Cincinnati Bengals, sell out using economic principles

How do you fill the stands of an NFL team?

The general consensus is that as teams win more games, the fans have a greater desire to attend the games. In economic terms, winning increases the demand to attend games. However, there are exceptions. Take the Cincinnati Bengals. They have had a surprising season, lead by a strong defense and the exciting rookie combination of Andy Dalton and AJ Green, the Bengals sit on the verge of making the playoffs. They are 9-6 and if they win their next home game against AFC North rivals Baltimore Ravens, they will make the playoffs.

Under these conditions, it should not be difficult for a team to sell tickets to home games. Turns out, it is a problem. The Bengals have an average attendance of near 42,000 which puts them last in the National Football League. Six of their previous home games have not sold out and as a result the blackout policy has been in effect, disallowing local fans to watch the games on TV.

There could be several reasons why their attendance is so low. The first is that the prices are too high. The team might have thought the demand for Bengals games was higher than it actually is, thus when they determined their price, they set it too high. This might imply that the ownership made a mistake, and are now suffering as a result. But an alternative explanation is that the ownership is quite bright and they are maximizing profits, and not trying to sell out a stadium. If the Bengals franchise operates as a monopoly, in that they determine the price and quantity of tickets sold, then it would suggest that to maximize profits they would restrict the quantity and increase the price.

But as they enter into the last game of the year, there is a need to sell out the stadium. Having a full stadium can provide a significant benefit to the home team. Think of the noise created in Seattle’s Qwest field, and the resulting false starts the opposing offense commits during the game (or the small earthquake created the stadium caused on Marshawn Lynch’s TD run last season). Having fans in the stadium might also encourage the home team to play better. And if they win this game, they go to the playoffs, which might increase the demand and profits in future years.

So what can the owner do the last game of the season to sell tickets? He can’t just lower the prices, because they are set (and think of how irate loyal fans who bought the tickets at a higher price might get). A principles of micro economics course might suggest using second degree price discrimination, that is a lower price per ticket is charged when multiple tickets are purchased. So that is what the Bengals have done. Season ticket holders can buy one ticket and get one free. This also increases the value of being a season ticket holder, and might encourage more individuals to become a season ticket holder in future years.

So while Mike Brown has been accused of being one of the worse owners of all of sports franchises (this is saying a lot with the email happy owner of the Cavaliers just upstate), I would argue that he might be pretty economically sound with his ticket pricing strategy.

How much does the Super Bowl bring to the host city?

With the World Series coming to town for a second year in a row (talk about a competitive balance problem), there is a lot of talk about what this means for the local economy. As I have read the research that has been done, I was shocked to see that the evidence is consistent in the finding that mega-sporting events do not have a significant impact on the local economy.

I would like to think that bringing in 100,000 fans to Cowboy Stadium for the biggest American sporting event. It was estimated that these fans would inject $600 million into the Dallas-Fort Worth Economy ($200 million in direct expenditures). However, Mother Nature had other plans; during Super Bowl Week she dropped two different snow storms. Events were cancelled, flights were cancelled, hotel rooms were cancelled, and the anticipation of a large impact fell faster than when I tried to walk down my inclined driveway.

After the Super Bowl the Star Telegram ran an article about the economic impact of the Super Bowl (Article can be found here). The article reports how mayors were happy to have experienced an increase in sales tax revenues in the month of the Super Bowl. While the percentages might sound good, they actually show a very small increase in actually increases of revenues.

	Sales Tax Revenue
	Feb. 2010	Feb. 2011	% change	$ change
Arlington	5,550,239	5,800,000	0.045	249,761
Fort Worth	6,634,615	6,900,000	0.04	265,385
Grapevine	2,149,533	2,300,000	0.07	150,467
Euless	658,929	738,000	0.12	79,071
Bedford	627,649	622,000	-0.009	-5,649

While not all communities are shown, it is a far cry from the estimated $200 million in estimated direct expenditures. And while it is bigger than 0, it might not be statistically different than 0.

Yankees or Mariners?

I have a soft spot in my heart for the Mariners. While I never was a fan of their team, Seattle did play against the Angels and Royals who did hold my childhood allegiance and one time and another. And I don’t like the Yankees. I lived in NY for 5 years, and no matter how hard I tried, I just could not convince myself to be a Yankee fan. I would get visible upset when Susan Waldman and John Sterling would interrupt the normal radio program to broadcast a Yankees game (I know wish the Rangers had their own Susan and John, their announcers put me to sleep after calling out a Josh Hamilton home run). In spite of this, I will try to provide an unbiased discussion of competitive balance.

