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Sports Economics
Article in Australian Economic Review · September 2009
DOI: 10.1111/j.1467-8462.2009.00562.x · Source: RePEc
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The Australian Economic Review, vol. 42, no. 3, pp. 377–85
For the Student
Sports Economics
Ross Booth
Department of Economics, Faculty of Business and Economics, Monash University
1. Introduction
When I am asked which sort of economics
I teach, most people express surprise when I
tell them that I specialise in sports economics.
The follow-up question is usually: What do you
do in sports economics? The primary purpose
of this article is to give you, the student, a
sense of some of the topics covered in several Australian courses in sports economics
and the lessons that can be learned by applying economic principles to analyse sport.
Some of these lessons have a wider application
beyond sport.
There are basically two schools of thought
on the value of teaching sports economics.
The first is that, as many students like sport
more than economics, the combination of the
two is likely to be appealing and you will
learn some economics ‘almost as an aside’,
as it were: it is a way of engaging you
with economics, of reinforcing and applying
some key economic concepts. The other school
of thought is that it is an industry worth
studying on its own merits and, as it is datarich, it also can provide a useful test of economic theory. Of course, both views are not
mutually exclusive.
Sports economics typically cuts across several fields of economics, involving microeconomic concepts applied to sport and industrial
organisation, labour economics, and public finance. As examples of applied microeconomics
in sport, I discuss the use of the principle of
comparative advantage in team selection, the
economic welfare implications of several methods of ticket distribution and some sources of
market power of sports teams and the ways in
which they are used.
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Television broadcasting rights revenue has
changed drastically the landscape of sport in
recent decades, with leagues often able to
exercise their market power in their negotiations with television networks. Hence, this
is a topic that has come to be of significant interest to sports economists; here, I will
review briefly some aspects that have been
addressed recently.
A special feature of sports leagues is that
teams in different leagues do not necessarily
have the same objectives. Therefore, an important contribution of sports economics has
been to show how the behaviour of sports
leagues and teams only can be fully understood if we examine the ownership structure of the league and its constituent clubs,
as this will affect whether the objective is
to maximise profit or to maximise some
other objective, such as winning (subject to a
budget constraint).
Different sports are in competition with
other sports and leisure activities, so competitive balance—how even is the competition?—
probably matters to sports leagues. Sports
economics can shed light on which, if any,
of the three major approaches to increasing
competitive balance in a professional team
sports league (locating teams in similarly
sized revenue markets, intervening in the players’ labour market with player drafts and/or
salary caps, and revenue-sharing) are likely to
be successful.
Finally, I will describe how sports economics
can give us some insight into a hotly debated
topic in the wider community: the real economic impact of mega-sports, the construction
of sporting facilities or the presence of a sporting team.
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2. Applied Microeconomics—Comparative
Advantage: Ticket Pricing, Scalping
and Economic Welfare
The one-semester prerequisite in microeconomics provides the foundation for some interesting applications of microeconomics to the
sporting industry and the opportunity to reinforce concepts learnt in the first year.
Sports economics can be a useful way of
illustrating comparative advantage, a concept
that is sometimes baffling to students new to
economics. You might be aware of examples
of disputes between fans about the best position on the field for a particular player. For
example, I can recall some disgruntled supporters of the Western Bulldogs (a team in the
Australian Football League (AFL)) querying
the wisdom of the coach when playing Chris
Grant, arguably the Bulldogs’ best forward at
the time, in defence. The answer to this question might be explained by applying the principle of comparative advantage to team selection. Although Chris Grant clearly might be
both the best forward and the best defender in
the team (an absolute advantage in both positions), Grant will have a position in which his
absolute advantage is greatest. It is better for
the coach to play Grant in the position where
he has a comparative advantage—where his net
contribution of goals scored minus goals saved
for the team is maximised—that is, where his
opportunity cost (in terms of the net goal contribution to the team) is lowest. The coach was
not necessarily a fool, but was simply being
astute in playing Grant where his comparative
advantage lay, even though the coach would not
explain it in those terms. In switching Grant
from playing in the forward line to the back
line, the coach might have been responding to
a change in comparative advantage over time
(such as a change in Grant’s abilities and/or
the development of other small forward options that reduced Grant’s value as a forward
and/or the loss of key tall defenders that increased Grant’s value as a defender). In short,
perhaps it was the coach who was knowledgeable and the supporters who were ignorant of
a basic tenet of economics: the principle of
comparative advantage.
