Sports Economics

1. (2.5 Points) Graph a short run situation where a large-market team has lower

profits at its profit maximizing level of attendance than a small-market team has

at its profit maximizing level of attendance. In your graph, be sure to identify the

profit-maximizing attendance and profit in each case. (hint: you can do this by

hand, or use the template graph on Blackboard located along with Homework #2,

which you should be able to modify by moving the various lines to tell your

story).

2. (2.5 Points) When a player says that an owner doesn’t want to win, what is really

being said?

3. (2.5 Points) Use the following schedule of stars, winning, and salary to answer the

questions.

Stars Total Winning% Salary

0 420 $7

1 429 $5

2 448 $5

3 466 $5

4 490 $6

5 528 $6

6 598 $7

7 646 $8

8 680 $8

9 695 $9

10 700 $10

a. Graph the total cost of winning percent (from player compensation, only).

b. Is the the long-run or short-run total cost structure for this team? Why?

c. What costs are missing from the complete picture of the costs of

generating winning?

d. How would inclusion of the costs you list in part (c) alter your graph in

part (a)? Show the revised graph.

4. (2.5 Points) A league is considering expansion into two different markets, A and

B. Suppose all else is constant in these two markets except for each of the

following differences, considered one at a time. What happens to the expansion

fee in Market A relative to Market B?

a. Market A is a larger revenue market than Market B.

b. Population growth is greater in Market A than in Market B.

c. Currently, city politicians and voters are hostile to any consideration of

subsidies for a sports team in Market A, but not so in Market B.

d. Interest rates are higher in Market A than in Market B.

5. (5 Points) It seems these days that everybody wants a pro sports team. But, almost

universally, expansion teams are weak and stay that way for quite some time. For

example, Quirk and Fort (1992, pp. 251-252) offer the following evidence on the

number of years that it takes expansion teams to reach 0.500 over the period 1900

to 1989:

League Shortest to .500 Average to .500 Longest to .500

MLB 2 years (Angels) 8.2 years 15 years (Mariners)

NFL 3 years (Bengals,

Seahawks)

5.5 years 13 years (Saints)

NBA 2 years (Bucks) 5.6 years 10 years (Jazz)

NHL 2 years (Blues) 6.3 years 14 years (Devils)

a. Given the bleak prospects for an expansion team shown above, how would

you explain the high demand for new teams on the part of the residents of

some cities?

b. Given the data, what do you think expansion does to the overall quality of

league play from the fans' perspective? How does this enter into the

determination of the expansion fee by a league?

c. What factors would explain the difference between the shortest time to

0.500 and the longest time to 0.500 in each league? (Hint: Think about

the lessons from Chapter 2).

6. (2.5 Points) When free agency was introduced in the NFL after the 1992 season,

some argued that expansion teams would have an easier time competing than in

the past since new owners could just buy great talent and enter the league with a

running start. Using the data on MLB expansion team performance in the lecture

notes, would you have made the same prediction? (Hint: Remember that free

agency started in 1976 in MLB. Compare expansion team success before and

after that year.) Does this appear to have been the experience in the NFL (hint:

look at NFL expansion team success before and after 1992...i.e. the Seahawks and

Buccaneers versus the Jaguars and Panthers).

7. (5 Points) There have been two changes to the revenue sharing rules in MLB

within the last 20 years. The first took place in 1995 season, and then there was

another increase in revenue sharing in place for the 2001 season. These changes

create a "natural experiment" for analyzing the impact of changes in revenue

sharing on competitive balance. I have provided a spreadsheet on blackboard

with team winning percentages before and after these revenue sharing changes.

With this spreadsheet, calculate the yearly standard deviation in winning

percentages by league (in Excel, you can get standard deviations by typing

=STDEV(___) where ___ is the column associated with each year). This excel

file will then provide you with a chart to analyze the impact of these revenue

sharing changes, along with the average standard deviations in winning

percentages before and after the various changes. Using this information answer

the following questions:

a. How did the changes in revenue sharing impact competitive balance?

What does this tell you about the effectiveness of revenue sharing in

improving competitive balance? Why would this be the case?

b. Are there any changes, other than the changes in the revenue sharing rules,

that may be impacting competitive balance and making it difficult to

determine the impact of revenue sharing alone?

c. Which would be more effective for increasing the level of competitive

balance in baseball, a salary cap, or a 50-50 gate revenue-sharing plan?

Why?

8. (2.5 Points) Some have argued that to improve competitive balance, the weakest

(lowest revenue generating teams) should be contracted, or removed from the

league. Does contraction necessarily mean that competitive balance will

improve? Explain.

Here are some suggested things to collect for your paper due at the end of the term (not

due with your homework, just a suggestion to make the actual “writing” of the paper at

the end easier):

• Add to the data that you collected for homework 1, data on your chosen

franchise’s revenues and payroll over time. Plot these three variables on the same

graph. Explain, for your franchise, the connection between winning, payroll and

revenues. Using the same regression tools that you used in homework #1,

estimate the impact of your team’s payroll on their winning (winning = a*Payroll

+ b), and the impact of winning on revenues (revenues = a*winning + b)

• Examine your chosen franchise’s “exclusive territory”. What is the population

and average (median would suffice) income in this territory? While you won’t

know exactly what this territory is, look at other competing teams in the area and

make a logical conclusion about their exclusive territory. Has this territory

changed over time due to expansion or relocation?

• What year did your chosen franchise enter their league? Is there any evidence

that their value has been changed by expansion of teams into the league (or if they

were an expansion team recently, is there any evidence that their entrance has

changed the other team’s valuation?)

Subject | Business |

Due By (Pacific Time) | 06/09/2014 09:00 am |

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