Let’s turn back the clock to 2001. The Mariners had an amazing year. Their star players were a young Ichiro, a power hitting second baseman named Bret Boone, solid veterans like Jay Buhner and John Olerud, and even had the young Jamie Moyer on the mound (by young, I mean younger than he is today. He was still old in 2001). They put together one of the best single season any major league team has ever had. They won a total of 116 regular season wins (to tie the record set in 1906). To put that in perspective, only one team had 100+ victories this season. The Phillies had the best record with 102 wins.

That same year the Yankees ran away with their division, with the second placed team finished 13.5 games back. Their 95 wins was still good, 3^rd best in all of baseball. Their team had many Yankee greats: Derek Jeter, Paul O-Neal, Bernie Williams, Roger Clemens, and Scott Brosius (from Rex Putnam high school near Portland, OR; the one time that I made the starting lineup as a kid was when we played at Rex Putnam High School. We lost)

So the question is who was a better team?

	Seattle	New York
Winning Percentage	.716	.594
Runs Scored – Runs allowed	927 – 627	804 – 713

The record at the end of the regular season, clearly indicates the Mariners where the better team. They had a better offense as they scored more runs than the Yankees, and had a better defense as well.

Now let’s look at what happens when they played each other in the regular season

	Seattle	New York
Winning Percentage	.716	.594
Runs Scored – Runs allowed	927 – 627	804 – 713
Regular Season Matchup	6 wins	3 wins

Again, Mariners are clearly the better team. But they also met in the post-season.

	Seattle	New York
Winning Percentage	.716	.594
Runs Scored – Runs allowed	927 – 627	804 – 713
Regular Season Matchup	6 wins	3 wins
Conference Series	1 win	4 wins
Runs Scored - Runs Allowed	22 – 25	25 – 22

The series only lasted 5 games, as the Yankees won the series by a 4 – 1 margin. So when it really counted, the Yankees won. But as you look at the numbers of the series, the Yankees only scored 3 more runs than the Mariners for the entire series. This series was a lot closer than the final outcome shows.

In fact, the Yankees went on to win the World Series that year and furthered the thought that the Yankees are evidence of a competitive balance problem in baseball.

By most measures, these teams were fairly evenly matched, with the edge really going to the Mariners. The main difference was that the Yankees won their games in October, and as such won, the championship. So looking at only championships as a measure of competitive balance, can skew the actually balance that exists in the league.

We are the champions, no time for losers

At the beginning of each season, fans have an honest belief that their team has a chance to win the championship. This is the year!! We will overcome the curse of the goat which Steve Bartman single handedly kept going, we will show the world that defense wins championships (i.e. we have no offense), or this is the year our prospects become superstars. Not to be the bearer of bad news, all but one of you are wrong.

Championships matter. So to argue that competitive balance exists can be an argument that every team has a chance to win the championship. And if this is true, you should see different teams win the championship each year. Using this measure which sport would you think has the most competitive balance?

Let’s look at the past 31 years and compare what percentage of teams has actually won a championship

	Won a championship	Played for Championship
MLB	63	86
NBA	28	60
NFL	47	78

My prior belief was that baseball has the least competitive balance, at least that is what I hear from my television and read on my computer. But it is clear that baseball has had a higher fraction of their teams win a championship in the past 31 years.

What about recent history. Let’s look at the past 11 years

	Won a championship	Played for Championship
MLB	30	50
NBA	19	37
NFL	25	50

Story does not change; baseball has the most competitive balance. Basketball has a much lower fraction of teams that win the championship.

While these numbers show how championships can measure competitive balance, they do not make the case that this constitutes a “problem.” Is it problematic if the Lakers, Celtics, Heat, and Spurs win the championship every year?

Competitive Balance in Sports

I am about to teach a class of undergrads all about competitive balance in sports. And to be honest, I have no idea what I am talking about. But that is okay, I’m not alone. A lot of people who talk about competitive balance and the major problem that it is have no idea what it is. In an ESPN.com poll in 2006, when asked “Which is a bigger problem for the future of Major League Baseball” competitive balance or steroids, 50.1% responded with “competitive balance” compared to 49.8% who answered with “steroids.” (see article)

Let’s be honest, as long as the Yankees have their $200+ million payroll (see payroll numbers here) and keep winning all those World Series, competitive balance will always be a problem. Or is it? How many World Series have the Yankees won in the past 10 years? The same number as the Giants, Phillies, Cardinals, White Sox, Marlins, Angels and Diamondbacks. Only one team has repeated as a champion, and they just experienced an epic collapse in September (read Red Sox).

