that you currently play in and enter a league that assured your team would never lose again.

Would you want to do so? Why or why not?

Answer:

Studies show that, while fans want their hometown team to win, they do not want their team to win all the time. If a team wins all its games, attendance will decline, as the contest becomes too predictable. This will in turn affect the team’s bottom line. A profitmaximizing team should thus choose to stay in the competitive league.

5.2 Based on the work of Coates, Humphreys and Zhou, it appears that hometown fans are happy to see lopsided wins. Yet at the league level, it appears that competitive balance is crucial. How can we resolve the apparent contradiction?

Answer:

There are two different perspectives to consider. The first is from the perspective of a team’s fans, who typically would prefer their team to win the game regardless of the competitiveness. The second perspective is from the perspective of the league’s fans, who generally would like to see a more competitive game.

5.3 Explain how the law of diminishing returns provides a natural tendency toward competitive balance.

Answer:

The law of diminishing marginal returns means that adding good players will eventually add less and less to a team’s performance on the field and at the box office. Adding an All Star goalie will not bring many more wins if a hockey team already has an All Star goalie. Thus, the marginal benefit of the second goalie is probably less than the marginal cost of hiring him. As a result, even the wealthiest teams do not have an incentive to sign all the best players. Diminishing returns thus add to competitive balance.

5.4 Suppose in a six-team league, the winning percentages were as follows at the end of the season: Team A, .750; Team B, .600; Team C, .500; Team D, .500; Team E, .400; Team F, .250. Compute the standard deviation of winning percentages.

Answer:

The standard deviation is given by the equation

 w 

(WPCT  0.500)2 , N i

where WPCTi is team i’s winning percentage, and N is the number of teams in the league.

In the case of sports leagues, the mean winning percentage is always 0.5 because one

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA team’s win must be another team’s loss. Using the numbers given, the standard deviation is roughly 0.156.

5.5 In question 5.4, suppose each team plays a 50-game schedule. Compute the “ideal” benchmark standard deviation of winning percentage based on equal playing strength, and the ratio of the actual to the ideal.

Answer:

The “ideal” standard deviation for a league in which all teams are equally likely to win is given by the equation I 

0.5

,

where G is the number of games played. The ideal standard deviation in a league that plays 50 games is roughly 0.071. The ratio of the actual standard deviation to the actual standard deviation is 0.156

 2.20.

0.071 5.6 If the NFL increased its schedule from 16 games to 36, what would the new benchmark ideal standard deviation be (assuming equal playing strength)?

Answer:

The “ideal” standard deviation for a league in which all teams are equally likely to win is given by the equation I 

0.5

,

where G is the number of games played. Under a 16-game season, the ideal standard deviation is  I 

0.5

 0.125.

Under a 30-game season, the ideal standard deviation is  I 

0.5  0.091.

30

5.7 Why do many economists believe that free agency has not affected competitive balance?

Answer:

According to the Coase Theorem, resources flow to their most valued use as long as there are well-defined property rights, regardless of who holds those rights. In the case of professional sports, free agency has transferred the rights to players’ services from the team owners to the players. The Coase Theorem predicts that the distribution of talent— and hence competitive balance—will be no different under free agency than it was when players were bound to teams. The change in property rights only affects who is compensated for the move. The Yankees paid the owner of the Red Sox to obtain Ruth’s services. To obtain a free agent like Jason Giambi, they pay only the player.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

5.8 Draw a graph that recreates the Lorenz curves from Figure 5.2. Based on what you know from this chapter, add a Lorenz curve for the NBA. Explain your rationale.

Answer:

Figure 5.3 shows that. As shown in Table 5.3 in the textbook (based on the 2020-21 season), NBA has a ratio of 2.31 between the actual and ideal standard deviations of winning, which is larger than the counterparts for Serie A and MLS. Thus, the Lorenz curve for the NBA would be the furthest away from perfect balance on Figure 5.2.

5.9 Suppose over five seasons, the order of finish for five teams in the West League and the East League is as follows. Use the HHI to determine which league has better competitive balance across seasons.

West League Season

East League Season

1 A

2 A

3 A

4 E

5 E

1 A

2 B

3 C

4 D

5 E

B

B

D

D

D

E

A

A

A

A

C

C

C

C

C

C

B

D

E

D

D E

D E

B E

B A

B A

B D

D E

B E

B C

B C

Answer:

In the West League, Team A finished first 3 times, Team E finished first twice, and no other team finished first. In the East League, each team finished first once. The HHI index is given by the equation  fi2 HHI  , T where f is the number of first-place finishes, and T is the number of seasons. Here, fi is 3 for Team A and 2 for Team B in the West League and is 1 for each team in the East League. T equals 5 for both leagues. Inserting these values yields HHI 2.6 for the West League and HHI 1.0 for the East League. Because HHI is lower for leagues with greater competitive balance, the HHI shows that the East League is more balanced than the West League. These two leagues can be compared using the HHI only because they have the same number of teams. As noted previously, one would expect teams in the Big Ten (with its paradoxical eleven teams) to win championships more frequently than teams in the 32-team NFL.

5.10 If you were a fan of Team A, which set of distributions shown in the previous question (West or East) would you prefer? Why? Answer:

The fans of any one team will want their team to win more often than it loses. Fans of Team A may prefer the less balanced results of the West League since they are the champions most often. Of course, the downside for fans of team A in the West League is that when their team is down, it is really down. In the East league, fans of Team A get four second place finishes to go along with their single championship. If teams earn playoff appearances or tournament bids by finishing either first or second in the league, fans of Team A would likely prefer the East League. In general, while the more equal distribution of championships in the East League may seem more fair, its desirability depends on factors like the size of the cities in the league and the intensity of their fans.

5.11

Go to the NFL regular season standings for 2022 (http://sports.espn.go.com/nfl/standings) and compute the standard deviation of winning percentage and the ratio of actual to ideal standard deviation. Was competitive balance in 2022 better or worse than it was in 2021?

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA Answer:

Note that it may be easier to utilize a spreadsheet for this exercise. After obtaining each team’s winning percentage from ESPN, we plug it into the following formula for the

(WPCT  0.500)2 , and we have N σ2022=0.188 and σ2021=0.167. The ideal standard deviation for NFL since the 2020 season is given by 0.5/√17=0.121. So the ratio of actual to ideal standard deviation is 1.554 in 2022 and 1.380 in 2021. We thus conclude that competitive balance in 2022 is worse than it was in 2021. standard deviation of winning percentages  w 

i

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 6 Sports Gambling



Outline

Introduction Learning Objectives 6.1

A Brief History of Sports Gambling Horse Racing Sports Gambling

6.2

Types of Gambling Fixed-odds Betting Pari-mutuel Betting Fantasy Sports The Efficient Market Hypothesis in Gambling

6.3

Winners and Losers from Gambling The Leagues Governments Consumers

6.4

Gambling Addiction and Problem Gambling

Biographical Sketch: Joseph Oller Summary, Discussion Questions, Problems

 Teaching Tips and Additional Examples Chapter 6 is a brand-new chapter introduced in the seventh edition focusing on sports gambling, a timely topic that presents significant on- and off-field impact on both professional and intercollegiate sports.

This chapter considers a wide range of sports gambling related issues through a multidisciplinary lens and offers students with different disciplinary backgrounds plenty of opportunities to get involved and share their thoughts.

For starters, when discussing the current state of sports gambling, consider breaking students into groups and having them conduct some quick due diligence research on various states’ stance toward sports gambling. Having some basic understanding of the institutional context and state-specific nature of sports

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

gambling will help students further appreciate the policy relevance of a lot of the material to be covered in this chapter.

The mathematical constructs behind various types of gambling, while relatively straightforward individually, can be quite confusing when they are being compared and related to each other. The sheer number of jargons can also be intimidating. It would thus be helpful to repeat the jargons when illustrating the concepts and consider assigning additional practice questions from real world examples, similar to the ones at the end of this chapter, either as homework assignments or as pre-class warmup exercises.

Fantasy sports are likely the topic that many students will feel most excited about as this is probably the type of sports gambling that they are most familiar with. To make the class more interactive, you may consider having students run the show and talk about how fantasy sports work based on their real world experience (and if they want, even showcase how their fantasy teams are performing). If you are teaching the course in the spring, also consider setting up a class-wide March Madness bracket competition to illustrate a real world example of pari-mutuel betting.

When introducing the efficient market hypothesis, it may be worthwhile to emphasize to the class that under the EMH you cannot consistently beat the house in the long run, especially since practically all bets already have house edge built in. In my opinion, this should also be a takeaway that’s worth repeating throughout the discussions on sports gambling.

The chapter then makes a nice transition to outline the impact of sports gambling on various stakeholders.

The Becker model of rational crime offers a distinctive economist’s take on match-fixing and how setting the right incentives may help alleviate the issue. If the class has background in intermediate microeconomic theory, one could also expand on the discussion of diminishing marginal utility of income to further illustrate the utility functions of risk averse, risk neutral, and risk seeking consumers and show how consumers with different risk preferences may react differently to the same fair bet. This is also a good opportunity to branch out and discuss various behavioral/psychological biases that may help explain some of the seemingly irrational inconsistencies in gambling behavior.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

 Additional Sources 1.

The National Conference of State Legislatures (NCSL) maintains a summary of the current status of each state’s sports betting legalization process (as of April 2021): https://www.ncsl.org/research/fiscal-policy/sports-betting-in-the-states.aspx

2.

For more in-depth discussions on how to test for the empirical evidence of the EMH in betting markets, consider assigning the following short paper on the topic. Even, W. E., & Noble, N. R. (1992). Testing efficiency in gambling markets. Applied Economics, 24(1), 85-88.

3.

Ginsburg, D. E. (2004). The Fix Is In: A History of Baseball Gambling and Game Fixing Scandals.

McFarland.

4.

Wolfers (2006) offers a concise, rigorous, and yet accessible empirical test for point shaving in NCAA basketball. Wolfers, J. (2006). Point shaving: Corruption in NCAA basketball. American Economic Review, 96(2), 279-283.

5.

Recent research by Brymer et al (2021) examines the relationship between sports betting lines and referee biases. Brymer, R., Rodenberg, R. M., Zheng, H., & Holcomb, T. R. (2021). College football referee bias and sports betting impact. Eastern Economic Journal, 47(1), 91-106.

6.

Wexler, A. (2014). All Bets Are Off: Losers, Liars, and Recovery from Gambling Addiction. Central Recovery Press, LLC.

 Solutions to Back-of-Chapter Problems 6.1 The NCAA has recently lifted its restrictions on Name, Image, and Likeness for college athletes allowing them to earn money on endorsement deals for the first time. How might this affect the NCAA’s stance on gambling?

Answer: As college athletes were prohibited from getting paid per the NCAA regulations, their expected cost associated with game manipulation were also lower according to the Becker model of rational crime. As a result of the recent NCAA rule change, certain star athletes may now get paid for their NIL. This would certainly make game manipulation more costly for these star players and therefore reduce its likelihood. However, since most student athletes will not be paid for their NIL, it’s unclear whether this rule change alone will affect the NCAA’s stance on gambling, particularly given the organization’s reputation for promoting amateurism.