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September 2009
Achieving economic efficiency in the allocation of resources—or maximising economic
welfare by maximising the sum of consumer
and producer surpluses—is a key concept in
economics, and another that many students find
difficult to grasp. The issue of rationing scarce
tickets by either a random ballot or a queuing process can be used to illustrate the loss
of economic welfare to reinforce the concept.
Efficiency requires that tickets are allocated to
those who value them the most. A random ballot will mean that the tickets are not allocated
necessarily to those willing to pay the most,
which therefore will not be efficient. Queuing
also results in a loss of consumer surplus as, for
some fans, the opportunity cost of the amount
of time spent in the queue will not be worth the
wait, even if they are prepared to pay the most.
The question is posed as to why, if these distribution processes result in economic welfare not
being maximised, would the authorities allow
this to happen? Moreover, if ‘scalping’ were to
increase economic efficiency, why would some
authorities be so keen to make it illegal? The
answer, of course, is that economic efficiency
might not be their only objective. The authorities might have another objective: seeking
‘equity’ in the distribution of tickets.
Sports leagues provide good examples of
what can give firms considerable market/
monopoly power; that is, there is no close substitute for the product they offer. This can stem
from fans’ attachment to a particular team (supporting Carlton is not the same as supporting
Collingwood), the geographical location can
give a team some monopoly power (it is easier for a fan in the Western District of Victoria
to follow Geelong than a team in Melbourne)
and often there are significant barriers to entry to a league, such as a licence to be obtained from the league or having a stadium
to play in. This market power that is enjoyed
by sports teams can explain why a profitmaximising team might prefer to play in front
of a less-than-capacity crowd, rather than have
a pricing regime that would fill the stadium.
Sports teams’ market power also allows them
to practise price discrimination. First-degree
price discrimination is difficult to achieve,
but there are examples of second-degree price
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discrimination in sport, where the price charged
depends on the quantity of tickets purchased, a
means by which the team can acquire some of
the consumers’ surplus. Third-degree price discrimination is also common in sport, where different groups of consumers are charged different prices, thereby exploiting the differences in
demand elasticities in order to maximise profit.
In the AFL, for example, there are different
general admission prices for adults, children
aged 6–14 years, and concession holders (such
as pensioners and full-time students).
3. Sports Broadcasting
Sports broadcasting rights have been fundamental to the growth in earnings in the sports industry. As such, it is interesting to examine the
economics of sports broadcasting. It is helpful
first to understand the importance of TV ratings
to TV networks: advertisers are willing to pay
large amounts of money for advertising slots in
very popular sports broadcasts and, as a result,
the TV networks compete with one another to
secure these valuable broadcast rights for millions of dollars. The leagues are typically in
strong bargaining positions because they have
a sporting product that is very popular and for
which there is no close substitute, whilst often
there are several networks bidding against one
another for the broadcast rights. For long the
poor cousin of Australia’s four football codes,
soccer has struggled for free-to-air TV coverage. Despite its recent revival, with the new
A-League in 2005–2006 and the World Cup
qualification in 2006, it still only is broadcast
on pay TV. In circumstances where there is a
TV network bidding for the first time (Nine
and Ten networks for AFL following Seven’s
long reign) or a new league environment (such
as a new league and/or a change of playing
season, as happened in soccer), the costs and
revenues might be quite uncertain and it is possible that a network could end up paying too
much for the media rights and suffer ‘the winner’s curse’. The impact of the big TV revenues
is plain to see in the escalation of salaries for
coaches, players and administrators—the high
demand for labour being derived from the high
demand by TV viewers for sport. The most
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lucrative Australian TV contract was for the
AFL 2007–2011, where the Seven and Ten
networks paid $780 million for 5 years ($156
million per year). A further increase in broadcast rights is one of the key motivations in the
AFL’s push to expand into the Gold Coast and
western Sydney.
