Monopoly and Antitrust
Inefficiency of Monopoly

Competitive Outcome



$
P = PC = MC
Q = QC
PM
Monopoly Outcome


CS
PS
Welfare
DWL
B
PM > PC = MC
Q = Q M < QC
Comp
A
C
PC
A
--
B
A+B+C
A+B
--
C
D
MR
Monop
A+B+C
MC
QM
QC
quantity
Rent-seeking may add to DWL
Price Discrimination
Pricing strategy that attempts to capture
more consumer surplus
 Types





1st Degree:
2nd Degree:
3rd Degree:
Charge each consumer the highest price they’re WTP
Quantity discounts
Charge prices based on price elasticities
Necessary Conditions



Market power
Segment the market
Prevent resale
First Degree Price Discrimination
CS
PM
PS
DWL
MC
D
MR
QM

QC
Monopolist is able to capture CS
…and eliminate DWL by selling until P = MC
Second Degree Price Discrimination


Offering discounts
based on the number
of games attended
PM
Offering discounts
based on the number
of people in your
group
MC
D
MR
QM
QC
Third Degree Price Discrimination

Segment market into groups with differing
elasticities



Adults
Senior citizens
Profit max rule: MRA = MRS = MC

MRA = PA[1 – 1/EA]
Example:
EA = 3
ES = 5
MC = 8
PA = $12
PS = $10
Charge higher price to group
with less elastic demand
Personal Seat Licenses


People pay for the right to buy season tickets
Two-part tariff: entrance fee + per unit charge


Per unit price = MC
Entrance fee = resulting CS
PM
MC
D
MR
QM
QC
Monopsony

Monopoly on the buyer side


Labor Market and the Reserve Clause
BBC and English Soccer
Barriers to Entry

Broadcast contracts



NFL spreads contracts out over CBS, Fox, NBC, ESPN
USFL
Pre-emptive franchise location

AFL vs NFL in Dallas and Minneapolis
Antitrust Law

Sherman Act (1890)

Section 1: prohibits cartels (or “trusts”)


Every contract, combination in the form of a trust or
otherwise, or conspiracy, in restraint of trade or commerce
among the several states, or with foreign nations is hereby
declared to be illegal.
Section 2: attacks monopoly itself

Every person who shall monopolize or attempt to
monopolize any part of the trade or conspire with any other
person or persons to monopolize any part of the trade or
commerce among the several states or with foreign
nations, shall be deemed guilty of a misdemeanor…
Federal Baseball v NL (1922)

Federal League
(1914-1915)










Brooklyn
Chicago
Pittsburgh
St. Louis
Baltimore
Buffalo
Indianapolis
Kansas City

National League
(1876 – present)








Boston
Brooklyn
Chicago
Cincinnati
New York
Philadelphia
Pittsburgh
St. Louis

American League
(1901 – present)








Boston
Chicago
Cleveland
Detroit
New York
Philadelphia
St. Louis
Washington
US Supreme Court ruled: “baseball was not interstate commerce”
Implication: Baseball is exempt from antitrust laws
 Toolson (1953)
 Flood (1972)
Contrast with NFL

Radovich v NFL (1957)



Blacklisted for playing in AAFC
NFL lost at Supreme Court
 no legal monopoly power or monopsony power
Tried to retain monopsony


“Gentleman’s Agreement” until early 1960s
“Rozelle Rule” imposed when that broke down



Successful antitrust suit in 1970s by John Mackey
Players’ Association negotiated deal that allowed Rule to
continue
Tried to establish monopoly


Got limited exemptions for TV and merger with AFL
No games on Friday (HS) and Saturday (NCAA)
Impact of Baseball’s Exemption

MLB has had few challengers



Federal League was last major rival
Other leagues have had regular challenges
Baseball has been stable



Montreal Expos moved to Washington – 2005
Washington Senators to Texas – 1972
Blocked attempts by Giants, White Sox, Pirates
NFL Has Been Far Less Stable

1980: Oakland Raiders sue NFL




Challenged NFL’s right to block move to LA
Brought antitrust suit
Jury – drawn from LA! – agrees
NFL cannot force other teams to stay put