6.2 In point spread betting it is typical that the moneyline on the bet is -110 whether the bettor takes the favorite or the underdog. Occasionally, one sees a bet with moneylines of -105 on the favorite and 115 on the underdog. Why might the bookmaker offer these moneylines?

Answer: By adjusting the default moneyline from -110 to -105 on the favorite, the house is effectively reducing their commission from 10% to 5% in an effort to encourage more betting on the favorite. Similarly, increasing the moneyline from -110 to -115 on the underdog will discourage more betting on the underdog.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA 6.3 One well-known aspect of gambling economics is the “favorite-longshot bias.” A longshot has a low probability of winning but a high payout (say 100/1) for the gambler if the longshot does win. A favorite has a high probability of winning but a low potential payout (say 1/2). Typically, the expected value for a bet on a longshot is lower than the expected value for a bet on a heavy favorite.

How would the Conlisk gambling utility function explain this phenomenon?

Answer: The favorite-long shot bias refers to the phenomenon that bettors tend to overvalue longshots while undervaluing favorites. Conlisk utility function, in the form of 𝑈 = 𝑢(𝐸𝑉, 𝐸), where EV is the expected return from the bet and E is the entertainment value of the bet, helps explain the phenomenon in that for many bettors, the entertainment value of placing a bet may significantly outweigh the expected return from the bet. Thus, despite having a lower expected return, a longshot may still present a higher (Conlisk) utility than a heavy favorite because of its entertainment value.

6.4 Suppose a bookmaker offers a series of point spread bets on next weekend’s NFL games. One gambler bases his bets on the colors of the team uniforms and his favorite mascots while the other bases her selections on a careful study of recent team performance, which team is the home team, and the current injury status of the teams’ star players. If the efficient market hypothesis holds for the point spread for these bets, which bettor will win the most money?

Answer: If the efficient market hypothesis holds, then the two bettors will earn the same amount of money in the long run and neither will be able to beat the house. This is because EMH states that the spreads that a bookmaker sets already reflect all the publicly available information about the matchup and provide accurate predictions about the game outcomes. So in the long run, it is not possible to beat the house on a consistent basis, regardless of whether you place a random or educated bet, not to mention that every bet has a house edge built in.

6.5 Suppose the Denver Broncos are a 5/2 favorite to beat the Las Vegas Raiders. Convert these fractional odds to decimal odds. Convert these odds to moneyline odds. What is the implied win percentage for the Broncos (assuming the bookmaker is setting fair odds)?

Answer: Assuming a fair bet, we can convert the fractional odds of 5/2 to decimal odds of 3.50 since 5/2=2.5=3.5-1. The corresponding moneyline odds are +250 with an implied probability of winning of 1/3.5, or 28.57%.

6.6 Why can’t point spreads be converted to moneyline or decimal odds?

Answer: While point spreads can be (strongly) correlated with moneyline or decimal odds in terms of potential payouts, there is no universal formula to convert between point spreads and moneyline/decimal odds. The conversion would vary from sport to sport, e.g., the implied odds of a 3-point win in an NBA game are not the same as the odds of a 3-point win in the NHL. 6.7 In horse racing, gamblers can bet on a horse to win, place, or show. Punters who bet on “win” receive a payoff if the horse wins. If they bet on “place,” they receive a payoff if the horse wins or comes in second. If they bet on “show,” they receive a payoff if the horse comes in first, second, or third place. Will the fractional odds be higher on win or show? Why?

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Answer: A win bet will have far higher fractional odds than a show bet because the likelihood of winning a show bet is much higher than a win bet.

6.8 Following up on Problem 6.7, suppose a horse has 2/3 odds to show. If the horse has a 15% chance to win, a 20% chance to come in second, and 15% chance to come in third, what is the expected value of $3 bet on this horse to show? What would be the house edge on this bet?

Answer: The expected value of a $3 show bet is $1.5, which is given by $3 ∙ (15% + 20% + 15%) + $0 ∙ (50%). A show bet with 2/3 odds has an implied winning probability of 60%, which is given by 1 − 100/(100 + 100/(2/3)). The house edge on this show bet is thus 10%, or $0.3.

6.9 The director of trading at Caesar’s sportsbook in Las Vegas has said of wagering for the FIFA World Cup, “As a patriotic American, it would be great to see the US Men’s National Team advance far, but I don’t think I am patriotic enough to want them to win.” Why might he say such a thing, and what does this suggest about whether Caesar’s balances their sports book in World Cup betting?

Answer: The statement implies that the US Men’s National Team is deemed as an underdog by the house. If the US consistently beats the odds and advances far into the tournament, then there could be enough bets to go against Caesars in the short run. This could cause severe financial damage to the corporation or, in the worst case scenario, bankrupt them. This is why the director prefers not to see the US team advance far, which also implies that Caesars did not balance their sports book in World Cup betting because they would otherwise be guaranteed a profit and should not care whether a specific team beats the odds or not.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 7 Teams, Stadiums, and Municipalities

 Outline Introduction Learning Objectives

7.1 A Brief History of Stadium Constructions The Entrepreneurial Period (1880s–1923) The Civic Infrastructure Period (1953–1990) The Public–Private Partnership Era (1991–Present) 7.2. What Do Teams Get From New Facilities?

New Facilities Mean More Fans – At Least for a While New Facilities Often Mean Different Fans Do New Facilities Mean More Wins?

7.3. Why Do Cities Subsidize Facilities?

The Direct Benefits From Facilities Spillover Effects Intangible Benefits 7.4. How Cities Pay for Facilities Avoiding Taxes Tax Increment Financing Sin Taxes Evaluating Taxes Stadiums and Municipal Debt

Biographical Sketch: George W. Bush Summary, Discussion Questions, Problems,

 Teaching Tips and Additional Examples Chapters 7 is the first of the two sections addressing Public Finance and Sports, reflecting a shift of the general focus from industrial organization to public finance. While Chapter 8 provides a standalone

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA discussion on mega-events, Chapter 7 focuses on the economic relationship between cities and sports teams and examines the benefits and costs of publicly financed stadia.

The seventh edition continues to update the fourth phase of stadium construction since the Great Recession. The discussion considers how public finances are more scrutinized after our latest major economic downturn as voters and politicians became more reluctant to finance stadiums compared to previous phases. There is also a discussion on present value, future value, and contingent value of a publicly financed stadium when conducting an economic impact analysis.

If your teaching style is to engage students, this chapter provides a number of opportunities. One way to begin dialogue is to ask what they think about stadium financing before they read the chapter. Most students that are sports fans will be predisposed toward awarding generous public funding to franchises that seek it. Even casual fans should be able to cite the most widely used macroeconomic tool in the course, that of the multiplier effect. By having students think about how the Marginal Propensity to Consume can change (and the issue with leakage and opportunity cost of those funds), you can steer them into a discussion just like how an economist views these issues.

When discussing the form and function of a stadium, both a discussion of the new “retro feel” venues and some history will prove very useful. If you have an interactive classroom, log on to www.Ballparks.com, or the official sites of teams and their venues, to show the different shapes and sizes of a cross section of buildings from different eras. This discussion could also be complemented by students’ independent research and presentation on specific stadia of their choice. If your school is in or near a major league city with a venue that many students have visited, you may consider including it in your virtual tour or even arranging a field trip.

The discussion regarding the benefits of a new stadium on attendance is a nice application of the concept of diminishing returns. Asking the class to illustrate this on a graph with “time” on the “x” axis and “%∆ in attendance” on the “y” axis can help illustrate the concept that the short run benefits diminish as time goes by. You could also split up the MLB, NHL, and NBA into separate lines on the same graph (with MLB having the largest impact as explained in the text).

When evaluating the direct and indirect benefits from facilities, there is a robust discussion on externalities. Taking the time to think about both the positive and negative externalities can provide insights as to why this topic is difficult to quantify at times. Furthermore, this section provides an opportunity to remind students that this is how market failures can occur and why government interventions may sometimes be warranted.

The last section focuses on how cities pay for facilities and introduces several standard models and analytical tools in public finance, such as tax incidence and the Ramsey Rule. Students often think of taxes as an abstract concept and find related models and tools dense. It can be helpful to have students first reflect on their real-world experiences with taxes, e.g., by brainstorming different types of taxes that they encounter on a daily basis and discussing how these taxes contribute to the specific public services

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA that they enjoy (or take for granted). There are also opportunities to extend the discussion on topics such as sin taxes to a broader theme regarding the tradeoff between efficiency and equity.

 Additional Sources 1.

A number of outstanding resources devoted to ballparks and their past, present, and future can be found online. One of the best is http://www.ballparks.com.

2.

Although now somewhat dated, the classic text on the public finance of sports is Sports, Jobs and Taxes, (Brookings Institution Press, 1997), a collection of essays edited by Andrew Zimbalist and Roger Noll. This book is notable for its numerous case studies and is among the most highly cited works in the field. Another insightful look at the issue is Kevin Delaney and Rick Eckstein, Public Dollars, Private Stadiums: The Battle over Building Sports Stadiums, Rutgers University Press, 2003.

3.

Troy Soos’s Murder at Fenway Park, the first of the Mickey Rawlings mysteries, is a fun, nonacademic look at the issue. Richard North Patterson’s Dark Lady twists a tale of murder and corruption around local politics and the construction of a new Major League Baseball stadium in the fictional metropolis of Steeltown.

4.

A large number of academic papers have addressed the economic impact of stadiums and franchises including numerous works by scholars such as Brad Humphreys, Dennis Coates, Robert Baade, and Victor Matheson. While many of their papers are quite technical, most have introductory sections that clearly address why sports boosters’ claims of economic windfalls are overblown and are quite accessible to lower-level undergraduate classes. Other more recent papers on the economic impact of sports and the financing of sports facilities are available through the International Association of Sports Economists/North American Association of Sports Economists Working Paper Series at http://ideas.repec.org/s/spe/wpaper.html.

5.

Besides major leagues, the economic impact of secondary/feeder leagues is also worth considering.

See, for example, Arthur T. Johnson, Minor League Baseball and Local Economic Development, University of Illinois Press, Chicago: 1995; or Agha, N. (2013). “The economic impact of stadiums and teams: The case of Minor League Baseball.” Journal of Sports Economics, 14 (3), 227–252.

 Solutions to Back-of-Chapter Problems 7.1

The New York Yankees drew fewer fans to their new ballpark in 2009. Observers attribute this to the Great Recession and the higher ticket prices in their new stadium.

What does this say about the income and price elasticity of demand for tickets to Yankee games?

Answer: The Great Recession significantly reduced an average fan’s income. Thus, for income elasticity, it’s clear that quantity demanded decreases as income decreases, implying that Yankees games are a normal good. On the other hand, the stated fact in the question does not indicate the magnitude of the quantity change as a result of the price change. We are thus not able to draw implications on the price elasticity of demand.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

7.2

Why is the multiplier effect for the Los Angeles Lakers likely to be greater than the multiplier effect for the Sacramento Kings, when they are both teams in the NBA? Answer: Los Angeles is much larger than Sacramento, so people are more likely to live and shop in Los Angeles than Sacramento. As a result, the leakages from Los Angeles are much smaller than the leakages from Sacramento, so the multiplier is likely larger.

