# Project #32636 - Sports Economics

Sports Economics

1. (2.5 Points) Graph a short run situation where a large-market team has lower
profits at its profit maximizing level of attendance than a small-market team has
at its profit maximizing level of attendance. In your graph, be sure to identify the
profit-maximizing attendance and profit in each case. (hint: you can do this by
hand, or use the template graph on Blackboard located along with Homework #2,
which you should be able to modify by moving the various lines to tell your
story).
2. (2.5 Points) When a player says that an owner doesn’t want to win, what is really
being said?
3. (2.5 Points) Use the following schedule of stars, winning, and salary to answer the
questions.
Stars Total Winning% Salary
0 420 \$7
1 429 \$5
2 448 \$5
3 466 \$5
4 490 \$6
5 528 \$6
6 598 \$7
7 646 \$8
8 680 \$8
9 695 \$9
10 700 \$10
a. Graph the total cost of winning percent (from player compensation, only).
b. Is the the long-run or short-run total cost structure for this team? Why?
c. What costs are missing from the complete picture of the costs of
generating winning?
d. How would inclusion of the costs you list in part (c) alter your graph in
part (a)? Show the revised graph.
4. (2.5 Points) A league is considering expansion into two different markets, A and
B. Suppose all else is constant in these two markets except for each of the
following differences, considered one at a time. What happens to the expansion
fee in Market A relative to Market B?
a. Market A is a larger revenue market than Market B.
b. Population growth is greater in Market A than in Market B.
c. Currently, city politicians and voters are hostile to any consideration of
subsidies for a sports team in Market A, but not so in Market B.
d. Interest rates are higher in Market A than in Market B.
5. (5 Points) It seems these days that everybody wants a pro sports team. But, almost
universally, expansion teams are weak and stay that way for quite some time. For
example, Quirk and Fort (1992, pp. 251-252) offer the following evidence on the
number of years that it takes expansion teams to reach 0.500 over the period 1900
to 1989:
League Shortest to .500 Average to .500 Longest to .500
MLB 2 years (Angels) 8.2 years 15 years (Mariners)
NFL 3 years (Bengals,
Seahawks)
5.5 years 13 years (Saints)
NBA 2 years (Bucks) 5.6 years 10 years (Jazz)
NHL 2 years (Blues) 6.3 years 14 years (Devils)
a. Given the bleak prospects for an expansion team shown above, how would
you explain the high demand for new teams on the part of the residents of
some cities?
b. Given the data, what do you think expansion does to the overall quality of
league play from the fans' perspective? How does this enter into the
determination of the expansion fee by a league?
c. What factors would explain the difference between the shortest time to
0.500 and the longest time to 0.500 in each league? (Hint: Think about
the lessons from Chapter 2).
6. (2.5 Points) When free agency was introduced in the NFL after the 1992 season,
some argued that expansion teams would have an easier time competing than in
the past since new owners could just buy great talent and enter the league with a
running start. Using the data on MLB expansion team performance in the lecture
notes, would you have made the same prediction? (Hint: Remember that free
agency started in 1976 in MLB. Compare expansion team success before and
after that year.) Does this appear to have been the experience in the NFL (hint:
look at NFL expansion team success before and after 1992...i.e. the Seahawks and
Buccaneers versus the Jaguars and Panthers).
7. (5 Points) There have been two changes to the revenue sharing rules in MLB
within the last 20 years. The first took place in 1995 season, and then there was
another increase in revenue sharing in place for the 2001 season. These changes
create a "natural experiment" for analyzing the impact of changes in revenue
sharing on competitive balance. I have provided a spreadsheet on blackboard
with team winning percentages before and after these revenue sharing changes.
With this spreadsheet, calculate the yearly standard deviation in winning
percentages by league (in Excel, you can get standard deviations by typing
=STDEV(___) where ___ is the column associated with each year). This excel
file will then provide you with a chart to analyze the impact of these revenue
sharing changes, along with the average standard deviations in winning
percentages before and after the various changes. Using this information answer
the following questions:
a. How did the changes in revenue sharing impact competitive balance?
What does this tell you about the effectiveness of revenue sharing in
improving competitive balance? Why would this be the case?
b. Are there any changes, other than the changes in the revenue sharing rules,
that may be impacting competitive balance and making it difficult to
determine the impact of revenue sharing alone?
c. Which would be more effective for increasing the level of competitive
balance in baseball, a salary cap, or a 50-50 gate revenue-sharing plan?
Why?
8. (2.5 Points) Some have argued that to improve competitive balance, the weakest
(lowest revenue generating teams) should be contracted, or removed from the
league. Does contraction necessarily mean that competitive balance will
improve? Explain.
Here are some suggested things to collect for your paper due at the end of the term (not
due with your homework, just a suggestion to make the actual “writing” of the paper at
the end easier):
• Add to the data that you collected for homework 1, data on your chosen
franchise’s revenues and payroll over time. Plot these three variables on the same
graph. Explain, for your franchise, the connection between winning, payroll and
revenues. Using the same regression tools that you used in homework #1,
estimate the impact of your team’s payroll on their winning (winning = a*Payroll
+ b), and the impact of winning on revenues (revenues = a*winning + b)
• Examine your chosen franchise’s “exclusive territory”. What is the population
and average (median would suffice) income in this territory? While you won’t
know exactly what this territory is, look at other competing teams in the area and
make a logical conclusion about their exclusive territory. Has this territory
changed over time due to expansion or relocation?
• What year did your chosen franchise enter their league? Is there any evidence
that their value has been changed by expansion of teams into the league (or if they
were an expansion team recently, is there any evidence that their entrance has
changed the other team’s valuation?)

 Subject Business Due By (Pacific Time) 06/09/2014 09:00 am
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