Eco 383: PPT lecture slides, Sept. 9 – Oct. 2, 2008

• Topics:– How’s baseball doing?– MLB’s monopoly– Ticket prices and salaries, demand, and supply– MLB’s monopoly and antitrust exemption

• Last revised 2 Oct. 2008

How’s baseball doing?

• In brief:– The recent past (2000-2003): conflicting

answers• Owners: Teams losing lots of money

• Economists, Forbes: Teams making profits or (in 2001-2003 recession) small losses

– The present: great (all agree)– The future: danger signs on horizon

The recent past

• 1977: first free agents, last round of expansion for a while• Rising attendance, revenues, media, team resale prices• Salary explosion• Owners complained about losing money

– 1994-95: attempt to impose salary cap long strike– 2000 MLB report: 27/30 teams lost $ in 1995-99

• No way, said independent researchers

– 2002: Owners tried to eliminate 2 teams– Commissioner Bud Selig unpopular with media and fans

The present:Everybody’s happy nowadays…

• Since 2004: MLB revenues and attendance booming, profits solid• 2002 and 2006 Basic Agreements (between owners and players union)

– More revenue sharing• “Small-market” teams get more money• Higher “marginal tax rates” on team revenues indirectly restrain

player salaries Salary share of revenues fell (good for owners’ profits)

• No strike or lockout in either case• Commissioner Selig now widely praised as great CEO for baseball

– Credit for interleague play, wild card• Competitive balance has improved

– 6 different teams won World Series in the 7 years from 2000-2007

The future:Danger signs on the horizon

• Fewer fans (at least as % of pop.)– 58% of Americans say they’re baseball fans

• (2002; NFL: 67%)– Only 13% of Americans say baseball’s their favorite sport

• (down from 23% in 1985; 2003; NFL: 29%)• Aging fan base

– Age of average MLB fan is over 40, oldest of major sports• Losing African-American fans

– Trend coincides with fewer black players (~9% of current players, down from 25% in 1975)

• Scarcity of black players partly due to lack of black college baseball players

• Losing (non-Hispanic) white fans, too– Trend coincides with reduced numbers of American-born players

• Perceived lack of competitive balance bad for game’s image

Baseball as a monopoly

Multiple choice:There’s no ___________ in baseball.

• (A) crying

• (B) supply curve

• (C) both (A) and (B)

(Multiple choice)

• Answer: ( C )– There is no supply curve in Major League

Baseball (MLB), because• MLB is a monopoly sports league

• Each of the 30 MLB teams is a local monopoly.

Each MLB team as a local monopoly

• Most MLB teams have a city all to themselves– Even teams in the same city are not really

substitutes

• Prohibitive restrictions on entry (of new teams)– Owners generally oppose expansion.

• When it does occur, expansion fee is very high.

Salaries and ticket prices

• Q: Do higher player salaries cause higher ticket prices?

• A: NO, because player salaries are fixed costs, which are not part of marginal costs (MC) or marginal revenue (MR). The price that equates MC and MR is the profit-maximizing price, regardless of the level of payroll.

• Ticket prices are essentially set by the level of DEMAND.

• 2001-2002: Average salary rose 5%, while average ticket price fell 4%

Q: What if a team increases its payroll by signing a superstar player? Wouldn’t that tend to increase ticket prices?

A: Yes, not because of the increase in (fixed) costs, but because of the increased DEMAND for tickets, which will cause the new profit-maximizing price to be higher.

In most recent years, MLB ticket prices have increased much faster than prices overall (e.g., 25% in 1999-2001, 10% in 2007-2008).

Why: Demand for games has gone up, thanks to --

• General U.S. prosperity

• Renewed interest in the game (cable TV coverage, home-run records, expanded playoffs, improved marketing)

• Attractive new stadiums (S.F., Pittsburgh; Baltimore, Cleveland, Texas)

Ticket prices once again

• Recall: Ticket prices are driven mostly by DEMAND.– Higher demand higher ticket prices.

• Causes of higher demand?

– Most MLB costs are fixed and don’t affect price.

• SUPPLY matters too, but not as much.– Can teams increase profits by restricting

output? Not in the models we’ve seen, but…

Restricting supply to raise profits

• Wouldn’t work in basic monopoly model:– Team charges same price for all seats.– Team is already at profit-maximizing P and Q

makes no sense to change either

• How it could work in real life:– If new, smaller ballpark is more intimate and exciting

D rises (more attractive product)

– Reducing the number of seats, esp. cheap seats:• Some fans will buy costly tickets instead (if D is inelastic)• Fewer walk-up sales more advance-ticket sales (substitute)

– Advance sales are better because team gets the $ even if fan is a no-show.

MLB as a sports league monopoly

MLB as a monopoly league

• No other league provides a comparable product

• Prohibitive restrictions to entry of new leagues– Fan loyalties to existing teams, AL, NL– Stadium construction costs– MLB’s power to sign exclusive TV deals

• MLB, exempt from antitrust laws, has more license to squash competitors than most firms do.

Baseball’s antitrust exemption (AE):A history

• U.S. antitrust laws were passed in 1890 (Sherman Act) and 1914 (Clayton Act) in order to – (1) break up and prevent monopolies

– (2) prevent firms from colluding on prices and output

• The antitrust acts did not exempt baseball, but . . .– Lawsuit, ~ 1915: Federal League team owner sued NL

and AL for antitrust violations in crushing the Federal League. Case went through the courts, finally to Supreme Court.