7.3

How might the existence of positive externalities lead a city to subsidize a local team’s facility even when the facility fails to be a profit center for the city?

Answer: Firstly, the role of the government is typically not about making profits. Next, positive externalities entail that the local team’s facility can bring benefits to the neighboring communities and the city that may not be captured by the private sector.

The city can thus prevent market failure and improve economic well-being by providing a subsidy to the facility. There can also be multiplier effects and intangible benefits associated with the facility.

7.4

The Seattle Sounders are one of the most financially successful teams in MLS. Prior to the pandemic, they attracted over 40,000 fans per game to Lumen Field, which they share with the Seattle Seahawks of the NFL. Should the Sounders try to build a soccerspecific stadium? Why or why not?

Answer: This is an open-ended question. While the team will mostly likely benefit from playing in its own custom-built soccer arena in terms of on-field performance (especially consider the fact that it’s currently sharing a stadium with a football team), the Sounders will need to conduct a careful cost-benefit analysis accounting for the potential pros and cons. Some factors to consider include the number of seats and luxury boxes, whether the new stadium will help retain and develop a large fan base, the cost of the new stadium, how long the construction will take, funding sources and financial support from the local government, potential environmental impact, etc.

7.5

While football and baseball teams have gone from multipurpose to football- and baseball-only facilities, basketball and hockey teams continue to share arenas. Why? Answer: Most baseball and football teams have moved out of multipurpose stadiums because basketball and hockey fields take different shapes and configurations that cannot be fully served by a one-size-fit-all multipurpose stadium. Also, these cookiecutter stadiums were typically too big for baseball teams with 162-game seasons but too small for football teams with 16- or 17-game seasons. On the other hand, because basketball courts and hockey rinks are more similar in size and shape, there can be significant synergies between the two sports, and many basketball and hockey teams indeed continue to share arenas.

7.6

If the marginal propensity to consume in a municipality is 0.8

(a)

What is the value of the simple multiplier?

(b)

If a new stadium that adds $30 million in new consumption expenditures is built, what is the impact on the economy based on this multiplier?

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA (c)

Suppose city residents spend 60 cents of every additional dollar on goods made in other cities or countries, what happens to the multiplier and to the impact on the economy?

Answers: (a) The simple multiplier 1/(1 - MPC). In this case, with MPC = 0.8, the multiplier is 5. (b) An initial expenditure of $30 million would have a final impact of $150 million. (c) In this case we would reinterpret our Marginal Propensity to Import as 0.6. This changes our multiplier to 1/(1-MPC+MPI) = 1/(1-0.8+0.6) = 1.25. Now the final impact is (30m)(1.25) = $37.5 million.

7.7 (a) (b) (c) (d)

Evaluate the following taxes from the standpoint of vertical and horizontal equity: A 25-cent per-gallon tax on milk A tax on stock market transactions A sales tax on men’s clothing A tax on cigarettes Answers: Vertical equity is harmed with any flat tax. Horizontal equity is harmed whenever goods that are only consumed by select segments of the population are taxed. The effect on horizontal and vertical equity is as follows: (a) Milk taxes are horizontally equitable, but not vertically equitable because they have a greater impact on low-income families. (b) A tax on stock market transactions is likely to be vertically equitable, in that most lower income families do not execute many trades. The extent of horizontal equity depends on how uniform the preference for stocks is among individuals with similar incomes. The more tastes vary, for example, between stocks and other forms of investment such as real estate, the less horizontally equitable the tax will be. (c) A sales tax on men’s clothing is likely to fair poorly on both counts. It is likely to be regressive (thus not vertically equitable), and it is also not horizontally equitable in that it falls only on men rather than both genders. (d) A tax on cigarettes is likely to be neither horizontally nor vertically equitable for the same reasons as a tax on men’s clothing.

7.8 Suppose the demand for toothbrushes is perfectly inelastic at Qd  3,000. The market supply curve is perfectly elastic and is equal to p  2.00. What would be the deadweight loss associated with a $0.20 tax on toothbrushes? Based on the Ramsey rule, would this be a good product to tax or not?

Answer:

The deadweight loss is zero for any tax on a good for which either the supply or demand is perfectly inelastic. In this case, with perfectly inelastic demand, there is no loss and the incidence falls completely on the buyers. Such a tax is consistent with the Ramsay rule.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA 7.9 A local government justifies its subsidy of a local hockey arena by claiming that the facility generates positive externalities. Use supply and demand curves to illustrate its reasoning.

Answer:

With positive externalities, marginal social benefit outweighs marginal private benefit, i.e., social demand is above private demand, and the socially optimal level of output may not be achieved without a subsidy from the government.

7.10 Suppose New York wants to build a new facility to replace Madison Square Garden. Assume that the cost of building a new arena in midtown Manhattan is $2 billion and that all the costs occur right away. Also assume that New York will receive annual benefits of $100 million for the next 30 years, after which the new arena becomes worthless. Does it make financial sense to build the new facility if interest rates are 5 percent?

Answer:

This project does not make sense for the city. At the very least, the city is forced to pay $100 million per year,  5 percent ($2 billion), in interest alone to pay for the stadium.

This figure does not count in paying down the principle of the loan. Using one possible equation for amortization, the stadium could actually cost the city roughly $130 million per year to pay off the facility resulting in a net cost to the city of $100 million per year.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 8 Mega-Events  Outline Introduction Learning Objectives 8.1

A Brief History of Mega-Events The Original Mega-Event: The Ancient Olympics The British Ethic and the Rise of the Modern Olympics FIFA and the World Cup

8.2

The Short-Run Benefits of Hosting Mega-Events Broadcast Rights and Sponsorships The Host City Comparing Ex-ante and Ex-Post Economic Studies

8.3

The Long-Run Benefits of Hosting Mega-Events General Infrastructure Advertising and Branding

8.4

The Costs of Hosting Mega-Events The Costs of Staging a Mega-Event Institutional Reasons Why Cities Spend So Much An All-or-Nothing Demand Curve The Winner’s Curse

8.5

Why Do Cities Continue to Bid? The Distribution of Costs and Benefits Nanoeconomic Rationales

Biographical Sketch: Willard “Mitt” Romney Summary, Discussion Questions, Problems

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

 Teaching Tips and Additional Examples Chapter 8 is the biggest change in the seventh edition. Addressing mega-events as a standalone chapter gives this important topic its justified amount of attention. Material from previous chapters have also moved into this chapter. Content discussing the “All-or-nothing demand curve”, “Winner’s curse”, and the history of the Olympics are placed in this section.

The All-or-Nothing demand curve is a great bridge from everyday life examples (like going to the movies and buying large portions of popcorn) to the sports world (like a city winning an Olympic bid).

Following this up with the “winner’s curse” as the text nicely does gives two great explanations as to how taxpayers can get taken advantage of by providing large subsidies for mega-events.

Illustrating the Winner’s Curse Few concepts are as counterintuitive as the winner’s curse. It can be difficult to get students to believe that people actually behave that way. One useful way to illustrate the concept is to have students act it out in class. We recommend that you do this before covering the winner’s curse so that students do not let the concept cloud their behavior, though we suspect that the exercise will work whenever applied.

Activity Walk into class with a clear bowl filled with $5.00 to $10.00 in change. You should know the dollar amount exactly. Announce to the class that you are going to auction off the contents of the bowl. The student with the highest bid will win the contents of the bowl but will have to pay their bid price. You must impress upon the students that you are serious about the auction and that you will indeed pay—and expect to be paid—by the winner. (Of course, you may also elect not to collect on your bet.)

Ask each student to write his or her name on a slip of paper along with his or her bid. (If asked, you can say that a student refusing to participate can always write $0 as his or her bid.) Collect the bids and write the numbers on the board or enter them on a spreadsheet. You may choose to spread out the change on your desk and allow students to quickly walk by the table before bidding.

The average bid will typically be less than the money value of the change, but the winning bid (and perhaps one or two besides) will exceed the value. Announce the winner, collect the overpayment, and ask how he or she feels. Use this as a jumping off point to discuss why the winner overbid. (In my

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA experience in classes of roughly 23 students, the typical bid is roughly half the actual amount but in about 80% of my classes at least one student overbids.)

The winners curse can be used to illustrate how teams overpay for mega-events and franchises. It can also be used to explain how teams can overpay top free agents in the labor market.



Additional Sources

A large number of academic papers have addressed the economic impact of mega-events including numerous works by scholars such as Brad Humphreys, Dennis Coates, Robert Baade, and Victor Matheson. While many of their papers are quite technical, most have introductory sections that clearly address why sports boosters’ claims of economic windfalls are overblown and are quite accessible to lower-level undergraduate classes. Other more recent papers on the economic impact of mega-events are available through the International Association of Sports Economists/North American Association of Sports Economists Working Paper Series at http://ideas.repec.org/s/spe/wpaper.html.



Solutions to Back-of-Chapter Problems

8.1 How does the economic impact of holding the Super Bowl in Minneapolis, Minnesota – the site of Super Bowl LII – compare with holding it in Miami or New Orleans at the same time?

Answer: A Super Bowl in Miami or New Orleans would displace many business travelers and vacationers who would have gone to the warmer climate cities even if there were no Super Bowl. This reduces the economic impact of the Super Bowl on Miami’s and New Orleans’ economy. Because far fewer people go to Minnesota in January, the net impact of a Super Bowl is much larger for Minnesota.

8.2 Why would a Super Bowl at Ford Field in Detroit have more of an impact on Detroit than a regular season Detroit Lions game that draws the same number of fans?

Answer: Even if a Super Bowl drew no more people to Detroit than a regular season game at Ford Field, far more people who go to the Super Bowl are from outside the Detroit area than is true for a typical Lions game. The out-of-towners are likely to stay at area hotels for several days. In addition, the money they spend in Detroit is new expenditure for the local economy, while a portion of the money that local fans spend would have been spent locally even if they did not go to the game. The net impact on the Detroit economy is thus much larger for a Super Bowl than for a regular season game.

8.3 If you are the mayor of a city hosting the Super Bowl, do you want the hometown team to make it to the championship game?

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA Answer: As far as the short term economic impact you would probably want two outside teams to make it to the championship game. The hometown team fans will remain in the city regardless of if their team is in the championship game. However, if two other franchises make the championship game, this would draw new fans to the local area providing a more potent short term economic boost to the local economy.

8.4 Use the all-or-nothing demand curve to explain why the IOC is unlikely to accept a bid by Los Angeles to host only the track and field events in its bid for the 2024 Summer Olympics.