Moves from Baltimore, Cleveland, LA (2X),
Houston, St. Louis
Did dissuade


New England from moving to Hartford, CT
Seattle from moving to LA
Cartel Theory

Game Theory
“Prisoner’s Dilemma”
NY Yankees
High Price Low Price
Dominant Strategy?
 Each team would
set Low Price
NY
Mets
High
Price
$500k
$700k
$500k
$200k
Low
Price
$200k
$300k
$700k
$300k
Nash Equilibrium
Competitive Outcome: (Low, Low)
Cooperative Outcome: (High, High)
Unstable due to incentive to cheat
NCAA: An Incidental Cartel

18 football-related deaths in 1905



President Roosevelt threatened to take action
NCAA formed to control “on the field” behavior
The Sanity Code (1946)

Drew up rules for “off the field” behavior



Limits to financial “aid” to athletes
“Seven Sinners” refuse
NCAA fails to get 2/3 majority needed to expel
 NCAA in tatters – cannot enforce own rules
New Life for the NCAA

“Point shaving” scandal breaks out in 1952


CCNY ruined as national power
Kentucky implicated





UK Coach – Adolph Rupp – likely involved as well
Also found illegal payments to players by Rupp
NCAA failed to respond
Embarrassed SEC suspends UK
NCAA establishes “Death Penalty”


Boycott by other members
UK is suspended for one season
SMU football 1987-88
SW LA basketball 1973-75
Morehouse soccer 2003
MacMurray tennis 2004-07
Applying the NCAA’s Cartel Power

Monopsony Power



Drive down price of labor
Problem: Schools cheat
Monopoly Power

Early TV contract


Limited teams to 3 TV games every 2 years
CFA lobbied for more TV



NCAA created I-A and I-AA; reworked revenue sharing
CFA filed Antitrust lawsuit against NCAA (1984)
Now many broadcasts – but less revenue!
Competitive Balance
The Value of Uncertainty of Outcome
Turnover in Champions?

1949









Yankees beat Dodgers
Yankees beat Giants
1963


Yankees beat Reds
1962


Pirates beat Yankees
1961

Dodgers beat Yankees
1956


Dodgers* beat White Sox
1960

Giants beat Indians
1955


Yankees beat Braves
1959

Yankees beat Dodgers
1954


Braves beat Yankees
1958

Yankees beat Dodgers
1953


Yankees beat Giants
1952
1957

Yankees beat Phils
1951


Yankees beat Dodgers
1950


Dodgers* beat Yankees
1964

Cardinals beat Yankees
Is Baseball Unique?

In 1960s only 2 NBA champions

Since 1980 only 9 NBA champions
Celtics Champions 1959-66, 1968-69
Lakers: 1980; 1982; 1985; 1987-1988; 2000-2002; 2009-2010
Bulls: 1990-1993; 1996-1998
Spurs: 1999; 2003; 2005; 2007
Celtics: 1981; 1984; 1986; 2008
Champs since 1980
Pistons: 1988-1989; 2004
MLB: 20
Rockets: 1994-1995
NFL: 15
NHL: 15
Heat: 2006
NBA: 9
Mavs: 2011
Sixers: 1983
Leagues Want Competitive Balance

Stimulates interest



Attendance
TV Ratings
Team dynasties?




$
Are Yankees bad for baseball?
“law of diminishing returns”
Market size effects
What is competitive balance?


Even competition in each game?
Turnover among champions?
MC
MRL
MRS
WS
WL
Winning
percentage
Measuring Competitive Balance

Between Season Variation

Hirfindahl-Hirschman Index (HHI)


HHI quantifies turnover in champions
Also used to measure monopoly power
 ci 
HHI    
i  T 
N

2
Large HHI means
few teams dominate
Where: ci=#championships by team i;
T=#Years;
N=#Teams
What is the HHI for the NBA since 1987?