History of Baseball’s AE (cont’d)

• Supreme Court, 1922: antitrust laws do not apply to baseball. Why:– Under the Constitution, federal government can only

regulate “interstate commerce.”

– Court said professional baseball games were not “interstate commerce.”

• “exhibitions of baseball are purely state affairs”

• The Court has upheld the AE ever since.– Respect for precedent (stare decisis).

Hallmarks of monopolies

• Higher prices

• Restricted output

• Inefficient – unresponsive to consumers and market signals– slow to innovate

• Does MLB fit that description?

Restricted output:MLB expansion (and lack thereof)

• 1903-60: same 16 teams• 1961-62: 4 new teams (total of 20)

– Prodded by threat of rival league (Continental League).• 1969: 4 new teams (total of 24)• 1977: 2 new teams (total of 26)• 1990s: 4 new teams

– 2 in 1993, 2 in 1998 (total of 30)– Prodded by Congressional threats to remove AE.

• 2002: Commissioner Selig proposes eliminating two teams (proposal withdrawn later)

Unresponsive to market signals?Franchise relocations (and lack thereof)

• 1903-51: same 16 teams in same cities

• 1953-72: ten teams switched cities

• 1972-2004: no teams moved– The AE makes it easier for MLB to prevent

team movements– “Territorial rights” allow teams to block

another team’s locating within 75 miles of them

• 2005: one team moved (Expos to D.C.)

The baseball monopoly and labor:The reserve clause

• Until 1975, MLB players were bound to the team that originally signed them– RESERVE CLAUSE = no free agency– Each team was a monopsony (the only available employer) as far

as its players were concerned.– The reserve clause depressed player salaries and gave players no

rights to change employers.– Courts ruled that the reserve clause was legal under baseball’s AE.

• Supreme Court case, 1972: Curt Flood, St. Louis Cardinals outfielder, sued MLB over the reserve clause and lost

• The reserve clause was ended in 1975; players got limited free agency in 1976.– > With the end of the reserve clause, the AE matters a lot

less now than it did before 1975.

Curt Flood Act (1998)

• Decreed that MLB’s antitrust exemption did not exempt MLB from U.S. labor laws– The players had already won

free agency in 1976, but the Act said MLB had to obey all other U.S. labor laws, too.

• Named for the player who challenged MLB’s reserve clause in court in early 1970s

Curt Flood Act (continued)

• A result of the 1994-95 work stoppage – Strike ended after a federal judge issued an injunction

against the owners in 1995, ruling that the AE didn’t apply to labor issues.

– 1996 Collective Bargaining Agreement: owners and players agreed to press for a law to that effect

– Congress passed the law in 1998 without dissent or fanfare

• What is left of MLB’s antitrust exemption?

Some possible effects of MLB’s AE …• FEWER TEAM RELOCATIONS

– from small cities to big ones, or to growing regions (South, West)• Restrictions on municipal ownership • Restrictions on minor leaguers

– No “judicial review” (can’t challenge these restrictions in court)

… and of sports league monopolies in general

• FEWER TEAMS• The amateur draft• Barriers to entry of rival leagues• Broadcasting deals for entire league• (Before 1976-77: the reserve clause)

Zimbalist on “What Is to Be Done?”

• Suggests Congress take action– MLB’s blanket AE should go

• MLB can use a “rule-of-reason” defense to prevent relocations, keep minor-league system and amateur draft

– Break up MLB into two truly independent leagues• (Also implies strong antitrust enforcement.)

• The two leagues could collaborate on playing rules and postseason play, but not on host cities, players’ labor market, or broadcasting deals.

• Each league would rush to fill a potential baseball market before the other.

MLB’s AE makes little sense in economic terms, but . . .

• J. C. Bradbury (in The Baseball Economist) says it’s basically harmless– Hard to say that MLB abuses its monopoly

power worse than NFL, NBA, and NHL do theirs

• Restricted Q? # of teams ~same in all four sports

• Higher P? Lower in MLB than the other three– Note well: Need to take other factors into account.

» Prices also reflect differences in demand and scarcity.

Why are ticket prices lower in MLB than in the NFL, NBA, and NHL?

• SCARCITY– More total seats available in

MLB• Even if demand for tickets

were the same in all four leagues, we’d expect MLB to have the lowest prices.

– Smaller number of games in NBA, NHL, and NFL means that each game counts for more in its impact on season.

League

Home games per season

Approx. seats per stadium

Total seats per season

MLB 81 40,000 3,240,00

NFL 8 60,000 480,000

NBA 40 20,000 800,000

NHL 40 20,000 800,000

The baseball-hockey paradox• MLB is clearly more popular (higher revenues and

TV ratings) than the NHL, yet NHL tickets are much more expensive. Why?– Scarcity

• NHL season is only half as long as MLB’s• NHL stadiums are only half as big as MLB’s

– Profit-maximizing monopoly solution runs up against capacity constraint in NHL.

• (See graph drawn in class.)• We would expect there to be a lot more sold-out games in the

NHL (and the NFL and NBA) than in MLB.

Back to Bradbury on MLB’s monopoly

• Q: Is baseball a contestable market?– Defn.: CONTESTABLE MARKET: a market that

currently has only one or a few firms (non-competitive by defn.), but functions like a competitive market because entry is unrestricted

• Other firms (rival leagues) could enter the market if there were unexploited opportunities for big profits.

– Threat of rival leagues forces MLB to provide more teams, lower prices, and better service than it otherwise might.

• A: Bradbury seems to think so.