Answer: The deadweight loss that results from a simple monopoly price is area abc. When the monopolist sets price p* and quantity at Q*, the deadweight loss is transferred to the monopolist’s revenue, and is not a loss to society. The consumer loss that is created (aec) is not a deadweight loss but a transfer to the monopolist as well. Thus efficiency improves (but, of course, equity is adversely affected from the consumers’ standpoint). In the case of the Los Angeles Olympic bid, in effect the city is forced to purchase more events that it would normally choose (such as, say, equestrian, rifle, rhythmic gymnastics, and (in homage to Saturday Night Live) men’s synchronized swimming) in order to get the events it wants such as men’s basketball and track and field.

8.5 If you had a choice, would you rather your city (or the nearest large city) host a major sports franchise or a mega-event such as the World Cup or Olympics? Why? Answer: In terms of economic impact, a franchise is preferred to a mega-event such as the World Cup or Olympics. The mega-event may generate more international attention but this would not necessarily translate into economic impact. The mega-event would only take place one time while hosting a franchise would generate repeated small economic bursts during home games for many years.

8.6 Suppose the International Olympic Committee announced that it would hold all of its Summer Games in Athens and all of its Winter Games in Sapporo. What is the likely impact on the monopoly power of the IOC, the IOC’s ability to exploit an all-or-nothing demand curve, and the winner’s curse?

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA Answer: If the IOC designated single host sites for the Winter and Summer Olympics, then it creates a bilateral monopoly in which one seller confronts one buyer. This gives the host city much more bargaining power than it has when it is bidding against other candidate cities. The IOC would have much less power to exploit the all-or-nothing demand curve. Because there is no auction, the winner’s curse does not come into play at all

8.7 Using the concepts discussed in this chapter, discuss whether a small city like Indianapolis or a big city like Los Angeles would benefit more from hosting the NCAA Men’s Final Four Basketball Tournament.

Answer: The student should answer this question by pointing out that a big city like LA has the proper infrastructure to handle an event like the NCAA Men’s Final Four Tournament. Many local citizens in the small cities may opt to stay away from the event in order to avoid congestion thus crowding out the local businesses. This is less likely to occur in LA. 8.8 Every summer, a large number of the world’s sports economists meet for a conference in a major city in the western United States. If the schedule permits, the economists always try to go to a local sporting event, such as a MLB, MLS, or National Women’s Soccer League (NWSL) game while they are there. Should the economists’ spending at these events count as economic impact for the city? Why or why not?

Answer: Generally speaking, this type of activity would be considered economic activity so this would be counted in an impact study. However, economists would caution that the spending on the sporting event is only going to the franchise they attend and not the local city. Thus economists would be less likely to include this in an economic impact for the city.

8.9 If the Summer Olympics typically attracts one million tourists and, the typical Olympic tourist spends $5000 while at the Games, did the Coronavirus pandemic – and inability of Olympic tourists to enter Japan – cost the Japanese economy $5 billion? Justify your answer.

Answer: Besides the $5 billion direct benefit, there are also indirect benefits to the Japanese economy from the money that tourists would have spent at the Summer Olympics due to the multiplier effect. So, depending on the marginal propensity to consume, the actual economic loss would likely be much larger than $5 billion.

8.10 A consulting group estimates that holding the NBA All Star Game in Miami next February would attract 25,000 people from outside Miami. It further estimates that they would stay an average of 3 days and spend $400 per day. a. Using these assumptions, what is the direct impact of the game on Miami’s economy? b. If the consulting group assumes that the MPC in Miami is 0.95 and the MPI is 0.15, what is the total impact of the game? c. Why might your answers to (a) and (b) overstate the impact of the game?

Answer: a. The direct economic impact is given by $400*3*25,000=$30,000,000. b. The total economic impact would account for the spending multiplier given by 1/(1-MPC). So the total economic impact will be $30,000,000*1/(1-0.95)=$600,000,000.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA c. For Part a), the influx of tourists will likely displace some of the spendings from local residents. Miami is also a popular winter destination that would attract a lot of tourists in February regardless of the All Star Game. So the net direct economic impact of the game will likely be much lower. For Part b), the simple spending multiplier will overstate the indirect economic impact of the All Star Game because it assumes a closed economy with no leakage.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 9 An Introduction to Labor Markets in Professional Sports  Outline Introduction Learning Objectives 9.1

An Overview of Labor Supply and Labor Demand Labor Supply Labor Demand Labor Market Equilibrium Human Capital and Player Compensation

9.2

Rank-order Tournaments and Superstar Effects Tournaments, Superstars, and the Distribution of Income

9.3

The Dangers of Tournaments and Superstar Effects The Danger of Trying Too Hard Performance-Enhancing Drugs and the Olympics

Biographical Sketch: Scott Boras Summary, Discussion Questions, Problems Appendix 9A: Using Indifference Curves to Model the Labor–Leisure Choice The Labor-Leisure Model When Hours Are Fixed

 Teaching Tips and Additional Examples Chapter 9 of the text is an introduction chapter to Labor Economics. For this reason, this chapter is heavy in theoretical models while Chapter 10 concentrates on the application of these theories. Classes with students that are light on economic theory may require more time allocated in Chapter 9 vs. Chapter 10.

On the other hand, classes that have a more economic background and understanding of Microeconomic theories could allocate more time toward the applications of the theories introduced in Chapter 9 and focus on Chapter 10.

The issue of labor compensation is an excellent example of how one can analyze commonly discussed issues with the tools an economist would use. Open a discussion about how players get paid seemingly so much money and notice the conventional wisdom in many of their responses. Then begin analyzing the issue as an economist would. Think through how a competitive labor market operates (covering topics

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA such as MPL, MRP and how wages converge toward MRP) as detailed as the class requires. Then think of how the sports world is different in at least two major ways. First the MPL is not some “widget”, rather as the text points out can be thought of as “wins”. Second the employers in the sports labor market enjoy strong monopsony power, an issue that can be introduced here and will be reinforced in Chapter 10.

This effectively drives wages below market value (below the MRP).

Among the most horrible results of superstar effects has been the unwitting use of performance enhancing drugs by Olympic athletes. The readings by Rodden and Ferstle provide two accounts of what went on in East Germany. For more inside looks you can turn to the Lance Armstrong USADA report on doping, or for a video one can show ESPN’s 30 for 30 episode titled “9.78*” which chronicles one race that featured numerous controversial figure involved in doping. Also recommended is the documentary titled “Icarus”.

To expand on the issue of Performance-Enhancing Drugs (PED’s) use the prisoner’s dilemma. This illustrates why players are ultimately helped by a stronger testing program. At this point ask the class who should push for stronger drug testing during Collective Bargaining Agreement (CBA) negotiations, the owners or player? Since it is the players who are helped most by stronger drug testing it is the Unions that should demand it in CBA negotiations. Curiously this has not been the case. To the surprise of many it has often been a concession to the owners (given up by the players for some other benefit) during CBA negotiations.

Instructors seeking to provide more gender balance to the course may wish to emphasize Joan Ryan’s account of the difficulties encountered by female gymnasts and figure skaters.

If one chooses to cover the appendix and examine the possibility of backward-bending labor supply curves, sports provide potentially the best possible examples in the field of economics. For example, there are clear examples of early retirement such as Michael Jordan and Barry Sanders that can be attributed to the phenomenon. Tiger Woods also provides an excellent example. In 2007, Tiger had the highest earnings per tournament of any player, making roughly $679,000 per tournament, nearly 3 times as much as the next highest player on the tour. Yet, he only played in 16 tournaments. Only 4 of the top 120 players in the world played in fewer tournaments. Clearly, Woods has high enough earnings that Woods would actually prefer to work less in order to pursue, ahem, “other pursuits.” Running back Ricky Williams is another example of someone whose high earnings actually prompted him to work less.



Additional Sources

1.

2.

Ferstle, Jim, “Closely Guarded Secrets,” Runners World, February 1999, pp. 64–67.

Rodden, John G., “Of Sport, State, and Stasi: Socialism with an Un-Beautiful Face,” The Midwest Quarterly, Winter 1999, pp. 134–152.

For detailed information about the Lance Armstrong report by the United States Anti-Doping Agency (USADA) go to: http://l.yimg.com/j/assets/ipt/2012.12.10_Armstrong_Doping_Reasoned+Decision_all.1.pdf For information about ESPN’s 30 for 30 series, episode titled “9.79*” go to: http://espn.go.com/30for30/film?page=9.79

3.

4.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA



Solutions to Back-of-Chapter Problems

9.1 Suppose that the market demand for baseball players is perfectly inelastic (vertical) at 750 players. If the market supply increases due to an increase in the number of available international players, show using a graph how wages will change as a result.

Answer:

If the market demand is perfectly inelastic, an increase in supply will lead to a decrease in player wages. The quantity of labor remains constant at L*, but wages fall from w to w due to the increase in supply. See Figure 8.1A.

Figure 8.1A 9.2 Use a labor supply and labor demand graph to show why salaries in the NBA went down during theCOVID-19 lockdown in 2020. Explain why the curves moved the way they did.

Answer:

During Covid lockdown, the demand for NBA tickets and thus the labor demand for NBA players fell. The labor demand curve shifted to the left, lowering the equilibrium salary for NBA players. Note that here we assume perfect competition for the NBA labor market. If we change this assumption to monopsony, the same insights will still hold.

9.3 Use a graph similar to Figure 9.5 to show the effect on league salaries of (a) An increase in the number of teams due to greater popularity of soccer. (b) A decrease in television revenues due to fan preferences for drama shows. (c) A minimum salary set above the equilibrium wage. (d) A decrease in roster sizes in the European leagues Answers:

For parts (a) and (b), the graph should show the appropriate shift in the supply or demand curve. (a) The demand curve shifts rightward, increasing quantity and increasing the equilibrium wage. (b) The demand curve shifts to the left (due to the decrease in demand for output).

The equilibrium quantity and wage both fall. (c) See Figure 8.2A. The wage increases, but employment decreases.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Figure 8.2A (d) The graph will be similar to Figure 9.6. Here, the decrease in roster sizes will move the roster limit to the left, further increasing the equilibrium salary (due to the roster limit).

9.4 Show what would have happened to the Lorenz curve in Figure 9.10 if the LPGA introduced two winner-take-all tournaments and the WTA reduced the winner’s share of all major tournaments to a payment equal to that of the runner up.

Answer:

Additional tournaments combined with lowered top prizes should help make player earnings more evenly distributed. So the Lorenz curve should be less bowed than the one shown in Figure 9.10.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA 9.5 Use the human capital model to predict the changes in general human capital investment for professional tennis players if new, slower playing surfaces are approved that increase the length of rallies (shots per point).

Answer: If these slower playing surfaces apply to all types of tennis courts, then getting used to the surfaces and developing corresponding playing tactics can help increase a player’s overall productivity. The human capital model would thus predict an increase in general human capital investment for tennis players.

9.6 In the late 1930s and early 1940s, Joe Louis handily defeated a series of opponents who came to be known as the “Bum of the Month Club”. Use what you know about rank-order tournaments to explain how this came about.

Answer: The key to rank-order tournaments is that they are based on relative productivity, not absolute productivity. So while Louis was ranked number 1, and he was facing the opponent who was ranked number 2 with a large absolute productivity difference. This is sometimes called the superstar effect, where the performance increases at an increasing rate.