Championships








Chi: 6
LA: 7
Det: 3
SA: 4
Hou: 2
Miami: 1
Boston: 1
Dallas: 1
N =25 years
HHI =
 6  2  7  2  3  2  4  2  2  2  1  2  1  2  1  2 
                       
 25   25   25   25   25   25   25   25  
HHI = 0.187
Baseball and the HHI

1950s
AL Champions



Yankees (8); Indians;
White Sox
 HHI= .660

NL Champions

Dodgers (5); Giants
(2); Braves (2); Phillies
 HHI= .340
2000s
AL Champions

Yankees (4); Red Sox
(2); Angels; Tigers;
White Sox; Rays
 HHI=.240
NL Champions

Cardinal (2); Phillies (2);
Marlins; Diamondbacks;
Giants; Astros; Rockies;
Mets
 HHI= .140
Competitive Balance

Within Season Variation


“evenness of competition”
standard deviation


average distance that observation lies from mean
Actual: σW =
 (WP .500)
2
T = number of teams
T
.500
G

Ideal:
σI =

Ratio:
R = σW / σI
G = number of games
R > 1 indicates imbalance
Dispersion of Winning Percentage
for 2011 or 2010-11 Season
Standard Deviation
League
Actual
Ideal
Ratio
NBA
.158
.056
2.82
EPL
.108
.081
1.33
MLB
.069
.039
1.77
NFL
.201
.125
1.61
NHL
.080
.056
1.43
Attempts to Promote Competitive Balance

Revenue Sharing


Indirect method of redistributing players
Two conditions:


Teams must benefit financially from improving performance
Players must be able to move among teams
Example: 60-40 Gate split
NY: RG = $36m and C = $28.8  πNY = $7.2m
KC: RG = $18m and C = $16
 πKC = $2.0m
πNY = 0.6(36) + 0.4(18) – 28.8 = $0
πKC = 0.6(18) + 0.4(36) – 16 = $9.2m
Attempts to Promote Competitive Balance

Salary Caps
Cap
Floor
Notes
NFL (2011-12)
$120m
$108m
Cap = % DGR
NBA (2011-12)
$58.04m
$49.3m
Player max 25%, 30%, 35% of cap
NHL (2011-12)
$64.3m
$48.3m
Player max $12.86m
Yankees: (212.75-178)(.40) = $13.9m

Luxury Taxes
Soft caps:
•“Larry Bird exemption”
•Injuries/Bonuses
Notes
MLB (2011)
Flat rate on amount over
threshold
50% player benefits
50% IGF + dev. countries
NBA (2011-12)
Progressive tax on
amount above threshold
$1.5 ($5m or less)
$3.25 ($15-25m over)
50% goes to non-violators
MLB Luxury Tax (2003-2011)
$40
Luxury Tax Paid (in millions)
$35
$30
$25
$20
$15
$10
$5
$0
2003
2004
2005
Yankees
2006
Red Sox
2007
2008
Angels
2009
Tigers
2010
2011
“Change is needed and that is reflected by the fact
that over a billion dollars has been paid to seven
chronically uncompetitive teams, five of whom have
had baseball’s highest operating profits,” the Globe
quoted Henry as saying. “Who, except these teams,
can think this is a good idea?”
John Henry
Owner, Boston Red Sox
December 2009
Attempts to Promote Competitive Balance

Reverse Order Drafts

Schedule Adjustments

Promotion and relegation
Incentive to lose
late in season?
Impact of Strategies

What is correlation between payroll and winning?
Winning
Percent
?
Payroll
Correlation coefficient = +1.0 ?
NFL 2009
1.00
0.90
Winning Percentage
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
$50.00
$70.00
$90.00
$110.00
$130.00
$150.00
Payroll (Millions)
Impact of Strategies


Correlation between payroll and winning: 2010-11
Sport
Correlation
Coefficient
NFL
.317
MLB
.410
NBA
.571
NHL
.734
Coase Theorem

Initial allocation of player rights does not affect
distribution of talent
Simon Rottenberg’s “Invariance Proposition”
Baseball’s Reserve Clause