In the United States and Europe, the sports
broadcasting landscape is much different and,
therefore, might impact differently on the structure of various sports. For example, in US baseball, most of the TV revenue is from local TV
stations rather than from a shared national contract negotiated by the league on behalf of the
teams. As a result, the media revenues for the
teams in baseball are much more dispersed than
they are in the National Football League in the
United States, which only has a national TV
contract. Thus, this impacts competitive balance in the respective leagues. There are other
issues with big money in sport, such as the
TV coverage intruding on the play, whether the
big money makes it more difficult for clubs to
manage the behaviour of some players, whether
the big money overly encourages players to invest in sporting careers (only a few succeed but
many fail) or whether the big money encourages risk-taking behaviour that can result in serious long-term injury. There is no doubt, however, that the big money in sport has resulted
in more sport being broadcast on TV, while a
more professional approach by athletes and administrators has resulted in a ‘better’ quality
of play, which is appreciated by most, if not
all, fans.
4. Behaviour of Sports Leagues
The sporting industry is an excellent one to
contrast the different motivations that different
types of firms can possess. In the Australian
context, there are many sporting organisations
that do not pursue profit maximisation, be they
either private or public not-for-profit sports organisations. Examples of public not-for-profit
organisations in Australia would be the Australian Sports Commission and the Australian
Institute of Sport. Examples of private notfor-profit sports organisations are the Victorian Amateur Football Association (VAFA) and
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many of its member clubs, such as the Monash
Blues Football Club. The key point here is that
the behaviour of these sporting organisations
cannot be explained in terms of profit maximisation. This provides a point of departure for
the analysis of some Australian sports leagues.
For example, the A-League in soccer and the
National Basketball League (NBL) might be
analysed in terms of profit-maximisation principles dominating the incentives of the privately
owned teams (and hence leagues), but it would
not make sense to try to analyse the behaviour
of the AFL clubs in terms of profit maximisation, given that the teams are member-owned
and essentially operate to win-maximise (subject to a budget constraint). Indeed, we would
expect the behaviour of the AFL, given the nature of the ownership of the teams and their
management by an independent commission,
to differ from the NBL and the A-League. The
National Rugby League (NRL) is an interesting mix, with some of the teams being privately
owned and some of the teams being more like
member-owned AFL clubs. Another big difference is that the NRL is owned partly by the
private sector (News Limited) and partly by
the rugby league industry through Australian
Rugby League Limited.
By way of example, simple two-team league
models, based on Fort and Quirk (1995), are a
very effective teaching tool that can be used to
demonstrate that the distribution of talent between teams will be different just because of a
difference in team ownership. The basic point
is that there is a limit to the amount of talent
that a profit-maximising team owner will hire.
But, in the same position, a win-maximising
owner would be willing to sacrifice profit and
instead hire more talent. In terms of the location of teams, it is much easier for a private
owner of a team to move a team from one city
to another than it is for a member-owned team
to agree to move. The profit-maximising private owner primarily will consider whether the
move will increase profits, but member-owners
do not get a financial dividend and typically
will be reluctant to have their team move because they will no longer be able to watch their
own team’s home games ‘live’. Merger is another option, but is viewed by many supporters
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as a fate worse than death. Thus, leagues comprised of privately owned, profit-maximising
teams are more likely to see changes in
market location by the relocation/merger of
teams than are leagues comprised of memberowned, win-maximising clubs. For these latter leagues, judicious expansion, as currently
planned by the AFL, is most likely to be the
best strategy.
5. Competitive Balance in Professional
Sports Leagues in Australia
It is agreed generally by most sports economists
that competitive balance matters. The more uncertain the outcome of any single game, the
more even the home-and-away season and the
more uncertain who will be the champion/
premier team, the more likely that fans will attend matches or watch on TV. However, being
contrary, one could point to the English Premier
League as one of the world’s most popular and
successful competitions, but in which only a
few (of the same) teams at the start of each
season are thought to have any real chance of
taking out the championship.
A large part of many sports economics
courses in Australia is an analytical comparison of different Australian sports leagues.
Often, this involves a focus on the effectiveness
of labour market devices and revenue-sharing
rules in increasing the competitive balance in
leagues comprised of win-maximising clubs
(such as in the AFL), as compared with
profit-maximising teams in other sports leagues
in Australia (such as the NBL and the ALeague) and in sports leagues in Europe and
North America.
5.1 Increasing Competitive Balance
Assuming that competitive balance is important to a league, what are the policies that a
league can adopt to try to increase competitive balance, and will they work? What does
economic theory say about their likely success, and is this supported by the empirical
evidence?
There are three major approaches used by
professional sports leagues to try to increase
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competitive balance. They all are aimed, one
way or another, at trying to achieve similar
amounts of player talent at all teams so that the
league will have a higher level of competitive
balance than it would otherwise.
