The Economic Theory of Professional Team Sports: An Analytical Treatment (New Horizons in the Economics of Sport)

177 Pages·2007·1.36 MB·English

by  Stefan Kesenne

The Economic Theory of Professional Team
Sports
NEW HORIZONS IN THE ECONOMICS OF SPORT
Series Editors:Wladimir Andreff,Department ofEconomics,University ofParis 1
Panthéon Sorbonne,France and Marc Lavoie,Department ofEconomics,
University ofOttawa,Canada
For decades,the economics of sport was regarded as a hobby for a handful of
professional economists who were primarily involved in other areas of research.
In recent years,however,the significance of the sports economy as a percentage of
GDP has expanded dramatically.This has coincided with an equivalent rise in the
volume of economic literature devoted to the study of sport.
This series provides a vehicle for deeper analyses of the demand for sport,
cost–benefit analysis of sport,sporting governance,the economics of professional
sports and leagues,individual sports,trade in the sporting goods industry,media
coverage,sponsoring and numerous related issues.It will contribute to the further
development of sports economics by welcoming new approaches and highlighting
original research in both established and newly emerging sporting activities.The
series aims to publish the best theoretical and empirical work from well-
established researchers and academics,as well as from talented newcomers in the
field.
Titles in the series include:
The Economics of Sport and the Media
Edited by Claude Jeanrenaud and Stefan Késenne
The Economic Theory of Professional Team Sports
An Analytical Treatment
Stefan Késenne
The Economic Theory
of Professional Team
Sports
An Analytical Treatment
Stefan Késenne
Professor of Economics,University of Antwerp and Catholic
University of Leuven,Belgium
NEW HORIZONS IN THE ECONOMICS OF SPORT
Edward Elgar
Cheltenham,UK • Northampton,MA,USA
© Stefan Késenne 2007
All rights reserved.No part of this publication may be reproduced,stored in a
retrieval system or transmitted in any form or by any means,electronic,
mechanical or photocopying,recording,or otherwise without the prior
permission of the publisher.
Published by
Edward Elgar Publishing Limited
Glensanda House
Montpellier Parade
Cheltenham
Glos GL50 1UA
UK
Edward Elgar Publishing,Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library ofCongress Cataloguing in Publication Data
Késenne,Stefan.
The economic theory of professional team sports :an analytical treatment
/ by Stefan Késenne.
p.cm.— (New horizons in the economics of sport series)
Includes bibliographical references and index.
1.Sports teams—Economic aspects. 2.Professional sports—Economic
aspects. I.Title.
GV716.K47 2007
796.06´91—dc22 2007010626
ISBN 978 1 84720 207 9 (cased)
Printed and bound in Great Britain by MPG Books Ltd,Bodmin,Cornwall
Contents
List of figures viii
List of tables x
List of symbols xi
Foreword xiii
1. The peculiar economics of professional team sports 1
1.1. Introduction 1
1.2. Peculiarities 2
1.3. Objectives of club owners 4
Exercises 1 7
2. Sports product market 8
2.1. Introduction 8
2.2. Market of live sport 8
2.2.1. Uncertainty of outcome and competitive
balance 10
2.2.2. Stadium attendance 11
2.2.3. Club revenue and cost 14
2.2.4. Ticket pricing 16
2.3. Market of television rights and television sport 19
2.3.1. Demand for television sport 19
2.3.2. Pooling of broadcasting rights 22
2.3.3. Pay-per-view or free-to-air? 25
Exercises 2 29
3. Player labour market 30
3.1. Introduction 30
3.2. Demand and supply in the talent market 31
3.3. Walras equilibrium model 34
3.3.1. Profit maximisation 35
3.3.2. Comparing profit and win maximisation 37
3.3.3. Segmented player labour market 47
3.4. Nash equilibrium model 49
3.4.1. Profit maximisation 51
3.4.2. Win maximisation 53
v
vi The economic theory ofprofessional team sports
3.4.3. Fixed supply of talent 55
3.4.4. Win bonus 57
3.4.5. Efficiency wages 64
Appendix 3.1.The benchmark model 68
Exercises 3 70
4. Product and labour market 71
4.1. Introduction 71
4.2. Ticket pricing and talent hiring 71
4.3. Stadium capacity constraint and maximum ticket price 76
4.4. Numerical example 81
Exercises 4 83
5. Restrictions on player mobility 84
5.1. Introduction 84
5.2. The transfer system in a profit-maximisation league 85
5.3. The transfer system in a win-maximisation league 90
5.4. International player mobility 94
5.5. Conclusion 99
Exercises 5 100
6. Revenue sharing 101
6.1. Introduction 101
6.2. Revenue sharing in the Walras equilibrium model 101
6.2.1. Revenue sharing in a profit-maximisation league 102
6.2.2. Revenue sharing in a win-maximisation league 110
6.3. Revenue sharing in the Nash equilibrium model 114
6.3.1. Exogenous salary level 115
6.3.2. Prize funds 120
6.3.3. Efficiency wages 121
6.4. Conclusion 123
Exercises 6 124
7. Salary caps 125
7.1. Introduction 125
7.2. North American payroll cap 125
7.2.1. Profit maximisation 126
7.2.2. Win maximisation 133
7.3. Soft cap and luxury tax 134
7.4. G-14 payroll cap in European football 137
7.5. Conclusion 141
Exercises 7 142
Contents vii
Answers to exercises 143
References and selected bibliography 151
Index 159
Figures
1.1. Club objectives 6
2.1. Demand for tickets 18
2.2. Monopoly versus perfect competition 21
2.3. Pooling of TV rights versus decentralised selling 24
2.4. Pay-per-view versus free-to-air 27
3.1. Profit maximisation 37
3.2. Marginal (MR) and average revenue (AR) 39
3.3. Win versus profit maximisation 40
3.4. When a rich club has a poor team 43
3.5. Average revenue (AR) and net average revenue (NAR) 45
3.6. Top players market equilibrium in a profit-maximisation
league 49
3.7. Nash–Cournot equilibrium 53
3.8. Comparing the fixed supply models 56
3.9. Effort function and efficiency wage 66
4.1. Profit-maximising equilibrium 74
4.2. Win-maximising equilibrium 75
4.3. Stadium capacity constraint 77
4.4. Maximum ticket price under profit maximisation 78
4.5. Maximum ticket price and stadium capacity constraint under
profit maximisation 79
4.6. Maximum ticket price and stadium capacity constraint under
win maximisation 80
4.7. First-order conditions for profit maximisation 82
5.1. The transfer system in a profit-maximisation league 86
5.2. Monopsony under profit maximisation 88
5.3. The transfer system in a win-maximisation league 91
5.4. Monopsony under win maximisation 92
6.1. Revenue sharing under profit maximisation 103
6.2. Revenue sharing under win maximisation 112
6.3. Fixed-supply Walras and Nash equilibria 119
7.1. Payroll cap 127
7.2. Payroll cap and owner profits 128
7.3. Payroll cap in a large-market club 129
7.4. Payroll cap in a small-market club 130
viii
Figures ix
7.5. Payroll cap and floor in a small-market club 130
7.6. Individual salary cap and payroll cap 133
7.7. Payroll cap in a win-maximisation league,large-market club 134
7.8. Payroll cap in a win-maximisation league,small-market club 135
7.9. Luxury tax 136
7.10. G-14 payroll cap in a profit-maximisation league (a) 138
7.11. G-14 payroll cap in a profit-maximisation league (b) 139
7.12. G-14 payroll cap in a win-maximisation league 140