Here is an economics paper that Ian Phillips (a colleague of mine) and I wrote about the business of Major League Baseball.
Introduction
The Major League Baseball (MLB) industry dates back 142 years to 1869 when it was first founded. The MLB has had a blanket exemption from United States antitrust laws since 1922 (Zimbalist, 2004), creating barriers to entry for anyone looking to start their own franchise. Being exempt from antitrust laws means that the MLB can operate under a monopoly market structure as the only provider of professional baseball in North America. MLB is composed of 30 different teams (29 in the United States, 1 in Canada). There are some unique aspects of the MLB industry compared to other industries that make it different, as consumers have an emotional connection with the game itself and their favorite team or player. MLB teams have large followings of fans that want to see their team win, as such MLB teams do not always make purely economic decisions. Supply is unique because it cannot easily fluctuate to meet varying consumer demands. There are a specific number of games played each year in stadiums with distinct seating capacities. The supply of MLB products has grown, as cable packages and an Internet streaming have become revenue-generating opportunities.
The labour market of MLB is another unique aspect of the industry. MLB operates with characteristics of a monopsony, as they are the only buyer and employer of professional baseball players (Eschenfelder & Li, 2007). Teams are looking for highly specialized employees that have the skills only the MLB seek. Furthermore, the labour market is unique because it is fixed. MLB is not expanding, and thus there are only a fixed number of players to hire.
Each season millions of fans attend MLB games. The 2011 regular season saw a 0.5 percent increase over the 2010 season as 73,425,568 people attended a game, making it the fifth highest attendance level ever (MLB, 2011). The league as a whole is relatively stable as the member teams have stayed in their respective cities and avoided relocation (with the exception of the Montreal Expos who moved to Washington prior to the 2005 season making it the only relocation to occur in the last 39 years). Evidently the demand for goods and services in the MLB industry are strong, even taking into account that attending MLB games is not a necessity and only a form of entertainment.
Clearly MLB games draw a huge number of patrons over the course of a season. With over 70 million people attending games, that means over 70 million people must travel to the stadiums. Having an MLB team in a city is a big draw for tourism. Shonk and Chelladurai (2008) attribute sport facilities and their affect on downtown development as one of two major reasons sport tourism is growing. With increasing tourism more money is spent within a region, benefiting the community as new money is added and spread to residents while also creating new jobs.
Demand and Forecasting
The demand for MLB varies for each of the 30 teams in the industry. Eschenfelder and Li (2007) refer to demand as “the willingness and ability of consumers to purchase goods and services” (p. 38). For the MLB industry, goods and services vary from tickets to memorabilia, to foot long hot dogs and MLB television packages. Goods and services can be classified simply as necessities or wants in the eyes of consumers. Products of the MLB industry are considered ‘wants’ because they are things “that are desirable but not required for existence” (Eschenfelder & Li, 2007, p. 37). Considering MLB products are wants, they are deemed to be elastic, because the percentage change in the quantity demanded exceeds the percentage change in price (Parkin & Bade, 2008). This means that a change to the price of products will cause a greater change to the demand for those goods. Consumers are sensitive to the price of goods and services in the MLB industry.
The demand for MLB products are affected by six main factors: the price of related goods, expected future prices, income, expected future incomes, population and preferences (Parkin & Bade, 2008). Most important to the MLB industry are the price of related goods, income and preferences. Prices of related goods refers to substitute and complement products. If the price of MLB products rises too greatly, consumers may look to spend their money on substitute forms of entertainment. Oppositely, the law of demand states, “when the price of an item goes down, the demand for it goes up” (Sawyer et al., 2004, p. 7). If prices are low it allows for MLB products to be accessible to more consumers.
Income is important to demand because as it rises, people want to buy more goods (Parkin & Bade, 2008). MLB products are classified as normal goods, because as consumer purchasing power (income) rises they will buy more products (Parkhouse, 2005). Considering the United States economy is still facing hard times (Mutikani, 2011), and that the national unemployment rate is currently at 9.1% (Bureau of Labor Statistics, 2011), income is not rising for many Americans. Lower income has a negative effect on the demand for MLB products.
Finally, consumer preferences affect demand. Parkin and Bade (2008) explain preferences as “an individual’s attitudes towards goods and services” (p. 64). The MLB is the highest level of baseball in the world, and therefore is the preference of Americans. Americans may substitute other entertainment options rather than attend baseball games, but they will not substitute other forms of baseball instead of MLB.
When forecasting demand, there are six factors to consider: general economic conditions, industry conditions, income levels of the population, consumer habits and tastes, market potential for various groups and government regulations and laws (Eschenfelder & Li, 2007). With poor economic conditions and low income levels of the American population, those are two discouraging factors. Industry conditions are tumultuous but dependable. Encouragingly for the MLB, they have had a blanket exemption from the nation’s antitrust laws since 1922 (Zimbalist, 2004). Additionally, analysis of past demand data is strong, as the MLB has had only 1 team relocate since 1972.