The first approach is to try to locate the teams
in markets of approximately equal size. This
should mean that the teams are able to generate approximately the same amounts of revenue
from the gate and membership and so be able
to afford approximately the same amount of
player talent. This can be achieved by careful
expansion and contraction of the league. Some
leagues use an automatic promotion and relegation system, such as in the English Premier
League and in the VAFA.
The second approach is to use labour market devices, such as a player draft and/or team
salary cap, to try to achieve approximately
equal amounts of player talent at each team.
In the case of the player draft, the teams usually get access to new talent in the reverse order to which they finished on the ladder at the
end of the home-and-away premiership season.
The team salary cap imposes a maximum aggregate amount that a club can pay its list/roster
of players.
The third approach is to use revenue-sharing
rules to try to lessen the differences in the clubs’
revenues and, therefore, the differences in the
amount of talent that the clubs can afford. Note
that revenue-sharing also might be important
for clubs’ financial stability as, without it, some
clubs might not be financially sustainable.
Many authors have spent a considerable
amount of time trying to explain different levels
of competitive balance in different sports, both
in Australia and overseas. There is an especially large amount of literature on the impact
of intervention in player labour markets and of
the effect of revenue-sharing rules in different
institutional settings. In this sense, the analysis
of some Australian sporting leagues requires a
different set of assumptions to those used overseas and the outcomes of the effects of different policies will be different, depending on different institutional arrangements—notably, the
ownership of clubs and the differing objectives
that follow—typically, profit maximisation for
privately owned clubs and win-maximisation
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(subject to a budget constraint) for memberowned or industry-owned clubs.
5.2 Case Study: Player Drafts and Team
Salary Caps
Economic literature in the United States concludes that player drafts do not work. The socalled ‘Invariance Principle’ is an application
of the Coase Theorem to sport: that is, the allocation of resources will be invariant to the
ownership of property rights. In other words,
the (final) distribution of player talent will be
unaltered by a player draft as the talent will
move to where its value is highest (as under
free agency/free market) through either the cash
sales of (net) player talent or the trade of (net)
player talent.
But, the Invariance Principle does not always
hold! In theoretical models, it can be shown that
whether or not the Invariance Principle works
depends on the objectives of the teams, the
wage levels relative to the revenues, whether
sales or trades are allowed, and whether a draft
is combined with a team salary cap. Suppose
the bottom team drafts the best player. As an
example, a profit-maximising owner would be
willing to sell that player to another team owner
in a larger market for more than the small market owner could earn from that player in the
small market. But, if the owner were a winmaximiser, then subject to meeting the budget
constraint, the win-maximising owner would
have no interest in selling or trading the best
player to another team as the objective is to winmaximise, not to profit-maximise. Team salary
caps are another device often used to increase
competitive balance, but this device has the obvious problem of enforcement. If a team salary
cap system is difficult to enforce, then at least
a player draft system provides some restriction to the accumulation of talent at wealthy
clubs. One of the interesting issues in the winmaximising case is whether there is a need for
a minimum team salary, as usually is argued
in the profit-maximising case. Prima facie, if
a club is a win-maximiser and has the revenue
to pay the full amount of the team salary cap,
then a minimum team salary would not be necessary. Indeed, its imposition by a league in
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such circumstances might only force the club
into a loss-making situation. A burning issue
at present is whether some form of limited free
agency would affect adversely competitive balance. If a team salary cap exists and is enforced,
there should be no serious adverse effect of
its introduction.
6. Economic Impact of Sports Events,
Facilities and Teams
A contentious issue in many cities is whether
a government can justify subsidising either a
sporting event, such as the Olympic Games
or the Formula 1 (F1) Grand Prix, or a
sporting team, either directly or indirectly by
way of building a new stadium, such as the
‘rectangular stadium’ for both the Melbourne
Storm NRL team and the Melbourne Victory
A-League team.
The usual justification put forward by governments for any subsidy is that the ‘event’
generates a significant economic impact. But,
studies by economists usually conclude that
the ‘net’ economic impact of such events is
very small and usually are exaggerated by
the authorities.
The reason for a small net economic impact
is that there are usually substitution effects.