Reserve Clause: players are the property
of the team that drafted them
Free Agency: players can negotiate with
any team
New York
Texas
Revenue = $20m
Revenue = $40m
Salary = $1m
Salary = $1.1m
Reserve Clause
Revenue = $20m
Revenue = $40m
Salary = $21m
Free Agency
Impact of Strategies

Low correlation between payroll and winning

Coase Theorem

Initial allocation of player rights does not affect
distribution of talent


Reserve clause is no different than free agency
Reverse order draft should have no long-term effect
Public Finance
The Market for Sports
Franchises
Golden Age of Baseball: 1903-1952
1952 American League: Team Standings
1952 National League: Team Standings
Wins
Losses
WP
GB
Brooklyn Dodgers
96
57
.627
0
2
New York Giants
92
62
.597
4½
.526
14
St. Louis Cardinals
88
66
.571
8½
75
.513
16
Philadelphia Phillies
87
67
.565
9½
78
76
.506
17
Chicago Cubs
77
77
.500
19½
Boston Red Sox
76
78
.494
19
Cincinnati Reds
69
85
.448
27½
St. Louis Browns
64
90
.416
31
Boston Braves
64
89
.418
32
Detroit Tigers
50
104
.325
45
Pittsburgh Pirates
42
112
.273
54½
Team
Wins
Losses
WP
GB
New York Yankees
95
59
.617
0
Cleveland Indians
93
61
.604
Chicago White Sox
81
73
Philadelphia Athletics
79
Washington Senators



Team
No teams entered, exited, or changed cities
Construction of “old” parks
Change:





Boston Braves  Milwaukee (1953)
St. Louis Browns  Baltimore Orioles (1954)
Philadelphia A’s  Kansas City (1955)
Brooklyn Dodgers  Los Angeles (1958)
NY Giants  San Francisco (1958)
Shibe Park (Phil)
Fenway Park (Bos)
Forbes Field (Pit)
Comiskey Park (Chi)
Navin Field (Det)
Wrigley Field (Chi)
Yankee Stadium (NYY)
Ebbets Field (Brk)
Dodger Blues?

Before the move



Most profitable team in MLB
Alone accounted for 47% of NL’s profits
Key Lessons


No city “safe”
Starts involvement of cities


Before 1950 – only 1 stadium publicly built
By 1980 – almost all were
What Power do Teams Have?
Monopoly Power
 All-or-Nothing Demand Curve
 Winner’s Curse

Monopoly Power: Limit Output

Leagues slow to expand

By 1953: U.S. demographics had changed


Baseball & Football moved rather than expand


NFL did absorb 5 teams from rival leagues
MLB expanded (1961-62)

Prevent new league (Continental League)



LA had no baseball teams – St. Louis had 2
Minnesota, Houston, NY Mets, LA Angels,
Avert Congressional intervention (Senators)
NFL expansion tied to AFL


First expanded (1960) to try to kill it
Next expanded (1966) to merge with it
All-or-Nothing Demand Curve

Firms generally can’t set both
price and quantity

Standard monopoly pricing
sets price at P1 and allows
buyers to buy Q1



Consumers earn surplus
Firm earns profit
$
A
Surplus
P1
Loss
Teams confront cities with an
all-or-nothing choice: Point A


How far can you push
consumers?
Consumers willing to absorb
loss as long as net gain in CS
is positive
MC
MR
Q1
Q2
D
Games
Paper Clip Auction






Guess how many clips are in the cup ($1 for closest guess)
Each clip is worth $0.03
Write down your bid (and name) on a piece of
paper
Average bid usually lower than actual money value of clips
Winning bid will generally exceed money value
Why did winner overbid?




