Sports Economics
EBB920A05
Book Notes
,Table of Contents
Chapter 1 - Economics and Sports 3
1.2 Babe Ruth and Comparative Advantage 3
Chapter 2 - Review of the Economist’s Arsenal 4
2.1 The Supply and Demand Model 4
2.2 Output and the Production Function 10
2.3 Market structures: from perfect competition to monopoly 12
2.4 The Rise of Professional Sports 15
Chapter 3 - Sports Leagues and Franchises 16
3.1 Open versus Closed Leagues 16
3.2 The Economics of Team Behavior 16
3.3 Closed Leagues: Revenue and Cost in North American Sports 19
3.4 Open Leagues: Revenue and Cost in European Soccer 24
3.5 Single-Entity Ownership 25
Chapter 4 - A Monopoly and Antitrust 26
4.1 What’s wrong with Monopoly? 26
4.2 Strategic Pricing 28
4.3 What’s right with Monopoly? 32
4.4 Strategic Barriers to Entry 33
4.5 Society’s Response to Monopoly: Antitrust Laws 33
Chapter 5 - Competitive Balance 34
5.1 Why study Competitive Balance? 34
5.2 Measuring Competitive Balance 37
5.3 Attempts to Alter Competitive Balance 41
Chapter 6 - The Public Finance of Sports - Who Benefits and Why? 45
6.1 How Teams Benefit from New Facilities 45
6.2 How Fans Benefit from a New Facility 45
6.3 How cities Benefit from Teams and Facilities 49
Chapter 7 - The Public Finance of Sports - Who Pays and Why? 54
7.1 How cities came to fund stadiums 54
7.2 How Teams Exploit Monopoly Power 55
7.3 Stadium Location and Costs 57
7.4 Stadium Costs and Financing 58
7.5 Paying for Stadiums 59
Chapter 8 - Mega Events 62
8.1 A brief history of mega-events 62
1
, 8.2 The short-run benefits of hosting mega-events 63
8.3 The long-run benefits of hosting mega-events 67
8.4 The costs of hosting mega-events 68
8.5 Why do Cities continue to bid? 69
Chapter 9 - An Introduction to Labor Markets in Professional Sports 71
9.1 An overview of labor supply and labor demand 71
9.2 Rank-Order Tournaments and Superstar Effects 76
9.3 The Dangers of Tournaments and Superstar Effects 79
Chapter 10 - Labor Market Imperfections 80
10.1 The Monopsony Power of Sports Leagues 80
10.2 Unions in Professional Sports 82
10.3 Free Agency 85
10.4 Conflict and Compromise in Collective Bargaining 89
Chapter 11 - Discrimination 91
11.1 Evidence of Discrimination in Sports 91
11.2 The Economics Theory of Discrimination 92
11.3 Different Forms of Discrimination in Professional Sports 92
2
, Chapter 1 - Economics and Sports
1.2 Babe Ruth and Comparative Advantage
Opportunity Costs
Opportunity cost = the value of the best forgone alternative
the loss of other alternatives when one alternative is chosen
Opportunity cost in sports → when the goal of the team is to win as many games as possible,
then the opportunity cost of using a player at one position is the wins that the team sacrifices by
not using him at another position
● E.g. Using Babe Ruth as an outfielder (hitter) sacrificed him not playing in the pitcher
position. If they had kept him in the pitcher position, they would sacrifice wins by not
having a great hitter in their lineup.
Absolute and comparative advantage
It is usually the case that a player is good in either one position, however Babe Ruth was an
exception. He was the best pitcher and the best hitter on the team. This meant he had an
absolute advantage at both hitting and pitching.
Absolute advantage = a person or country has an absolute advantage in an activity when it is
more efficient at that activity than another person or country.
The Red Sox used Babe Ruth as a hitter because his AA was larger as a hitter than as his AA
as a pitcher. This meant he had a comparative advantage as a hitter.
Comparative advantage = when the opportunity cost of an activity is lower than it is for another
person or country
This meant that Babe Ruth had an AA over his teammates as a pitcher, but he did not have a
CA as a pitcher.
More generally, one of the most important conclusions of the theory of comparative advantage
is that developing specific skills and specializing in activities that use these skills make
individuals, firms, and nations better off.
We are better off specializing in what we are relatively best at and leaving the rest to others.