9.7 Using a graph, show what happens to player effort in a tournament if players find effort more distasteful (the marginal cost-of-effort curve shifts upward).

Answer: If players find effort more distasteful, their MC of effort curve would shift upward. This means that for the same prize level, we would expect to see players to exert less effort.

9.8 Use supply and demand curves to explain how the development of the interstate highway system, which allowed fans to travel much greater distances to watch ball games, increased pay disparities between major league and minor league baseball players.

Answer: Once the interstate highway system was developed, the cost to travel to other cities decreased. Baseball fans could then travel to their local major league games. This is represented by an increase in demand for major league games. Once the equilibrium price increased the revenue generated by the players increased thus so too did the pay for major league players. The opposite is true in the minor leagues since major league baseball and minor league baseball are substitutes.

9.9 Show how the prisoner’s dilemma led to massive doping in international track and field. What can authorities do to prevent doping from becoming a dominant strategy?

Answer: It would be in the best interest for the athletes of international track and field to all stop doping. This would be the collusive agreement that would be in their best interest provided they were able to enforce it successfully. However, it was in each athlete’s dominant strategy to cheat thus separating themselves from their peers. Once a few athletes began cheating, it became clear that most had to cheat just to keep up with the rest of the athletes. The authorities would have to enforce the collusive agreement that they all not cheat somehow. Some ideas would be stricter drug testing or taking multiple samples to ensure testing at a later time (when testing methods progress).

9.10 Use the supply and demand model to explain why top athletes are paid less than top celebrities.

Answer:

Here are two possible reasons. First, celebrities could have a higher marginal revenue product than athletes. If Steven Spielberg’s movies sell more tickets than Roger Federer’s tennis matches, then Spielberg is likely to have a higher income than Federer.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA A second reason would be that there is a larger supply of good athletes than celebrities.

For example, Mike Trout is paid well because he can hit the ball 400 feet, but there are reasonably large number of other players who can hit the ball nearly as well. Julia Roberts is paid well because she is Julia Roberts. Therefore, it is arguable that Manny Machado is a closer substitute for Trout than Scarlett Johansson is for Julia Roberts. Thus, with few available substitutes, Julia Roberts has a better chance of earning higher wages than Trout.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 10 Labor Market Imperfections  Outline Introduction Learning Objectives 10.1

The Monopsony Power of Sports Leagues The Economics of Monopsony The Impact of Rival Leagues The Reserve Clause

10.2

Unions in Professional Sports A Brief Introduction to the Economics of Unions The Unique Role of Player Associations

10.3

Free Agency The Advent of Free Agency The Franchise Tag Salary Arbitration Measuring Monopsony Power Salary Caps Luxury or Competitive Balance Taxes

10.4 Conflict and Compromise in Collective Bargaining 10.5 Professional Associations Biography Feature: Marvin Miller Summary, Discussion Questions, Problems

 Teaching Tips and Additional Examples The “Sports and the Law” titled “McNeil v. National Football League” could open the door for many different discussions. Enthusiastic sports fans often follow the Collective Bargaining Agreements and usually come across the issue of decertification that is often considered by the players. This piece explicitly explains why this is the case. You can begin by introducing the term “non-statutory labor exemption” and dissecting it. As the class understands what antitrust law is in place to prevent (collusion), you can then ask where unions’ strength comes from (collusion). Thus the “labor exemption” grants an antitrust exemption to unions. The non-statutory part (as the text highlights) indicates that the power comes from the courts rather than the legislators. Therefore, the non-statutory labor exemption grants the CBA negotiated between the unions and owners’ tremendous strength. It is so strong that it supersedes other laws such as antitrust law. However, it is only binding provided that it has been collectively bargained for. By decertifying the players can claim their new organization is not subject to the old (decertified) one.

A more recent follow-up to this would be the case brought on by Maurice Clarett. His legal team fought the NFL rule that prevented him from entering the draft due to the NFL’s age requirement. There were a few interesting questions brought up in the case. For starters, is it legal to restrict employment if an employer wanted to hire that person (in Clarett’s case he would have been drafted, so such a restriction would have taken place)? The courts ruled that such rule was collectively bargained for, thus this practice was protected. Secondly, how could he be represented by a union’s collective bargaining agreement when he was not yet a member of that union? Again the courts ruled in favor of the NFL and the practice is still done today.

In today’s world of multi-millionaire athletes it is hard to convince students that this is a relatively recent phenomenon, and for most of the history of professional sports, athlete salaries were much more modest.

Movies like Eight Men Out (the book by Eliot Asinoff is excellent but the movie has more immediacy) provide students with a valuable insight into how athletes were treated before the advent of free agency.

If you can, try staging a showing of this wonderful movie. If you do not have the time, pepper your lecture with anecdotes that show the relative status of players. For example, can you imagine anyone even

bothering to post an ad in a modern stadium that says “Hit This Sign—Win a Suit,” as one said in Ebbetts Field?

When discussing competitive balance, one can impress upon students the fact that the “good old days” were not necessarily so good by listing the pennant winners in baseball from 1947 through 1966: Table 9.1A Year

American League

National League

1947

Yankees

Dodgers

1948

Indians

Braves

1949

Yankees

Dodgers

1950 1951

Yankees Yankees

Phillies Giants

1952

Yankees

Dodgers

1953

Yankees

Dodgers

1954 1955

Indians Yankees

Giants Dodgers

1956

Yankees

Dodgers

1957

Yankees

Braves

1958 1959

Yankees White Sox

Braves Dodgers

1960 1961

Yankees Yankees

Pirates Reds

1962 1963

Yankees Yankees

Giants Dodgers

1964

Yankees

Cardinals

1965 1966

Twins Orioles

Dodgers Dodgers

From 1947 through 1966 only one World Series did not have at least one of the Yankees, Dodgers, or Giants in it. Almost half of the Series had two of the three. Twice in this period the Yankees appeared in five straight World Series. All this occurred before free agency.

The long history of the reserve clause in baseball has spawned vast literature. Lowenfish and Lupien’s history provides an impassioned indictment of the reserve clause. Roger Abrams provides a more dispassionate view of the impact of the demise of the reserve clause.

You might begin this section with a general discussion of the purpose of a union from the perspective of the employee. It might take a little steering but the class should be able to recognize that one of the most difficult challenges that any union faces is a lack of homogeneity of tastes and preferences of its members.

In the context of sports, a 33-year old veteran is likely to emphasize far different aspects of compensation compared to a rookies. Another challenge that one would hope to get the student to recognize in this first discussion is the difficulty in bargaining with a monopsonistic employer. If you plan to emphasize the economic history aspects of sports unions, you might want to have the students read accounts of the more significant stoppages that were written at the time they occurred. Contemporary news accounts exist about

all the different work stoppages in professional sports. The baseball strike of 1994–1995 has its own Web site, courtesy of The Baseball Archive.

To illustrate the impact of strong and weak negotiating positions as well as the effect that mistrust can have on negotiations, you can have the students act out the role of negotiators.

Illustrating Starting Point Bias and Final Offer Arbitration This activity clearly demonstrates the incentives players have to inflate their value in arbitration hearings and the incentives teams have to make lowball bids. Of course, final offer arbitration is specifically designed to eliminate these incentives by creating disincentives to make bids that are too out of line with reasonable estimates of a player’s true evaluation.

The Set-up Before class begins, make photocopies of the following two worksheets. The two sheets are identical except one asks whether the victim should be compensated more or less than $10,000, and the other asks whether the victim should be compensated more or less than $10,000,000. You will need enough of each sheet for one-half of the class. During class distribute one of the two sheets at random to each member of the class. Tell the class that they should not show their worksheet or their answers to anyone else. You should also tell them that they should write a specific number when asked, “How much more or less should the victim be compensated?” The worksheets also contain demographic questions. You may ask the class to omit this portion of the questionnaire if you choose.

The Results Collect the worksheets and write the responses for “How much more or less should the victim be compensated?” in two columns on the board. Put the responses from the worksheets with “more or less than $10,000” in one column and the responses from “more or less than $10,000,000” in the other.

Calculate the average. I recommend calculating the median rather than the mean because it can be done more quickly and because it makes the results less prone to distortion from outliers.

In my experience of over two dozen times performing this experiment in classes of roughly 25 students, the median of the $10,000 worksheets is roughly $500,000 while the median of the $10,000,000 worksheets is roughly $4,000,000. In every individual classroom experiment, the $10,000 worksheet group has had a median less than half that of the $10,000,000 group.

Again, this experiment clearly shows why groups involved in arbitration have the incentive to give exaggerated bids. It would be an even better experiment for a sports economics class if one could provide a sports related example. I have yet to develop one that works as perfectly in every class as this example, but feel free to experiment.

Test Case in Forensic Economics You are being asked to participate in a research experiment regarding jury awards in lawsuits. Please read the description of the case below and answer the questions that follow. It is critical that you not discuss your answers with any fellow students nor should you look at their survey form until after you have completed the questions and turned in your sheet. The results of the experiment will be made available to you via the Internet within the next several weeks. Thank you for participating in this project.

Suppose you have been asked to serve on a jury on a matter dealing with personal injury. In the case before you, a 50-year old construction worker was injured on the job due to the negligence of his employer. As a result, this man had his right leg amputated at the knee. Due to this disability, he cannot

return to the construction trade and has few other skills with which he could pursue alternative employment.

The negligence of the employer has been firmly established and health insurance covered all of the related medical expenses. Therefore, your job is to determine how to compensate this worker for the loss of his livelihood and the reduction in his quality of life.

Should the plaintiff in this case be compensated more or less than $10,000?

How much more or less than $10,000 should the plaintiff be compensated? (Write down the total dollar amount you think the plaintiff should receive.)

What is your gender?

Male

Female

What is your year in school?

First-year

Sophomore

Counting a high school AP economics course as 1 semester and not counting any classes you are taking this semester, how many economics courses have you had?

Junior

Senior

0 sem. 1 sem. 2 sem. 3 sem. 4 sem. More (Circle one. If more than 4 sems., write number.)

What is your hometown? (Write down your city and state/province if you are from U.S. or Canada and your city and country if you are an international student.)

What best describes your political leanings?

Strong

Leaning

Leaning

Strong

Democrat

Democrat

Republican

Republican

Test Case in Forensic Economics You are being asked to participate in a research experiment regarding jury awards in lawsuits. Please read the description of the case below and answer the questions that follow. It is critical that you not discuss your answers with any fellow students nor should you look at their survey form until after you have completed the questions and turned in your sheet. The results of the experiment will be made available to you via the Internet within the next several weeks. Thank you for participating in this project.

Suppose you have been asked to serve on a jury on a matter dealing with personal injury. In the case before you, a 50-year old construction worker was injured on the job due to the negligence of his employer. As a

result, this man had his right leg amputated at the knee. Due to this disability, he cannot return to the construction trade and has few other skills with which he could pursue alternative employment.

