Basic Economics in Sports Today

I was thinking more about the economy of sports, so I decided to write about some of the basic concepts and apply them to the current situation.  I know I am oversimplifying some of this, but I think its an interesting exercise nonetheless.

Law of Demand:  As price increases, demand decreases.

  • Result:  Ticket prices have increased significantly over the past decade.  This increase had been consistent with and driven by the demand, as seen in the high degree of sellouts across the major sports.  However, price increases over the last two years have been met with a drop in attendance, meaning that sports has passed the equilibrium point.

Law of Supply:  As price increases, supply increases.

  • Result:  Over the past decade, the actual number of sports and sporting events have increased along with prices (the only ways to increase supply are expand stadiums or host more events).  This increase included extreme sports (X Games), niche sports (PBR), and international exhibitions (Olympic sports & soccer).  Now with the drop in demand and ticket prices, we are seeing signs of the supply dropping (e.g. my previous post mentioned the cancellation of the Tour of Georgia).

Price Elasticity of Demand:  Demand is “inelastic” when the quantity demanded decreases slowly relative to a price increase.  Demand is “elastic” when the quantity demanded decreases faster relative to a price increase.

  • Result:  We have seen price elasticity in sports shift from fairly inelastic to more elastic over the past two years.  There are several things that impact this shift, including substitute products (more sports and entertainment alternatives mean people will choose other options when prices increase), % of income (as ticket prices equate to a larger % of income, people become more resistant to price increases), and necessity (tickets are not a need while other needs have also increased in price, thus there is higher resistance to ticket price increases).

Again, I’m just looking at some very basic concepts, without considering the multitude of other important factors.  While there are a lot of “negative” news items related to the economy, it really is not surprising when you drill down to the basics.  Sports has overshot its economic equilibrium.  Adjustments will have to be made across all of the different sports, starting with a basic reduction in price, supply, or both, until we get back to a more stable equilibrium.

3 thoughts on “Basic Economics in Sports Today

  • November 17, 2008 at 12:21 pm
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    Do you think that the corporations that are building new stadiums that are set to open in the next 3-18 months will take this into account? Or are we going to be stuck with overpriced seats for awhile because owners don’t always understand basic economics?

    Jeremy

  • November 17, 2008 at 1:52 pm
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    The smart ones should, but I doubt it. They are going to make the classic mistake of letting sunk costs influence their decision making. Basically, no matter what they decide to price their tickets at, the $1B spent on the stadium is sunk – no getting it back!

    Oversimplified Example:
    Say a team spends $10M on stadium work. Then they budget 1,000 tickets at a $10,000 price point with the goal of making that $10M cost back. Maybe only 400 people can buy those tickets at $10,000 ($4M revenue), but they could sell all 1,000 tickets at $6,000 ($6M revenue). Economics says you drop the price and make the $6M – the problem is that many teams will think about needing to make back the $10M entirely. That $10M is already gone (sunk cost) and they cannot let it influence their revenue moving forward!

  • February 1, 2011 at 3:52 pm
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    I think a good example of teams not reading the tea leaves very well and still pricing their tickets without any concept of their fans situations was present in NY/NJ with the New Meadowlands Stadium.

    I know that the Jets commissioned any number of studies to try and find a way to capture as much revenue that they felt was being suctioned off to the secondary market as possible without fully understanding the secondary market and the factors that drive the prices there.

    This led to the embarrassing articles where fans complain about being gouged; the in game experience suffering due to empty seats; and the generic feeling of the games because so many of the more rabid fans can’t afford to attend the games.

    While there are certain economic theories that say that the more a ticket to a certain event costs, the more the demand increases, I believe that in a sour economic climate that the necessity of balancing your family’s finances wins out over whether or not you are going to go to a game.

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