So what is competitive balance? Is it like pornography, you know it when you see it. So what should I look for (competitive balance wise, not pornography)? If the Yankees win the World Series this year, is that an indicator?

How would you measure competitive balance in sports?

Are unions good for sports leagues?

For you NBA fans out there, I have some bad news. There is a high probability that there will be no 2011-2012 NBA season. Recently the players union rep Derek Fisher has met with league officials, and he has recently stated that the only way to reach a new collective bargaining agreement is to remain strong as a union. During the 1998 lockout, remaining unified as a union lead to a resolution of the work stoppage.

The NFL took a different strategy in their collective bargaining conflict. The players voted to disband the union and pursue a resolution through lawsuits and the courts. They had success previously with lawsuits; that is how they gained free agency. Just like in 1987, this strategy worked and it is certain the union will recertify in a year or two.

In fact, in most major sports leagues the players have organized a union. Tennis players are now facing the issue of whether to unionize or not.

Dr. Ben Hansen, Assistant Professor of Economics at University of Oregon, wrote a very insightful piece for the Sports Illustrated Tennis Mailbag article (see link here)

Here is what he said:

"My discussion will concern the basic economics of unionization, and will not treat other more complex political issues.

Pro-union arguments

1. In some labor markets, a single employer often arises. For instance, a coal mine in a small town. As everyone works at the coal mine, the coal mine can underpay and underinvest in safety, exploiting monopsony (a single purchaser of a good) power. If tournaments didn't coordinate, they might compete by offering better pay, better conditions, etc. To the degree tournaments in the ATP can coordinate (which we might also call collude), they can pay less, provide worse conditions, etc.

2. Thus, to balance the effects of monopsony power, a union can encourage bargaining, which may arrive at outcomes that would naturally result were it not for the market power of tournaments.

3. Tennis players face in game theory what is known as the prisoner's dilemma when it comes to how often they play. They might all prefer a scenario where everyone plays for two fewer months in a year. But each individual's private incentives are to deviate from that outcome to amass additional ranking points. Relatively, no one has a higher ranking because everyone plays more, and thus everyone is worse off (except for the low-ranking players who benefit from simply another pay day).

Arguments against a union

1. Unions make entry difficult. Many professions that have associations or unions require absurd qualification tests. For instance, to become a hair stylist, individuals must work for free essentially in order to be qualified to cut hair. Is this to protect the hair stylists of the world? Many other professions have gradually increased requirements to keep bad apples from competing, but in actuality, it increases their own wages. Only recently have lawyers had to complete formal law school or undergraduate degrees. Previously, it was fine to teach yourself and pass the bar. To some extent, rankings and seeds (up to 32 at Grand Slams) have made it more difficult to enter the top tiers of the sport and easier for established pros to keep their ranking. Would unionization make entry for the next generation more difficult? No turning pro until one is 18? Other rules to initiate new players would limit entry and competition.

2. Wage compression often results in unions. Likely low-ranked individuals would end up being paid more (as they would have voting power in the union), even though the top stars generate all of the negotiating power. Determining voting power in the union is a difficult issue, because the masses (those ranking 100 and below) have different incentives from the stars. Do the stars really want those ranked 100 and below determining the negotiations via voting? Or are votes weighted based on ranking? And if you do that, no individual ranked 100 or below has a strong incentive to join the union.

3. Lockouts. Actual strikes are, of course, extremely costly to everyone, because there are huge gains from trade in tennis. We get tennis, everyone gets money, everyone is certainly much better off than the alternative, with no tennis. However, if the threat of a strike isn't credible, it hurts bargaining power. Tennis pioneers in the pre-Open Era were willing to make sacrifices to go pro, but also came at huge gains. I doubt that a strike could happen at a Grand Slam, but I could see one for the year-end championships. It would be most successful because fewer players are involved. At some point, I am sure those ranked 10-30 would be tempted to step in, although it's not clear much revenue would come from a final matchup between players of that caliber."

Dr. Hansen mentioned tournament conditions, and here is an example of tournament officials doing a poor job on dealing with inclement weather. Needless to say, Andy Roddick was not happy with the situation.