The negligence of the employer has been firmly established and health insurance covered all of the related medical expenses. Therefore, your job is to determine how to compensate this worker for the loss of his livelihood and the reduction in his quality of life.

Should the plaintiff in this case be compensated more or less than $10,000,000?

How much more or less than $10,000,000 should the plaintiff be compensated? (Write down the total dollar amount you think the plaintiff should receive.)

What is your gender?

Male

Female

What is your year in school?

First-year

Sophomore

Counting a high school AP economics course as 1 semester and not counting any classes you are taking this semester, how many economics courses have you had?

Junior

Senior

0 sem. 1 sem. 2 sem. 3 sem. 4 sem. More (Circle one. If more than 4 sems., write number.)

What is your hometown? (Write down your city and state/province if you are from U.S. or Canada and your city and country if you are an international student.)

What best describes your political leanings?

Strong

Leaning

Leaning

Strong

Democrat

Democrat

Republican

Republican

Negotiation Activity Divide the class into six teams (you may have to adjust this to your class size), three teams of union officials and three teams of management negotiators. The union and management teams are then paired together (Management Team A negotiates with Union Team A, and so on).

Give each team a slip of paper that describes their negotiating position. Announce that they have to decide how to divide up a new media contract worth $10 billion. Tell them that you will allow them a few minutes to discuss their position, after which they will have to negotiate with the opposition (if you have a very large class, you may want to have them appoint negotiating teams that will then have to report back to the larger group). If they fail to reach an agreement within the allotted time, a strike occurs and the size of the pie shrinks.

Time the three teams once negotiation begins. Allow about 5 minutes for negotiation (you may wish to give them a one-minute warning). Declare an end to negotiation and ask each set of teams for their outcome.

If all goes as anticipated the three teams should come back with very different outcomes. The A and B teams will probably settle without a strike, while C should strike, since there is no contract zone. The A and B teams should have very different settlements. Union A should get a very favorable settlement, while Union B gets a very unfavorable settlement. You can then ask a representative from each team to read its slip aloud and lead a discussion about why each team reached the solution it did.

Information Slips for Negotiating Teams Union A Your membership is divided and your strike funds are low. To make matters worse, management knows this. You know that management is united and has taken out a sizable strike insurance policy. You want as much as possible, but you are willing to settle for $1.5 billion.

Management A The owners are united and have taken out a sizable strike insurance policy. The union knows this as well.

You know that the union is divided and has little ability to sustain a strike. You want as much as possible, but you are willing to settle for $7 billion.

Union B Your membership is united and your strike funds are as high as they’ve ever been. To make matters even better, management knows this. You know that management is divided and is under pressure from the TV network to deliver games, or else. You want as much as possible, but you are willing to settle for $6 billion.

Management B The owners are divided and are under severe pressure from the TV network to deliver games without interruption. The union knows this as well. You know that the union is united and has a massive strike fund with which to sustain a strike. You want as much as possible, but you are willing to settle for $2.5 billion.

Union C

Your membership is united and your strike funds are as high as they’ve ever been. You know that management is divided and is under pressure from the TV network to deliver games, or else, but they may try to bluff you, like they have in the past. You want as much as possible, but you are willing to settle for $7 billion.

Management C The owners are divided and are under severe pressure from the TV network to deliver games without interruption, but you are certain that the union is in even worse shape. It looks divided, with little ability to sustain a strike. You want as much as possible, but you are willing to settle for $7 billion.

 Additional Sources 1.

Baseball Archive Web-site: http://baseball1.com/bb-data/q-strike.html

2.

For an alternative take on labor relations in baseball, see Kuhn, Bowie, Hardball: The Education of a Baseball Commissioner, New York: Times Books, 1987.

3.

An entertaining view of the early years of labor relations in baseball and of unions in general can be found in the Mickey Rawlings mystery Hunting a Detroit Tiger, Kensington, 1998.

4.

Abrams, Roger I., The Money Pitch: Baseball Free Agency and Salary Arbitration, Philadelphia: Temple University Press, 2000.

5.

Lowenfish, Lee and Tony Lupien, The Imperfect Diamond: The Story of Baseball’s Reserve System and the Men Who Fought to Change It, New York: Stein and Day, 1980.

 Solutions to Back-of-Chapter Problems 10.1 Give an economic interpretation of the deadweight loss that accompanies monopsony. What would eliminate this inefficiency?

Answer:

The deadweight loss represents the potential economic value of trades between supply and demand sides of the product that would have occurred under perfect competition but do not occur under monopsony because the firm purchases a lower quantity than would have been purchased under perfect competition. In short, the DWL is the lost value of the trades that do not occur due to the monopsonist reducing equilibrium quantity.

Eliminating this inefficiency would require the firm to lose their monopsony power. In sports this would equate to more free agency for the players.

10.2 Explain how the desire to increase the minimum salary for all players might cause dissention among members of the NHLPA. Answer: Members of player unions, such as the NHLPA, are generally heterogeneous in their tastes and preferences, e.g., a veteran is likely to focus on different aspects of a compensation package compared to a rookie. So a uniform increase of minimum salary for all players is unlikely to please all union members.

10.3 Use supply and demand curves to show how professional tennis players banded together to increase the prize money offered on the men’s and women’s professional tennis tours.

Answer: The tennis associations restricted supply, leading to higher salaries as shown in Figure 10.1 in the textbook. Coupled with an increasing demand for professional sports in general, and tennis in particular, this has led to significantly increased wages for both male and female professional tennis players.

10.4 In what way are sports unions like craft unions? In what way are they like industrial unions? In what way do they differ from both?

Answer: Craft unions are formed by people who practice the same craft (e.g., electricians) whereas industrial unions represent the response from workers to harsh working conditions during the industrial revolution. Clearly, athletes practice the same craft, so in this sense they are similar to craft unions. Unlike typical craft unions, however, they do not typically increase wages by limiting access to the union and instead leave hiring decisions up to the employer. On the other hand, professional sports do indeed have very harsh working conditions. Athletes have short careers and are prone to serious and potentially careerending injuries. Sports unions, like industrial unions, are a response to these difficult working conditions.

Sports unions, however, typically leave significantly more power to negotiate salaries to the individual workers than do most industrial or craft unions where wages are often negotiated for all employees at the union level.

10.5 Use what you have learned in this chapter to explain why “journeymen” in MLB earn 86 percent of their MRP while “apprentices” earn only 19 percent.

Answer: “Journeymen” athletes in most professional sports have typically earned free agency which allows them to bargain with multiple potential buyers of their services. “Apprentice” athletes in most sports are subject to the reserve clause which binds them to a particular team for a number of years. Teams exploit their monopsony power by underpaying rookies.

10.6 MLB has adopted final offer arbitration because it fears that regular binding arbitration is addictive.

In what way can binding arbitration be addictive? Why isn’t FOA addictive?

Answer: Under standard arbitration, there is a tendency for an arbitrator to split the difference between the two offers. Given this tendency, each side has the incentive to submit extreme offers in order to influence the arbitrator’s final decision. Unlike standard arbitration, FOA is not addictive. The arbitrator must choose one position or the other and cannot “split the difference.” This gives both sides the incentive to moderate their proposals rather than holding onto extreme positions.

10.7 Explain how each of the following would affect the salaries in the NBA. a.

The Chinese government creates a new basketball league to rival the NBA. b.

The NBPA successfully argues that players coming into the league with four years of collegiate experience are immediately granted full free agent status.

Answer: a. If the Chinese government created a rival league this would push salaries up. The NBA would lose some monopsony power as players would have a choice to play in the rival league. b Free agency allows players to bargain with multiple potential buyers of their services. Compared to standard rookie contracts, free agency will thus likely lead to higher salaries for players with four years of collegiate experience. It is worth noting that there could be a potential equity issue with this model as some college graduates may not receive any contracts under free agency.

10.8 How has the luxury tax discouraged the New York Yankees from signing free agents to high salaries?

Answer: The baseball luxury tax creates a disincentive to spend a large amount of money on payrolls.

The team has to pay the tax money spent over the predetermined threshold. This disproportionality affects large market teams with larger payrolls since not all team payrolls reach the luxury tax threshold. Since the Yankees would be less inclined to increase payroll, they would also be less inclined to chase the free agents with high salaries.

10.9 What would happen to the contract zone between MLB and the MLBPA if Congress repealed MLB’s exemption from the antitrust laws?

Answer: The repeal of the antitrust exception would reduce MLB’s bargaining power shifting the contract zone toward the union. This should lead to higher wages for players. It should be noted that Congress repealed MLB’s antitrust exemption with respect to labor dealings in 1998 with the Curt Flood Act. Therefore, repealing the rest of the exemption shouldn’t have too much effect on the contract zone in practice.

10.10 Suppose the NHLPA had staged a strike at the depths of the 2020 Pandemic. What would economic conditions have done to the contract zones of the NBA and the NBPA? Answer: There are a few ways to go about answering this question but the answer should connect the overall economic conditions to the contract zone. One such answer would be that the alternatives for the players and owners would decrease thus increasing the contract zone on both ends.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 11 Diversity, Equity, and Inclusion in Sports  Outline Introduction Learning Objectives 11.1 Diversity, Equity, and Inclusion Through the Lens of Economics Diversity Equity Inclusion 11.2 An Economic Theory of Discrimination Employer Discrimination Does Anyone Win with Employer Discrimination?

Employee Discrimination Consumer Discrimination 11.3 Towards Equal Access Role Discrimination 11.4 Gender Equality in Competitive Sports Trans, Nonbinary, and Intersexed Athletes Biographical Sketch: Colin Kaepernick Summary, Discussion Questions, Problems

 Teaching Tips and Additional Examples Students will likely find the material in this chapter very interesting, but they may not be comfortable voicing their thoughts. Race can be a very difficult and volatile topic for discussion. You might find it useful to emphasize the need for decorum and respect for opposing positions. At the same time, you will need to be prepared to jump in and defuse tensions created by inappropriate and/or naïve statements. One problem arises from the general theoretical discussion of discrimination. Students are unlikely to have thought about discrimination in the way that Becker describes it. Focusing on race or sex can make students self-conscious and uncomfortable, as discrimination can be a highly personal matter. One way to avoid this is to focus on a relatively neutral trait, such as hair color. Talking about discrimination against blondes can illustrate the point in a less confrontational manner.

This chapter highlights the fact that economists often view issues quite differently than other disciplines.

The non-sports story of employer discrimination in a competitive market (as far as economists are concerned) can be summarized as: The discriminating firm hires inferior talent and is punished. Within the competitive market they are forced to pay higher wages, or receive less payout and will eventually be driven out of the market by non-discriminators. In the sports world the story is slightly different. These firms enjoy monopoly power, so the discrimination is diminished at a slower rate. In addition, these firms

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA (firms in this case being the teams) are not driven out of business as a traditional firm would be (rather the league may face competition such as the Negro League). Also their MPL may be harmed, but in the world of sports we think of the MPL as wins rather than products. Therefore, we should expect a discriminating sports franchise as suffering a shortage of wins until they end their discriminatory ways. It is often useful to remind the students first of the typical microeconomic story prior to bridging this discussion to the sports world.