Consumer habits and tastes are not a threat to the future of the MLB. Passan (2011) wrote that through the first 320 games of the 2011 season (April 25, 2011), attendance was down 506 tickets per game compared to 2010. However, by September 28, 2011, attendance was up 186 tickets per game (Baseball-Reference, 2011). Only 12 out of 30 teams saw a decrease in average attendance. Even through difficult economic times, Americans are still attending MLB games on a regular basis.
The market potential of various groups would be a possible way for the MLB to grow. This could be in the form of expanding the league to new cities or marketing the MLB to new user groups. Attracting new fans to the game will increase revenue across the industry. Lastly, Government regulations and laws are not a threat to MLB. The MLB has strength in that the antitrust exemption allows the 30 teams of the MLB to “join together as a television cartel to sell not only national broadcasting rights but also national cable and satellite rights” (Zimbalist, 2004, p. 3). As the only entity of professional baseball, the MLB will survive in the future.
Supply and Pricing
The supply and pricing of goods and services for the MLB industry vary according to each team. Supply is defined as the “quantity of a good that firms willingly produce and sell” (Eschenfelder & Li, 2007, p. 44). Supply in the MLB industry is unique because the quantity of goods produced is fixed. Each team will have 81 home games (excluding playoffs) in stadiums with a fixed number of seats. Certain teams have the luxury of offering high prices for their tickets because the demand is so high, whereas others do not. The range between the highest and lowest average single game tickets proves that there are variations in demand. For example, in 2011 the Boston Red Sox had the most expensive average ticket price at $53.38, whereas the Pittsburg Pirates average ticket price was $15.30 (Associated Press, 2011). With a range of $38.08 ($53.38 - $15.30) it proves different markets have varying demand for tickets. Due to the fact that the product that MLB supplies is fixed, MLB teams must be creative in how they supply and price their product. Teams frequently use different promotional events in order to slightly change the product they supply. A free bobblehead doll or 90’s night are ways teams try to increase demand for their product.
There are many factors that affect the price of MLB products. Two common practices used in professional sports are time and place “smoothing” and variable pricing. Smoothing is used to vary prices based on seat locations in stadiums and arenas (Mullin et al., 2007). Variable pricing is used when teams change prices based on opponent and by day of the week. The demand for those games are greater, therefore teams can charge a higher price for admission. Furthermore, teams offer different prices based on the amount of tickets being purchased. Groups often receive discounts, as do people who buy season tickets rather than single game tickets (Mullin et al., 2007). Teams are willing to lower prices for the chance to receive guaranteed money.
Another element that affects price for MLB teams is the labour market. Team salaries varied from US$36 million to US$203 million for the 2011 season (USA Today, 2011). In order to cover the immense cost of players, teams must raise ticket prices, as they are “one way teams can generate revenue to cover costs” (Alexander, 2001, p. 342). Alexander (2001) later explains that the average MLB ticket price has increased by 92.7% since 1991, compared to a 20% increase to the Consumer Price Index. He attributes the rising price of tickets to their status as a monopoly. With no competitors, consumers are forced to pay increasing prices if they wish to watch professional baseball.
As a monopoly, when pricing their tickets the MLB ideally prefer a shortage of supply. Bearing in mind there is a limited number of games and seats, supply cannot change. In a shortage, there is excess quantity demanded over quantity supplied (Parkin & Bade, 2008). This means that prices will rise as tickets become difficult to buy, increasing overall profits.
Economic Contributions and Impacts
Sports tourism is defined as “leisure-based travel that takes individuals temporarily outside of their home communities to participate in physical activities, or to venerate attractions associated with physical activities” (Shonk & Chelladurai, 2008). An MLB team has an economic impact on its host city, as it is a catalyst for sports tourism in the local region. Fans will come from other cities or countries to watch professional sports and in doing so are going to spend a certain amount of money in the local economy by purchasing goods and services at local restaurants, shopping centers, hotels, etc.
The economic multiplier comes into effect as more money is being circulated in the community. The economic multiplier helps “to trace the flows of respending of the money initially injected into the economy until its complete leakage out of the economy” (Eschenfelder & Li, 2007, p. 130). Moreover, there will be more jobs for local residence as a greater number of employees will be needed to work in the businesses and industries that will benefit from the increased demand for their services. This leads to an overall higher standard of living throughout the community as people have more disposable income that they are spending on other local services such as restaurants, movie theatres, and other local attractions. This is referred to as the ripple effect because of the amount of money transferring hands in the local economy.
In recent years, a number of MLB teams have received money from local governments in order to build new facilities. This is the case in both Arizona and Florida where spring training is held during the months of February and March – a boost to both local economies. The Chicago Cubs recently reached a 30-year lease agreement with the City of Mesa (Arizona) to build a new US$99 million complex (Groff, 2011). The City of Mesa will pay US$84 million towards the new facility, as they understand it will help the local economy over the long-term (Groff, 2011).