(See video link)

A critique of “The Price of Poverty in Big Time College Sport”

A recent study by Ramogi Hum (a former collegiate athlete at UCLA and current President of the National College Players Association) and Ellen Stauroskwy (Professor of Sport Management at Drexel University) received some attention in the news for addressing some of the issues dealing with pay to play for college athletes. After reading the article, this may be one of the times where poor research is worse than no research. Their study at four objectives, of which the paper uses 4 of the 33 pages to address and the other 29 pages are dedicated to “exposing” the evils of the NCAA. Here are the points they make and their findings:

1. What is the value of a “full” athletic scholarship compared to cost of attendance?

They answer this simply by using IPEDS data which reports administrative data on the costs of attending. This information is publically available, just check out this website (IPEDS). IPEDS lists the costs of college as tuition, books and supplies, room and board, and other expenses. Since a scholarship only includes tuition, books and supplies, and room and board, the shortfall of an athletic scholarship is the “other expenses” category. Other expenses are $3,222 on average per year.

First, it is important to note what the “other” category is. IPEDS website states that this category is an estimation from the financial aid office on the costs a student might face: such as laundry, transportation, and entertainment. Therefore you would think that attending different colleges in the same area should have the same “other” category expenses. But this is not always the case.

Next, students who have financial need can apply for a Federal Pell Grant. Last year the maximum pell grant award was $5,500. Therefore, the difference in cost of attendance and athletic scholarship can be covered with this financial assistance.

2. How does the value of a “full” athletic scholarship compare to head coach compensation for football and men’s basketball?

This is done by looking at the shortfall of one athletic scholarship and multiply that number by the number of football and basketball scholarships (85 and 13 respectively). This is termed as the team scholarship shortfall and compared to the annual coach’s salary. Team shortfalls range in the 100,000’s of dollars for college football while the coach’s salaries are between $1.1 and $6.0 million dollars. Basketball has team shortfalls nearer to $40,000 and coaches salaries often over $2 million.

I am still trying to see how this comparison is important. Are they trying to insinuate that a coach should subsidize the team shortfall? If so, state it. But they are comparing apples to oranges and asking for lemonade. It might be important to note that the schools shown in the results are some of the highest paying schools. The median annual salary of an FBS football coach is $1.1 million and $822,000 for basketball coaches.

3. How does the value of a “full” athletic scholarship compare to established federal poverty guidelines?

Using room and board as a measurement of the part of the athletic scholarship which can pay for basic necessities such as food, shelter, utilities, etc. Other forms of benefits that students receive (i.e. tuition, books, etc) are not used to meet the daily needs. This shows that 85% of students at FBS schools live in poverty.

I am sympathetic to this point, as I once had a job that paid me in room and board instead of wages. As such, my income from that job did not allow me to buy some essentials, like toilet paper. But that did not mean I lived in poverty. My board included steak dinners once a week, an open salad and sandwich bar for lunch, and unlimited chocolate milk. In fact, I would suggest that most college students live under the federal poverty limit, but businesses recognize that. That is why they practice third-degree price discrimination and charge student prices.

4. How would the value of revenue-producing college football and men’s basketball player be affect if revenue-sharing formulas used in labor negotiations for NFL and NBA were applied?

The study uses revenue sharing rules in the NBA and NFL to indicate what fraction of total revenue in college would go toward players’ salaries. In the current collective bargaining discussions, the NBA owners want to use 50% of league revenues to go towards players salaries. This is less than what was used last year, so this might be seen as a conservative estimate. The NFL dedicates 46.5% of league revenue towards players’ salaries. This method indicates that the fair value of a basketball player is approximately $121,048 and a football player is $265,027.

I think there are two major flaws to this estimation. The first flaw is clear and egregious. Why would the revenue sharing deal used in the NFL be anywhere near what is would be in college football. The structure of the NFL and NBA are very different. Different structure on media contracts, revenue sharing, and many many more aspects. Thus the difference between current percentage of league revenue in the NBA (58%) and the NFL (46.5%). Just because they play the same sport, there is reason to believe that the structure of the NCAA football is vastly different than the NFL. The NFL has 32 teams and there are almost ten times as many teams in Division I and twice as many teams in BCS conferences alone, just to name one difference.

The second major flaw is that schools often use money generating sports to subsidize other sports within the athletic department. Most athletic departments actually do not make an overall profit, that is, they lose more money on other sports than they earn on football and men’s basketball. In fact, in 2009 only 25 of the 119 FBS school athletic departments made a profit. This was an improvement from 19 in 2006. Even more startling, 68 percent of football programs and 67 percent of men’s basketball programs made a profit in 2009.

Most of the paper was directed at exposing how terrible the NCAA is, and not enough was given to develop the actual analysis of the four prong objective of the study. The results they derived were not supported with evidence or with sound logic.

Thus the challenge is out there, how to determine the value of a college student-athlete? I wish I was able to answer this. So the ball is in your court, can you answer this question?