For a great discussion that moves the material away from the theory and toward the real world, look at the paper Andrew Hanssen titled “The Cost of Discrimination: A Study of Major League Baseball”. Having the students read and discuss the article could be insightful as Hanssen shows these exact things happening in MLB during the 50’s. To follow up the discussion you could tie in the text section in the chapter on Bill Veeck’s attempt to purchase the Philadelphia Phillies in 1943. As the text points out, he planned on filling the team with players from the Negro Leagues. After talking to the class about the Hanssen paper, ask them what would be different if Veeck were allowed to buy the Phillies. This probably would have increased the rate of segregation, increased the competitiveness of the Phillies, and helped the players who were talented enough to play in MLB but were not given the opportunity.

We present the Becker model without using indifference or isocost curves. If your students have all had intermediate microeconomics, you may want to show how tastes for discrimination can be illustrated by using indifference curves. You can also use isocost and isoprofit curves to show the economic effects of discrimination, as Becker does in his original manuscript.

For those who are interested in tackling racial issues head-on, Jon Entine’s Taboo and Malcolm Gladwell’s “The Sports Taboo” both contain provocative hypotheses about the apparent dominance of many sports by black athletes. The beginning of Entine’s book in particular can serve as a counterpoint to John Hoberman’s Darwin’s Athletes. These three books in combination would definitely make for lively debate.

If you would like to concentrate the discussion around a sport other than baseball, you may want to have the student read “Civil Rights on the Gridiron” by Thomas Smith. Smith’s article on the NFL illustrates that overt discrimination in sports did not end in the 1940s. It also illustrates some interesting aspects of discrimination. Some useful questions to accompany this might be: 1.

Aside from possible prejudice by Redskins’ owner George Preston Marshall, what forces may have led the Redskins to be the last team to integrate?

2.

How did discrimination impact on the Redskins?

3.

How did the government use the power of the marketplace to force the Redskins to integrate?

Another highly provocative area of discussion can be the difference between sexual discrimination and racial discrimination. The idea that colleges “solve” sexual discrimination by setting up “separate but equal” opportunities for women can lead to an interesting discussion on why this is an inappropriate resolution to racial discrimination. Articles like Jennifer Jacobson’s “Why do So Many Female Athletes Enter ACL Hell?” can lead to an interesting discussion on physical versus psycho-social differences between female and male athletes.

Today’s students often seem to find issues of gender discrimination often more interesting than racial discrimination. For most students, racially segregated teams are an artifact of a by-gone age. Black quarterbacks are common, a black head coach has won the Super Bowl, and the world’s best golfers of all time is black man with a mix of Asian parentage. On the other hand, many students have been directly

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA affected by Title IX and the opportunities opened to women athletes and the perceived loss of opportunities for males. The Girls of Summer is an entertaining look at the 1999 U.S. Women’s World Cup soccer team and the success of Title IX in promoting women’s athletics. Numerous court cases can make interesting additions to the classroom such as Cohen v. Brown (1996) and Grove City College v.

Bell (1984). You Can Quote Me On That: Greatest Tennis Quips, Insights And Zingers by Paul Fein and Billie Jean King provides an interesting tour through the history of tennis which includes King’s famous “Battle of the Sexes” against Bobby Riggs and Arthur Ashe’s fight against racism.

Finally, several excellent biographies of Jackie Robinson are listed. They can form the basis for class discussion of this extraordinary individual. If you prefer a film to stimulate discussion on this topic, you might consider The Jackie Robinson Story (1950) in which Robinson plays himself. The racial attitudes of

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA America in the 1920 as well as the Negro Leagues themselves are nicely profiled in the Mickey Rawlings mystery Hanging Curve.

 Additional Sources 1. Entine, J., Taboo: Why Black Athletes Dominate Sports and Why We Are Afraid to Talk About It, New York: Public Affairs, 2000.

2. Gladwell, Malcom, “The Sports Taboo,” The New Yorker, May 19, 1997, pp. 50–55.

3. Hoberman, John M., Darwin’s Athletes: How Sport Has Damaged Black America and Preserved the Myth of Race, Boston: Houghton Mifflin Co., 1997.

4. Jacobson, Jennifer, “Why Do So Many Female Athletes Enter ACL Hell?” The Chronicle of Higher Education, March 9, 2001, pp. A45–A46.

5. Smith, Thomas, “Civil Rights on the Gridiron: The Kennedy Administration and the Desegregation of the Washington Redskins,” Journal of Sports History, vol. 14, no. 2, Summer 1987, pp. 189–208.

6. Tygiel, Jules, Baseball’s Great Experiment, New York: Oxford University Press, 1983.

7. Robinson, Jackie, I Never Had it Made, Hopewell, NJ: Ecco Press, 1997.

8. There are several web sites devoted to the Negro Leagues. Two of the better sites are Shadowball at http://library.thinkquest.org/3427/data/front.htm Black Baseball’s Negro Baseball Leagues at http://www.blackbaseball.com 9. Longman, Jere, The Girls of Summer: The U.S. Women's Soccer Team and How It Changed the World,New York: Harper Paperbacks, 2001.

10. Fein, Paul and Billie Jean King, You Can Quote Me On That: Greatest Tennis Quips, Insights And Zingers, Washington, D.C.: Potomac Books, 2005.

11. Hanssen, Andrew, “The Cost of Discrimination: A Study of Major League Baseball,” Southern Economic Journal, 64(3), Jan. 2008, pp. 603-627.



Solutions to Back-of-Chapter Problems

11.1 Suppose that the competitive wage in independent league baseball is $20,000 per season. One team owner has a taste for discrimination against all nonwhite players. Her coefficient of discrimination against (white) Hispanics is 0.20, and her coefficient of discrimination against blacks is 0.18. What would she consider the wages of people who are members of these two groups to be? If the supply of players were perfectly elastic, what would happen to the representation of blacks, Hispanics, and non-Hispanics on the team?

Answer:

In each case, she would feel as though she were paying the nonwhite players w(1+d).

For Hispanics, she would perceive a $20,000 salary to be $24,000. For blacks, the perceived wage is $23,600. If the supply of white players was perfectly elastic, she could hire any number of white players at $20,000, and no nonwhite players would be hired.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA 11.2 An NFL running back comes to you, claiming that black running backs are the victims of racial discrimination by teams. Devise an econometric model that would tests his claim. What finding would prove (or disprove) his claim?

Answer:

This question relates back to the determination of marginal product (and marginal revenue product) discussed in earlier chapters. For running backs who have similar statistics, a regression model would predict similar wages. If the wages differ for unexplained reasons (i.e., reasons that are not attributable to productivity differences), then it may result from discrimination. A regression model could include age, experience, yards per carry, etc… Then you could include a dummy variable for race and test if this variable is statistically significant. The process would be much more difficult for linemen, as their productivity is not as easily observed using game statistics.

11.3 Under what circumstances would market forces fail to eliminate discrimination?

Answer:

The key to the elimination of discrimination in Becker’s model is the force of competition. However, if there exists consumer discrimination then the profit maximizing strategy would involve some discrimination even in a competitive marketplace.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA 11.4 Suppose that, as a league, the WNBA openly welcomes trans athletes, but one owner has a taste for discrimination against such players. What evidence might we see that such discrimination is taking place?

Answer: To establish evidence for taste-based discrimination, we will need to compare the MRP of two otherwise identical players. If their MRP is similar but only the trans athlete is consistently having a hard time getting hired, then there is suggestive evidence for potential taste-based discrimination. On the other hand, comparing different players’ MRP and making inferences on potential discrimination are no easy task in practice.

11.5 Use Becker’s model of discrimination to explain why the sponsors of Formula 1 racing teams who discriminate will likely experience lower profits for doing so.

Answer: By engaging in discrimination, sponsors will pay a premium to advertise at their preferred venues or with their preferred spokespersons. For example, given the choice between two Formula 1 spokepersons, a discriminating sponsor will choose the one with their preferred race/gender/nationality even if that spokesperson charges a higher fee. This leads to lower sponsor profits.

11.6 A professional sports team refuses to hire women as executives because it feels their family duties do not allow them to devote adequate time to the team. Is this discrimination? Justify your answer.

Answer: There are a few ways to answer this question but to most economists, discrimination occurs when there is a strong preference for one type of employee despite the fact that they both would generate the same revenue for the firm. In this case if the women executive allocates their time outside the firm (in this case for family duties) that would decrease their MRP. Therefore, this may simply be a case where the women are signaling that their MRP is lower, thus a less desirable hire rather than a case of discrimination.

11.7 Using supply and demand graphs, show how positional segregation can occur even if only the players (including potential future players) believe that such discrimination exists.

Answer: If a group of athletes believes there is positional segregation (like say green eyed athletes cannot play Wide Receiver) they would choose to play other positions (like Corner Back, Tight End or Line Backer). They would decrease the supply for WR thus decreasing quantity in that position.

11.8 In 2016, the British Open awarded about $8.5 million in prize money while the British Women’s Open awarded only $3 million. Is this evidence of gender discrimination in golf? Why or why not?

Answer: This answer depends on the revenue the male British Open tournament generates. If the male British Open generates more revenue than the Women’s British Open (a likely situation in this case) then this would not be evidence of gender discrimination. Rather this would be evidence of the male golfers’ MRP being larger than the women golfers’ MRP. 11.9 Use what you know about the prisoner’s dilemma to explain why the English Premier League teams such as Arsenal have so many foreign players even when, as a group, the Premier League teams agree that they want to limit the number of foreign-born players.

Answer: As a collective group the English Premier League (EPL) may attempt to collude and keep foreign players out of the league. However, they will have a difficult time enforcing this agreement, which is why Arsenal has so many foreign players. This is similar to OPEC deciding to decrease oil production as a collective group but each member of the organization could simply produce a higher amount than what’s agreed upon.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA 11.10 Draw a set of indifference curves (as described in Appendix .2A.2) depicting an owner with a taste for discrimination against Europeans. Put the number of Europeans on the vertical axis and the number of North Americans on the horizontal axis.

Answer: With the vertical axis labeled as the number of European players and the horizontal axis labeled as the North American players, we set out to draw the employer who discriminates against Europeans. The ICs are always downward sloping and never cross. However, in this case since the employer would prefer more North American players, the curves would appear flatter.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

Chapter 12 The Economics of Intercollegiate Sports  Outline Introduction Learning Objectives 12.1 The NCAA A Brief History of the NCAA The Structure of the NCAA 12.2 The Costs and Benefits of Big-time College Sports Football Dominates the Revenue From Intercollegiate Athletics The NCAA Basketball Tournament as a Source of Revenue The Cost of Intercollegiate Athletics Subtraction and Addition 12.3 Monopoly Power in College Athletics The NCAA and Optimal Cartel Behavior Prisoner’s Dilemma: How Rational Actions Lead to Irrational Outcomes Academic Standards: A Key to Academic Integrity or Monopoly Power?