Most bidders are risk averse
Not all bidders have same expectations
Only most optimistic bidder wins the prize
Does winning the auction become the goal itself?
Winner’s Curse

Buyer overbids due to uncertainty over value of
prize

B  B  B
V = 1 r (1 r ) (1 r )

Who wins?
1

2
3
 B
(1 r )
T
T
V = bidder’s value
Bt = benefits of prize
r = interest rate
Winner expects greatest payoff – could be:




3
2
Best suited to exploit opportunity
Most optimistic
Most intent on winning per se
Olympic “competition” for host site
Case in Point: The Olympics

1976 Montreal: C$1.6 billion


1984 LA








Debt ~C$1.0 billion paid over 30 years
Only city to bid on 1984 Summer Olympics
$200 million profit!
2004
2008
2010
2012
2014
2016
Athens: $15 billion
Beijing: $42 billion
Vancouver: $9.2 billion
London
Sochi
Rio de Janeiro
Bid budget
Cost of 2010 Vancouver Winter Olympics
$34,000,000
Security
$900,000,000
Sea-to-Sky Highway expansion
$1,980,000,000
Canada Line construction
$1,900,000,000
Venue construction
$580,000,000
Cypress Bowl ski facility upgrade
$16,600,000
Athlete’s Village construction
$1,080,000,000
Opening ceremonies
$58,500,000
VANOC operating budget
$1,750,000,000
Hillcrest/Nat Baily Stadium Park
$40,000,000
Vancouver Convention Centre expansion
$883,000,000
Event tickets for provincial MLAs and cabinet
ministers
$1,000,000
TOTAL
$9,223,100,000
http://this.org/magazine/2010/01/12/alternative-budget-olympics-vancouver-2010/
Olympic Broadcast Rights
1800
1706
1600
1493
Millions of US $
1400
1332
1200
1000
900
898
833
800
736
636
600
513
403
400
287
200
88
21
0
103
325
353
292
Stadium Economics

What’s true about each
facility in Era #1?



In Era #2?



Name of owner/builder
“park” or “field”
Reflects source of
funding
Municipally built
In Era #3?

Naming rights


$2m per year
What do firms get for
naming rights?
What’s in a Name?
Era #1
Era #2
Era #3
Forbes Field
Cleveland
Municipal
Stadium
Network
Associates Field
Wrigley Field
Atlanta-Fulton
County Stadium
Continental
Airlines Arena
Shibe Park
Milwaukee
County Stadium
Ericsson Stadium
Crosley Field
Tampa Stadium
Minute Maid Field
Ebbets Field
OaklandAlameda County
Stadium
US Cellular Field
Size Matters

Saw that baseball teams seldom sell out



Why?
Optimal size for baseball stadium 30-40,000
Football has larger optimal size


Used to rent space from baseball teams in off-season
Municipal stadia built when football took off
Shape Matters, Too

“Old School”

Municipal “Cookie Cutters”

Retro Look
Metrodome
Minneapolis, MN
Location: The Urban Ballpark

Retro location?
Old ballparks not built downtown
> Yankee Stadium built in “Goatville”
> Shibe Park on site of Hospital for Contagious Diseases

Stadia often not even in home city

Arlington Cowboys vs East Rutherford Giants
Location:Cars and Costs

Fans have moved to suburbs




Urban neighborhoods decay
Need place to leave cars
Result: “a sea of asphalt”
Stadium is “space intensive”


Creates problems for a downtown location
Space costs money
The Rent Gradient

Center City v. Outskirts


Why are NYC hotels taller
than in Zanesville, OH?
Cost of land
Rent gradient
Cost of land falls as move
from center of town

Height of buildings mimics
cost curve
Distance from city center

Two of the perennially top-ranked college hockey teams in the
country are Harvard and Yale. While tending to be alike in their
national rankings, they differ greatly in their playing style. Harvard
consistently opts for fast but small players while Yale fields slower
but brawnier skaters. This difference in playing styles has persisted
over the past several decades despite coaching changes and
turnover in player personnel. What accounts for the difference?
Explain in terms of economic analysis.
Yale Ingalls Rink
New Haven, CT
204 x 87 ft
72.8” and 197 lbs.
200 x 85 ft
70.4” and 184 lbs.
Public Finance II
What’s in it for the cities?
Political Rhetoric

Having a football team back in Houston will bring thousands of
visitors to our city, and it will generate millions of dollars in our
city. I’m excited about our new stadium with a retractable roof.
And we’re also very happy about getting a Super Bowl, and as you
know that’s very important economically to the city. It will
generate probably $300 or $400 million into our economy. But
more importantly, it focuses attention on a city that people do not
know enough about.
Houston Mayor Lee Brown, 1999.