3
EBB920A05
Book Notes
,Table of Contents
Chapter 1 - Economics and Sports 3
1.2 Babe Ruth and Comparative Advantage 3
Chapter 2 - Review of the Economist’s Arsenal 4
2.1 The Supply and Demand Model 4
2.2 Output and the Production Function 10
2.3 Market structures: from perfect competition to monopoly 12
2.4 The Rise of Professional Sports 15
Chapter 3 - Sports Leagues and Franchises 16
3.1 Open versus Closed Leagues 16
3.2 The Economics of Team Behavior 16
3.3 Closed Leagues: Revenue and Cost in North American Sports 19
3.4 Open Leagues: Revenue and Cost in European Soccer 24
3.5 Single-Entity Ownership 25
Chapter 4 - A Monopoly and Antitrust 26
4.1 What’s wrong with Monopoly? 26
4.2 Strategic Pricing 28
4.3 What’s right with Monopoly? 32
4.4 Strategic Barriers to Entry 33
4.5 Society’s Response to Monopoly: Antitrust Laws 33
Chapter 5 - Competitive Balance 34
5.1 Why study Competitive Balance? 34
5.2 Measuring Competitive Balance 37
5.3 Attempts to Alter Competitive Balance 41
Chapter 6 - The Public Finance of Sports - Who Benefits and Why? 45
6.1 How Teams Benefit from New Facilities 45
6.2 How Fans Benefit from a New Facility 45
6.3 How cities Benefit from Teams and Facilities 49
Chapter 7 - The Public Finance of Sports - Who Pays and Why? 54
7.1 How cities came to fund stadiums 54
7.2 How Teams Exploit Monopoly Power 55
7.3 Stadium Location and Costs 57
7.4 Stadium Costs and Financing 58
7.5 Paying for Stadiums 59
Chapter 8 - Mega Events 62
8.1 A brief history of mega-events 62
1
, 8.2 The short-run benefits of hosting mega-events 63
8.3 The long-run benefits of hosting mega-events 67
8.4 The costs of hosting mega-events 68
8.5 Why do Cities continue to bid? 69
Chapter 9 - An Introduction to Labor Markets in Professional Sports 71
9.1 An overview of labor supply and labor demand 71
9.2 Rank-Order Tournaments and Superstar Effects 76
9.3 The Dangers of Tournaments and Superstar Effects 79
Chapter 10 - Labor Market Imperfections 80
10.1 The Monopsony Power of Sports Leagues 80
10.2 Unions in Professional Sports 82
10.3 Free Agency 85
10.4 Conflict and Compromise in Collective Bargaining 89
Chapter 11 - Discrimination 91
11.1 Evidence of Discrimination in Sports 91
11.2 The Economics Theory of Discrimination 92
11.3 Different Forms of Discrimination in Professional Sports 92
2
, Chapter 1 - Economics and Sports
1.2 Babe Ruth and Comparative Advantage
Opportunity Costs
Opportunity cost = the value of the best forgone alternative
the loss of other alternatives when one alternative is chosen
Opportunity cost in sports → when the goal of the team is to win as many games as possible,
then the opportunity cost of using a player at one position is the wins that the team sacrifices by
not using him at another position
● E.g. Using Babe Ruth as an outfielder (hitter) sacrificed him not playing in the pitcher
position. If they had kept him in the pitcher position, they would sacrifice wins by not
having a great hitter in their lineup.
Absolute and comparative advantage
It is usually the case that a player is good in either one position, however Babe Ruth was an
exception. He was the best pitcher and the best hitter on the team. This meant he had an
absolute advantage at both hitting and pitching.
Absolute advantage = a person or country has an absolute advantage in an activity when it is
more efficient at that activity than another person or country.
The Red Sox used Babe Ruth as a hitter because his AA was larger as a hitter than as his AA
as a pitcher. This meant he had a comparative advantage as a hitter.
Comparative advantage = when the opportunity cost of an activity is lower than it is for another
person or country
This meant that Babe Ruth had an AA over his teammates as a pitcher, but he did not have a
CA as a pitcher.
More generally, one of the most important conclusions of the theory of comparative advantage
is that developing specific skills and specializing in activities that use these skills make
individuals, firms, and nations better off.
We are better off specializing in what we are relatively best at and leaving the rest to others.
3