Antitrust and College Sports 12.4 Spillovers from Athletics to the University 12.5 The College Sports Labor Market The Value of Athletes to Colleges The Value of College to Athletes College Sports as an Investment 12.6 Discrimination and College Sports Racial Discrimination Gender Discrimination Biographical Sketch: Shawne Alston Summary, Discussion Questions, Problems

 Teaching Tips and Additional Examples Few topics stimulate such strong disagreements as intercollegiate sports. Students in your class are likely to feel passionately either for or against the role that athletics play at their colleges. Class discussion can take the form of a debate over the role of athletics at your institution. A good starting point for the discussion could be data on your school’s athletic program. Have the students research the finances of your school’s athletic department (even the difficulty of finding precise figures is worthy of discussion).

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA The best source I have found for athletic financing is the NCAA’s Web site (www.ncaa.org), which has budget numbers for the NCAA as a whole as well as for the individual championships. It is interesting to note which playoffs are profitable (men’s basketball, as well as small profits from men’s lacrosse, men’s hockey, men’s baseball, and wrestling) as well as how the NCAA divides the NCAA March Madness pool. The Indianapolis Star (http://www2.indystar.com/NCAA_financial_reports/) also has a database of all public, Division 1 athletic programs. Notice almost none of them make a profit and most rely on general funds to pay expenses. Also the shifting of expenses from one place to another makes for some interesting accounting.

A common theme in economics and finance are the problems associated with an imbalance of information (leading to adverse selection and moral hazard issues). Similarly there is a long list of attempts to quantify asymmetric incentives in college athletics. Justin Wolfers’ article began a debate within the sports and economic literature when he published his article titled “Point Shaving: Corruption in NCAA Basketball”. An understanding of how the gambling market works along with basic understandings of the properties associated with a normal distribution is enough to begin a very interesting discussion with the class. Wolfers shows there are an unusual amount of heavy favorites winning the game but failing to cover the point spread. The debate within the literature is if this should be interpreted as point shaving.

Regardless of the interpretation the issue shows how flexible the subject of economics can be.

Intercollegiate (and interscholastic) sports have also been fertile ground for Hollywood. Hoop Dreams— the award-winning documentary about the role that basketball played in the lives of two inner-city youths—should be required watching for all students. Blindside by Michael Lewis, author of the wellknown Moneyball, is an interesting mix of economics and personal interest story and was made into a popular movie in 2009 starring Sandra Bullock.

For an inside look into college athletics a great video can be found in several of ESPN’s 30 for 30 episodes. A great place to start is in the episode “Pony Excess” that chronicles the rise and fall of the Southern Methodist University football program. The documentary shows how college football could be riddled with corruption which eventually leads to SMU receiving the “death penalty” in 1987. Other 30 for 30 documentaries that may be of interest relating to this chapter are “The U”, “Marian Jones: Press Pause”, “The Best that Never Was”, and “9.79*”.

The first hundred or so pages of Murray Sperber’s informative book Onward to Victory is a meditation on the role that Knute Rockne: All American played in 20th century America. While one may not agree with Sperber’s claim that it was crucial in formulating Ronald Reagan’s personal philosophy—and hence played a role in ending the Cold War—it was a watershed in America’s attitude toward sports. A far less favorable view can be found in the film Blue Chips, which deals with the corruption of a college basketball program. A second work by Sperber, Beer and Circus: How Big-Time College Sports Is Crippling Undergraduate Education, takes an equally dim view of college athletics and its influence on the overall academic environment at the nation’s universities and colleges. A similar investigation of the academic qualifications (or lack thereof) of athletes and their nonathlete peers is found in The Game of Life: College Sports and Educational Values by James Shulman and William Bowen.

Two other movies provide interesting views of the Olympics—and of the role that race has played in them. Leni Riefenstahl’s Olympia may be the greatest sports movie ever made. The opening sequence is of particular interest, as it marks the first real effort to link the modern games with antiquity and charts the first Olympic torch relay. The parade of nations is at once thrilling and—with the Nazi salutes—chilling.

(Beware, there is some frontal nudity involved.) Chariots of Fire examines the 1924 Olympics through

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA the prism of British class divisions and antisemitism. It also provides insights into an older, more rigid notion of amateurism.

In the more traditional media, Sack and Staurowsky provide another view of college athletics in the same vein as Sperber and Bowen and Shulman. Of all places, The Chronicle of Higher Education has many fascinating features on sports.

 Additional Sources 1.

Sack, Allen L. and Ellen Staurowsky, College Athletes for Hire: The Evolution and Legacy of the NCAA’s Amateur Myth, Westport, CT: Praeger Publishers, 1998.

2.

Gaul, Gilbert and Frank Fitzpatrick, “The Price of Winning: The Business of College Sports” series in The Philadelphia Inquirer, September 10–14, 2000.

Suggs, Welch, “Graduation Rates Hit Lowest Level in 7 Years for Athletes in Football and Basketball,” Chronicle of Higher Education, September 10, 1999, pp.A58–A59.

3.

4.

Sperber, Murray, Beer and Circus: How Big-Time College Sports Is Crippling Undergraduate Education, New York: Holt Publishers, 2001.

5.

Shulman, James, and William Bowen, The Game of Life: College Sports and Educational Values, Princeton, NJ: Princeton University Press, 2002.

6.

Movies: Hoop Dreams; Blue Chips; Knute Rockne: All American; Olympia; Chariots of Fire; Blindside.

7.

Website: http://www.ncaa.org

8.

Website: http://www2.indystar.com/NCAA_financial_reports/

9. http://espn.go.com/30for30/film?page=pony-excess 10. Wolfers, Justin. (2006) “Point Shaving: Corruption in NCAA Basketball,” American Economic Review, 96(2), pp.279–283.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA

 Solutions to Back-of-Chapter Problems 12.1 If college sports are a public good, what can you say about the amount that a university is willing to spend on?

What can the university’s administration do to resolve this problem?

Answer: If college sports are a public good then there is a market failure. The market will not make enough quantity to satisfy the socially optimal level of output. The university’s administration can try to resolve this by subsidizing the athletic programs. This will increase the quantity level to a higher amount than what the free market would normally produce.

12.2 Use the model of efficient cartel operation to explain why the University of Wisconsin receives a greater portion of bowl revenue than Utah State University.

Answer: The University of Wisconsin plays in the Big Ten Conference which is much larger than the conference that Utah State University plays in (the Mountain West Conference). Therefore, Wisconsin will likely receive more bowl revenue because their fellow conference members are probably playing in larger bowl games that have larger payouts.

12.3 What makes an incidental cartel different from other cartels? Why was the NCAA an incidental cartel?

Answer: In the marketplace, cartels exist to coordinate firm actions that result in restricted output and higher prices and profits. When successful, they increase monopoly (or monopsony) power for the firm. This is essentially what the NCAA has accomplished. However, the NCAA’s initial goals were to standardize rules and provide safety to the athletes. They eventually evolved into what they are today. Thus, we often consider them an “incidental cartel.”

12.4 Use supply and demand to analyze the impact of recent court rulings giving college athletes control of their NIL on salaries paid to rookies in the NFL and NBA. Answer: Assuming that the NFL and NBA act like a monopsony, then the impact of recent court rulings on rookie salaries would be similar to that due to rival leagues as discussed in Chapter 10.1. Specifically, the rulings help lower the opportunity cost of staying another year in college for some of the top student athletes (i.e., those who are able to profit off their NIL). Based on a monopsony model similar to Figure 10.1 in the textbook, the lowered opportunity cost could in turn reduce the labor supply of rookies in a given year and shift the marginal expenditure (ME) curve to the left. As a result, the monopsony has to set a higher profit-maximizing level of salaries for rookies.

12.5 Use economic theory to explain why almost all the Southeastern Conference’s football and basketball teams integrated within a few years of one another.

Answer: Much like Baseball, college athletics remained integrated despite the fact that African American athletes were more talented than the other players on their rosters. They were essentially colluding to segregate the talent pool.

However, once one team broke the collusive agreement (much like how the Dodgers signed Robinson), the rest of the conference (or league) had to integrate or they would be left behind. The dominant strategy was to integrate 12.6 Use game theory to describe how an effort by two universities to recruit a top basketball player might result in both committing NCAA recruiting violations.

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA Answer: The prisoners’ dilemma described in Table 12.1A is relevant for this question as well. If landing the recruit is more valuable to a school than the cost of a potential NCAA violation, each school has the incentive to cheat to get the recruit regardless of whether the other school is cheating or not. Since a school is afraid that the other school may commit a violation and land the recruit, it will have an incentive to violate NCAA rules as well or risk losing the recruit.

Table 12.1A University A University B

Cheat

Don’t Cheat

Cheat

Recruit evenly/both violate rules

B dominates

Don’t Cheat

A dominates

Recruit evenly/both obey rules

12.7 What unselfish and selfish motives might be behind the attempts by some schools to set academic standards for student-athletes?

Answer: Schools might want to set academic standards because they believe that colleges should subject athletes to the same standards that they apply to other students. Standards are one way to ensure that universities fulfill their academic mission. Alternatively, admissions standards could be a way that existing athletic powerhouses prevent rivals from challenging their positions. Academic standards limit the number of potential athletes available to rival schools. Because they are already attractive, the existing schools have a better chance of skimming off the more qualified athletes. Schools wishing to break into the upper echelon thus cannot compete by offering lower academic standards.

12.8 Use supply and demand analysis to show and describe the dramatic increase in men who coach women’s basketball teams.

Answer: This is a complicated issue with many possible answers. One such approach is to point out that since Title IX was implemented the number of woman’s basketball teams have increased dramatically. In doing so the supply drastically increased for coaching jobs, and in order to fill these positions many men were hired.

12.9 How might failing to graduate from college be an optimal investment in one’s human capital?

Answer: An investment in human capital adds to one’s skills. These skills can be academic or athletic. Some athletes are in college for the purpose of developing their athletic skills. While college is a good place to develop human capital, it is not the only place where such capital can be developed. Thus, leaving college for a professional sports team may allow athletes to better develop their athletic skills. In addition, those attending college incur a large opportunity cost since they cannot be paid for their services. If they have the opportunity to sign a top professional contract, even some of those who wish to develop their academic skills would probably be better off leaving college early in order to enjoy the return to their investment in athletic skills. It should be noted that the decision of whether to leave college early is not faced solely by athletes. Entrepreneurs such as Bill Gates and e-Bay’s Pierre Omidyar also left college early to pursue business interests.

12.10 Use human capital theory to explain why graduation rates for women’s basketball players are so much higher than those of men’s basketball players

Instructor’s Manual for The Economics of Sports, 7th edition Revised and updated by Dr Qi Ge, Vassar College, New York, USA Answer: Because the salaries in the WNBA are a small fraction of the salaries in the NBA, women have much less of an incentive to focus solely on their athletic skills. They therefore typically come to college more academically prepared than their male counterparts, so the return to investing in academic skills is higher. Because of higher academic returns and lower athletic returns, the monetary value of a career in the WNBA does not dwarf the value of an academic degree, so there is less temptation for women to leave school early.