Without the Chiefs and the Royals, Kansas City would be nothing
but another Wichita… or Des Moines… or Omaha.”
Kansas City mayor Emanuel Cleaver, 1997.
What is the role of Government?





Set and enforce rules of behavior
Macroeconomic stabilization
Deal with monopoly
Provide public goods
Deal with externalities
What are Externalities?


Costs/Benefits imposed on non-consenting people
Spillover effects

Negative Externalities



What you do hurts me
You don’t compensate me
Positive Externalities


What you do helps me
I don’t compensate you
Impact of Negative Externality


Free Market: P1, Q1
Games cause congestion
 imposes cost on others
 shifts supply curve left

Optimal Outcome: P2, Q2

Free market “overproduces”
 causes DWL

What can government do?
Ssocial
$
Sprivate
P2
External cost
P1
D1
Q2 Q1
Games
Impact of Positive Externality

Free Market: P1, Q1

Games generate “winning attitude”
 generates benefits for others
 “social” demand is above “private”
demand


Optimal Outcome: P2, Q2
$
External benefit
P2
P1
Dsocial
Free market “underproduces”
 causes DWL

What can government do?
S1
Dprivate
Q1 Q2
Games
Subsidizing Team Losses

Standard monopoly
with high fixed costs
may suffer losses
$
ATC


Government may
offer subsidies to
keep team in city
PM
ATC
MC
Subsidy =
MR
QM
D
Quantity
Can a Stadium be a Profit Center for a City?

Revenues



Rental Payments
Share of Concessions, Parking, Luxury Boxes, etc.
Costs




Standard operating costs (labor, utilities, etc)
Depreciation (facility will eventually be worthless)
Opportunity Cost: could have invested $$ elsewhere
Foregone tax revenue – city can’t pay itself
Examples of Stadia Rent



Baltimore Ravens pay no rent.
Chicago White Sox pay $1 per year
Cleveland Indians pay rent on a sliding scale:
$1.25 per ticket if
$1.00 per ticket if
$0.00 per ticket if





A > 2.5 million
1.85 < A < 2.5 million
A < 1.85 million
Cleveland Cavaliers pay rent on same sliding scale
as Indians
San Diego Chargers


City receives 10% of ticket revenue
City reimburses team 100% of value of unsold tickets



Ex: $50 ticket
Chargers receive $27 [=(50)(.90)(.60)] if sell ticket
Chargers receive $50 if don’t sell ticket
Calculating the Implicit Subsidy
S = Operating Revenue – [Depreciation + Opp Cost of Funds + Foregone Taxes]
Estimated Annual Subsidies
($Thousands)
Facility
NOR
(1)
DEP
(2)
OCF
(3)
FPT
(4)
Subsidy
(1)-(2+3+4)
150
153
155
31
189
Atlanta Fulton County Stadium
(Average)
–1,478
2160
3,243
649
7,530
New Orleans’ Superdome
(Maximum)
–7,922
8,572
21,400
4,260
42,174
Green Bay’s Lambeau Field
(Minimum)
Source: Quirk and Fort (1992).
Note:
NOR = Net Operating Revenue
DEP = Depreciation
OCF = Opportunity Cost of Funds
FPT = Forgone Property Taxes
Measuring the Value of a Franchise
Economic Impact Studies
 Cost/Benefit Studies

Measuring the Value of a Franchise
“Professional sports are an insignificant part of a large
city’s economy. For example, in Chicago, the entire
professional sports industry accounts for .08 percent of
Chicago’s personal income. To put the matter in a
somewhat different perspective, the sales revenue of
Fruit of the Loom exceeds that for all of Major League
Baseball (MLB), while the sales revenue for Sears is
about thirty times larger than that of all MLB revenues.”
Robert Baade
Sports Economist
Lake Forest College
What Do the Sabres Bring to Buffalo?