First, there is the opportunity cost of the government funding of the event. What would the
economic impact have been if the funds had
been spent on some other public activity, such
as a school, hospital or on transport infrastructure? For the private sector, consumer spending
on the Grand Prix simply might be a substitute for some other consumption spending in
the city. Second, there also might be leakages:
many Melburnians might flee the city on the
weekend of the F1 Grand Prix, thereby offsetting the positive impact of tourism, and the licence fee charged by overseas F1 boss, Bernie
Ecclestone, to stage the Grand Prix does not
impact the Victorian economy.
However, there could be beneficial ‘qualityof-life’ issues associated with such events, a
consumer surplus over and above the ticket
price that contributes to economic welfare. Positive externalities and public good aspects of
some events—non-rival and non-excludable—
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might mean that the private sector is reluctant
to finance such events because it is unable to
capture all the benefits, such as the ‘feel good’
and ‘common bond’ factors provided by the
event. For example, even if you are not a F1
fan, you might feel ‘proud’ that Melbourne is
able to attract such an event and/or that the
race provides an opportunity to ‘connect’ with
some people with whom you might not otherwise. The problem is that these benefits are
not easy to measure. Moreover, in the case
of the producer surplus, most of it accrues to
the F1 owner and does not contribute to economic welfare in Victoria. In addition, there
are significant negative externalities, in terms
of noise, traffic and sporting disruption leading
up to, during and after the event. The movement of the starting time to twilight might
attract more TV viewers overseas but that is
likely to be of benefit mostly to the owners
of the F1 Grand Prix through higher broadcast
rights revenue.
7. Concluding Remarks
Many students love sport; thus, sports economics provides a wonderful opportunity to
reinforce and apply some key economic concepts learnt in first-year undergraduate microeconomics to the sports industry. Key concepts
can be used to analyse and understand the role
that economic incentives play in determining
the behaviour of controlling bodies, leagues,
clubs, players, fans, sponsors, the media and
government. This economic analysis then can
be applied to the development of appropriate
policies to address economic problems in the
sports industry in Australia.
8. Notes on Resources
Although there have been many books written
on the economics of sports, only in recent years
have any suitable broadly based, analytical
textbooks become available for use in the classroom for students with a one-semester introduction to microeconomics. The two most
suitable textbooks are from the United States:
The Economics of Sport by Leeds and von
Allmen, first published in 2002, and Sports
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Economics by Fort, first published in 2003.
Sandy, Sloane and Rosentraub (2004) take
a less analytical view in their textbook,
The Economics of Sport: An International
Perspective, as do Eschenfelder and Li (2007)
in Economics of Sport. The English textbook
by Downward and Dawson (2000), The Economics of Professional Team Sports, is more
technically advanced and is designed to cater
for third-year undergraduates, whilst The Economic Theory of Professional Team Sports: An
Analytical Treatment, by Késenne (2007), also
is more suited to advanced undergraduate or
postgraduate students of sports economics. For
Australian sports economics classes, the UScentric nature of the textbooks by Leeds and
von Allmen and Fort can be problematic, as
much of the detail is not of interest to Australian students. Thus, there is a need to provide
additional reference material on Australian and
non-US sports. Moreover, much of the US textbook analysis needs to be adapted to the Australian institutional setting. This is not without
challenge, but it can make for some interesting
differences between some sports in Australia
and the rest of the world.
To the best of my knowledge, courses in
sports economics can be found at Monash,
Deakin, La Trobe, Adelaide, Griffith and
Queensland universities. However, the number
of students taking such courses is still too few to
make ‘economic’ the writing of an Australianbased text on sports economics; hence, the reliance on US texts.
Despite the absence of an Australian sports
economics textbook, the judicious use of an
overseas sports economics text, combined with
articles by Australian authors, can produce a
course that, given the subject matter, will excite some students, whilst at the same time
make economics ‘come alive’ for others. Other
contributions to the sports economics literature that might be included in a course in
sports economics could be from Australian authors, such as Jeff Borland, Braham Dabscheck,
Liam Lenten, Robert Macdonald, Mark Stewart and Bob Stewart. A list of some key journals
and other key references, particularly from an
Australian viewpoint, follows. These are not
exhaustive and a search of other books and
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journals will bring forth much material that is
sure to excite students of sports economics.
May 2009
Key Journals
European Sport Management Quarterly
International Journal of Sport Finance
International Journal of Sport Management
Journal of Sport Management
Journal of Sports Economics
Sport Management Review
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salary cap and player draft measure up?’,
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