A distinct aspect of the MLB industry is economies of scale. Economies of scale means simply that it is cheaper to buy hats for all the teams in the league from one company rather than have each team make their own individual deals. An example of this is the official licensing deal that MLB has with New Era Caps, who are the official hat provider of the league (Lefton, 2009). Another example was in 2006, when MLB signed a new 7-year national television deal worth an estimated US$3 billion with ESPN, Fox, and TBS that bring the league US$670 million annually (Bloom, 2006). The money from the TV deal is then divided equally among all 30 teams meaning that each team will receive $US22.3 million each season (Bloom, 2006).
Many teams either have corporate ownership or have their own television networks. There are many examples in the MLB where this is the case. One example is the Toronto Blue Jays who are owned by Media conglomerate Rogers Communications who also own their own sports channel (Sportsnet) on which all of the Jays games are broadcast. Another examples is how the Boston Red Sox ownership group has a stake in the New England Sports Network (NESN), which has approximately 150 Red Sox games on a year (NESN, 2011). Lastly, the Yes Network (YES) is owned by the New York Yankees and has 127 regular season games on each year (YES, 2011). The reasoning is that team owners want to have vertical integration of their products in order to promote them to a larger and more diverse group of consumers.
Labour Market
Due to the fact that MLB is a monopoly, labour is restricted as there are a limited number of jobs to be filled. The demand for players remains constant as the size of each team’s roster and number of teams in the league both remain fixed. These limits are negotiated between the leagues owners and the players association through the collective bargaining process (CBA, 2007). The supply for players is scarce, as a high level of physical skill is required to be an MLB player. Players that are eligible for “the first-year player draft” are restricted as to which team they can play for and are not given a choice as a free market does not exist, thus there is control over entry-level salaries (CBA, 2007).
Once a player has gained six years of service time he qualifies for free agency, which gives him the right to negotiate with any of the thirty teams for his services. However this does not mean that all of the teams are interested in signing that player, as they might not have a job opening that the player can currently fill (i.e. they already have a quality player at one position) or simple do not have the necessary capital to pay the player his perceived market value (i.e. small market team vs. large market team). Since there are a small number of teams trying to acquire the same player, it is likely that certain players will be paid more than what their overall economic contribution is to the team.
Labour in the MLB industry comes from all over the globe, due to the highly competitive nature that exists. MLB is one of the highest levels of professional baseball in the world; therefore they attract the best talent. On the 2010 MLB opening day rosters, 27.7 percent of players where born outside of the United States (MLB, 2010). A total of 14 countries where represented from 4 different continents: Asia, Australia, North America and South America (MLB, 2010). Not only is the cost of signing players high, but the cost of attracting and scouting foreign players is expensive, contributing to the overall cost of signing players from around the world.
Nature of Competition
As previously mentioned, MLB has an exemption for the antitrust law in the United States. As so, they are allowed to operate as a monopoly. A monopoly is defined as a market structure “in which there is one firm, which produces a good or service that has no close substitutes and in which the firm is protected from competition by a barrier preventing the entry of new firms” (Parkin & Bade, 2008, p. 207). MLB is the only firm supplying baseball due to its exemption from antitrust laws, which creates a very strong barrier to entry.
MLB may not have competitors for baseball, but Alexander (2001) explains that MLB does have to compete in some form, as they compete against other forms of entertainment for discretionary income of consumers. There is always a cost of using resources on a purchase, which can be measured by the benefit given up by not using them in their best alternative use (Ragan & Lipsey, 2011, p. 6). This is known as opportunity cost. Consumers will always weigh the alternatives before making a purchase. Eschenfelder and Li (2007) explain, “the more control a firm has over price, the less competitive the market” (p. 64). As a monopoly, the MLB and all 30 teams have complete control over price, yet because the demand for tickets is elastic the price must be reasonable so that people do not look for alternate entertainment options.
Another form of competition for the MLB is competition to sign players. This is considered producer-producer rivalry, as teams must persuade a free agent to sign with their club over another. MLB also operates as a monopsony, for the reason that players in their first six years are potentially bound to one team (Brown & Jepsen, 2009). Furthermore, MLB can be specified as a bilateral monopoly, wherein “a monopoly seller faces a monopsonistic buyer. The buyer is a firm that hires workers and the seller is a labour union representing the workers” (Eschenfelder & Li, 2007, p. 157). MLB would be the buyer of professional baseball players and the seller is the Major League Baseball Players Association (MLBPA). This is not completely true as players have the right to negotiate with teams on their own, however the collective bargaining agreement between the MLB and MLBPA outline certain terms that must be met in each contract.
With its strong history across the United States as the oldest professional sports league (founded in 1869) and exemption from U.S. antitrust laws, the MLB has very little threat of competitors entering the industry. Nevertheless, because baseball is a non-necessity (want) demand is elastic. Consumers will spend their money on substitute entertainment options should prices of MLB products increase too drastically. This is the only form of competition that the MLB faces.
References
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