Eco 383: PPT lecture slides,
Sept. 9 – Oct. 2, 2008
• Topics:
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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
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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 profitmaximizing 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 profitmaximizing 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, homerun 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
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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.
Home
games
per
season
Approx. Total
seats
seats per
per
season
stadium
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
League
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.