Bull Durham in the NFL

One argument I hear often is that we should decouple students and athletes, that is get rid of the NCAA altogether and set up a minor league system in all sports. Let’s be honest, NCAA is big brother and they currently set the wages for college athletes; such as the number of scholarships per school, maximum compensation, forbid certain forms of compensation (i.e. you can give free bagels, but you cannot give free cream cheese, jelly, or any other spread to accompany said bagels), and oversee enforcement of this structure. Therefore, if we get rid extramural sports, rather than the iron fist of the NCAA, the invisible hand of the free market would determine how much players should be compensated.

In fact this is done in baseball. And the fact that baseball has a fully functional minor league system is often used as a reference point as to what the NFL can do instead of college football. On almost every measure, professional baseball players earn more money than professional football players. In 2009, the highest paid baseball player made 29% more than the highest paid football player. The average and median player’s salary was greater in baseball than in football. Thus it could be argued, that baseball’s salary structure might be an upper bound as to what football’s might be if they implement a minor league football system.

So how much did Crash Davis and Nuke LaLoosh make while traveling in the team bus to play games? Minor League baseball actually has maximum salaries for their players. Based on which level the player is at, from lowest to highest – A, AA, AAA, the maximum salary increases. First year salaries at Single-A ball for a full season has a maximum of $1,050 per month. Don’t worry; it really starts to pick up for Double-A, $1,500 per month. Triple-A players, the stars of tomorrow, can earn a maximum of $2,150 (or about the value as year’s tuition at Duke).

The NBA has also started a minor league system in basketball known as the Developmental League. According to the D-League website, currently 15% of NBA players are D-League alumni. The league is still young, but surely these players are making more than the poor minor league baseball players. Salaries range from $12,000 – 24,000 per year. That’s right, per year, putting these players at or below the federal poverty level. They do however get $30 per day for food when they are on the road (can you say super size that value meal!!)

So before too many proponents argue that proper compensation can be achieved by having a minor league football system instead of the college system, you might want to know what the invisible hand will deal you. Turns out 50,000+ are willing to watch really bad quality football (think Big East, Florida vs. Furman or any FBS-FCS matchup, The Apple Cup (Washington vs. Washington State), Idaho vs. Louisiana Tech) when it is their school or alma mater playing.

How much are student-athletes paid?

Most jobs that you will have will pay you money. But many jobs will also pay you in non-pecuniary benefits. In addition to an hourly wage or salary, your employer may provide you with health insurance, a company car, training, and more. These benefits, though not cash, do carry a value with them. And should be counted when determining total compensation that you receive for the work you do.

Thus, to answer the question of how much are student-athletes being paid, it is imperative to examine both cash compensation and other benefits that they receive. The USA Today had a very interesting article in which they broke down the value of a Division I men’s basketball scholarship. (link)

	FBS median	UConn	Kentucky	VCU	Includes	Does not include
Grant in aid	$27,923	$44,016	$32,703	$37,639	Tuition, fees, room, board and books, including summer school, tuition discounts and tuition waivers	Money athletes can receive through federal Pell Grant program, which is based on need; money athletes can receive from NCAA Assistance Fund, awards not based on need and can be used for array of purposes
Coaching	$70,000	$70,000	$70,000	$70,000	All coaches; team-specific support staff such as strength/conditioning coach, athletic trainer, videography; access to team facilities
General support	$11,607	$13,717	$18,292	$9,629
Equipment uniforms & supplies	$2,650	$546	$10,128	$2,669		Full value of goods that athletic department receives for free or at discounted prices
Medical	$970	$746	$940	$893	Expenses and insurance premiums
Game tickets		$1,596	$1,904	$602	70% of the cost of 4 season tickets for home games, reflecting expected use of the 4 complimentary admissions athletes may receive for each game	Donation to athletics department that may be needed for right to buy 4 home season tickets in comparable location; cost of tickets for away games, conference and NCAA tournament games (athletes may receive six admissions for conference and NCAA tournament sessions)
Future earnings impact	$6,500	$6,500	$6,500	$6,500	One year's impact on wages, based on attainment of some college education	Value of admissions preference based on athletics; impact on wages based on attainment of a bachelor's degree, or based on education toward or attainment of a master's or professional degree
Total	$119,650	$137,121	$140,467	$127,932

Here is a breakdown of their findings.There are other benefits that student-athletes receive that are not included here. For example, it is often argued that those who come from economically disadvantaged backgrounds are the ones suffering the most. Yet these individuals are eligible for federal pell grants, which can bring in an additional $5,500 in cash.

This information does not answer two rather important questions:

1. Are they being paid enough?

Do student-athletes value the non-pecuniary the same as ca