2003 estimates by NY State Comptroller:





$31M in gate receipts
$8.6 M in concessions revenue
$4 M in advertising and broadcast revenue
Subtotal: $43.6 million
Total Impact = $65 million = ($43.6) x (1.5)
Multiplier
Multiplier Effects

Initial spending generates ripple effects
DY= DX + DX*MPC + (DX*MPC)*MPC+…
DY= DX*(1+MPC+MPC2+MPC3+MPC4+…)
 1 

 1  MPC 
Where:
X = initial spending
Y = aggregate income
MPC = ΔC / Δ Y
DY= DX 

Simple multiplier
Example
DX = $35
MPC = 0.80
Δ Y = 35(5) = $175
The higher the MPC, the higher the multiplier.
Modified Multiplier
Mlocal
1
=
1  MPC * f
Example:
MPC = 0.80
f = 0.5
Mlocal = 1.67
Where f = fraction of spending that is local
Benefits of a Franchise

Direct Benefits


Higher APC?
Net exports?



(New Spending)
Players live elsewhere?
Substitution effects?
Indirect Benefits

Positive externalities?


Big league image
Sense of identity
MLB revenues < Fruit of the Loom
Single team worth less than
sizable department store
Chicago has 5 major league
franchises
Sports account for .08% of
personal income
Buffalo Sabres: $65 million
Marietta College: $40 million
And now, YOUR Columbus Blue Jackets!
Costs of a Franchise

Direct Costs





Construction
Operating
Depreciation
Opportunity cost of funds
Indirect Costs

Negative externalities



Crime
Congestion
Noise
Such costs may already have been
internalized for older stadiums
Teams and Jobs

Arizona Diamondbacks




340 full-time jobs
Cost to city: $240 Million
$706,000 per job
Baltimore Ravens

[Deloitte and Touche]
[MD Dept of B&E Development]
Cost per job: $127,000 - $331,000
Baade and Dye (1990)


“Impact of Stadiums and Professional Sports on
Metropolitan Area Development”
Uses sample of 30 cities 1958-87
Dyit-Dyit-1 = b0 + b1*NTit + b2*NSit+…+ eit
Growth in per
capita income

Number of
Teams
Number of
Stadiums
Neither coefficient (b1 or b2) statistically significant
Other Studies

Rappoport and Wilkerson (2001) looks at Quality of Life



Direct approach: survey residents
Indirect approach: examine housing values
Coates and Humphreys (2003) look within cities

Find higher property values in immediate neighborhood, but falls off
rapidly
Johnson, Groothuis, and Whitehead (2001):
“What is the most you would be willing to
pay out of your own household budget
each year in higher city taxes to keep the
Penguins in Pittsburgh?”
Answer: $1.56  $50m over 30 years
$
CS
P
Expenditure
D
Q
Games
Stadium Financing

Taxes





Debt


Sales
Property
Income
User fees
Delayed taxes?
Lotteries

Voluntary tax?
Issues:
Revenue potential
Efficiency
Fairness
Impact of Taxes

Before Tax: P1, Q1

Government imposes tax:
supply shifts to St
$
St
S
P2
Per unit tax
P1

After Tax: P2, Q2


P2-t
Tax Revenue =
DWL =
D
Q2 Q1

Burden of tax


Buyers pay part
Sellers pay part
Issues:
Revenue potential
Efficiency
Fairness
Hotel Rooms
Tax Examples

Miami


Cleveland


15-year sin tax on residents of Cuyahoga County
Milwaukee (Miller Park)



Proposed sales tax on cruise ship passengers
5-county sales tax
Regressive tax
Seattle



Sales tax on restaurants and bars in King County
Tax on tickets to games
Tax on rental cars
Why Do Cities Do It?


Politicians pursue their own self-interest
Special interest groups have their agenda


Highly organized groups have advantage
Concentrated benefits and dispersed costs promote
rent seeking
A
No Team
B
Old Stadium
C, D
New, No Frills
Stadium
E
New, Elaborate
Stadium
Simple majority vote would lead to New, No Frills Stadium
All or nothing choice would lead to New, Elaborate Stadium