In Two Sports Myths and Why They're Wrong, authors Rodney Fort and Jason Winfree apply sharp economic analysis to bust a couple of the most widespread urban legends about professional athletics.
Exploring the claim that player salary demands increase ticket prices and asking whether Major League Baseball should emulate the National Football League, this quick read gives us a taste of 15 Sports Myths and Why They're Wrong, forthcoming from Stanford University Press this September.
Fort and Winfree take apart these common misconceptions, showing how the assumptions behind them fail to add up. They reveal how these myths perpetuate themselves, substituting the intuitive appeal of emotionally charged myths with rigorous, informed explanations that weaken their potency and loosen their grip on the sports we love.
Two Sports Myths breakdown these tall tales just in time for the MLB All-Star Game and will leave you wondering what other myths will be on the chopping block later this fall.
|Publisher:||Stanford University Press|
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About the Author
Jason Winfree is Assistant Professor of Agricultural Economics at the University of Idaho. He is co-author of Sports Finance and Management.
Read an Excerpt
TWO SPORTS MYTHS AND WHY THEY'RE WRONG
By RODNEY FORT, JASON WINFREE
Stanford University PressCopyright © 2013 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
PLAYER SALARY DEMANDS INCREASE TICKET PRICES
It bothers me enormously that no longer can a family of four see a game. What's happened is the [player] salaries are so high, we have to keep raising ticket prices. I don't want to raise my prices again.
—Abe Pollin, former owner of the Washington Wizards and Capitals (Heath, 1997)
If even an owner says it, shouldn't it be true? No wonder fans bemoan what they think are the facts. First, fans bemoan that tickets are too expensive. The Fan Cost Index is a sort of CPI for live attendance at North American pro sports games published by Team Marketing Reports (www.teammarketing.com). Their "sports market basket" for two adults and two children includes tickets, refreshments, parking, and souvenirs. While not all fans incur all of these expenses every time they attend, the index is useful for comparison between teams and over time. We choose the NFL because it is the most expensive (the most recent Fan Cost Index data are for 2011). The New York Jets topped NFL average ticket prices for 2011 at $120.85, and the New England Patriots topped premium ticket prices at $566.67. Adding in the rest of the basket, the price of the 2011 sports market basket for the NFL ranges from Jacksonville at the bottom, $316.50, to the Jets at the top, $628.90 (the average was about $427). Taking the average family to some pro games looks more like a trip to Disneyland than the trip to the stadium their parents might remember as kids.
Second, what do fans observe at the same time? Players continue to enjoy huge salaries and salary increases over time. (As longtime observers of the player pay scene, we agree that this is true.) With the help of statements by team owners (see the epigraph), and laments by sportswriters/broadcasters about the "corporatization" of sports attendance, fan arithmetic jumps to two plus two must equal four; player pay must be the cause of the increased prices they face. The easy explanation is that players are greedy (or at least tough negotiators) and that the only thing owners can do is to pass the expense on to fans. How else can owners still make a go of it in the face of these staggering results for players?
This myth rests on a complete misunderstanding of the most basic Econ 101 reasoning. The root cause of higher ticket prices and everything else in the sports market basket is not player salary. Player salaries rise because fans over time have shown a remarkable willingness to pay ever-increasing amounts for sports attendance over time, both at the gate and on TV or over the Internet. In other words, fans don't face increasing ticket prices because salaries increase. Salaries increase because increases in willingness to pay for sports characterize fan demand over time. The data bear this out and refute the myth as well.
Three other Econ 101 mistakes are as follows. First, as is generally human nature, no comparison is ever thrown into the discussion of what "high" price even means. Without any context, this is the same error that people make lamenting the high price of gasoline. Is it really (in the economic sense of the word) higher historically, or compared with other goods? Second, before fans get too carried away, they should sit down with economists and ponder this. There is a good economic reason that prices should be even higher (!) in leagues in which there are sellouts. Finally, despite the fact that many owners generate nifty profits from their teams, it is the case that owners would lose money—that's right, lose money—rather than just take lower profits by lowering some ticket prices.
The destructive power of this myth is that it drives an even wider wedge of resentment between fans and players than already would exist without the myth. Some begrudge high pay to those who receive it, and sports fans are no different. Just listen to fans when "bonus baby" rookies or newly acquired star free agents fail to perform up to expectations. The heckling invariably includes shouts of "overpaid!" It is clearly the sentiment of many fans that players are overpaid during contentious collective bargaining episodes, such as those that have plagued every sport over the last fifteen years. The myth that this then also means fans are paying more adds insult to injury. This wedge of resentment serves owners well during collective bargaining, where sometimes judicial and even political intervention, fueled by public sentiment, can enter into the process.
Even intuitively, those who buy into the myth should feel a sense that something is wrong. If owners could simply raise ticket prices to cover some cost increase (such as an increase in salaries), why wouldn't they raise ticket prices even without any cost increase? And one simple data comparison adds to what should be a bothersome intuition. Figure 1.1 shows that player salaries have far outpaced ticket prices. Data are not available over a long enough period to make any long-term conclusions in the NFL and NHL, but data from the NBA and MLB show that since the 1950s and 1960s player salaries are now about ten times higher relative to ticket prices. So while ticket prices and player salaries have both clearly been on the rise, something else is certainly going on with player salaries. If owners were increasing ticket prices to cover player costs, then fans would be very fortunate that teams have been able to come up with other revenue streams, especially media revenues, because if those revenues were not available they would have had to increase ticket prices by much, much more to cover player salaries.
Before we move on, it is important to acknowledge (remember) two things about pay in pro sports. First, if we were to look over an extensive period of time, the advent of free agency has dramatically affected player pay. Under "reserve clauses" in sports, the only time players could change teams was to follow their contract. Through litigation and collective bargaining, these reserve clauses were modified to create free agency for players after a certain number of years in the league. As one would expect, once players are able to sell their services to the highest bidder, salaries increased. But this is an "earthquake level" event in salaries, shifting all pay, rather than the type of annual change over time that is the point of the myth.
The second overarching factor to consider is that player pay is tied by formula to revenues in three of the major leagues (all but MLB) through payroll caps. Through collective bargaining, owners and players decide how to split up sport revenues. The share that goes to players is then divided equally across all teams, and that is the so-called payroll cap. So players are restricted in their salary demands by the room that any given owner has under the cap in any given season. This is a nice segue into our main point: it is revenues that determine player salaries.
The chain of economic occurrences goes like this. Owners determine how much more fans are willing to pay for games and related goods and services (concessions, parking, memorabilia) at the gate and for games on TV. In Econ 101 terms, this is an increase in demand for the final sports product at the gate and on TV. Note that if nothing else happened, prices at the gate and for TV viewing would rise just because of this shift in demand. This has nothing to do with player pay at all ... yet. But there is more.
With a modicum of competition for player services, owners use this increase in revenue to bid among each other for player services, bidding up pay to players. In Econ 101 terms, this is an increase in the derived demand for player services. (One interesting thing about pro sports talent is that its availability doesn't change much with a change in price, so what fans typically see is the same players paid more than were previously. While this can be a head-scratcher, we all love it when we are simply in higher demand and our pay goes up while we do the same job.) So it is true that ticket prices and player pay go up at about the same time. But the causality is from revenues to player pay—that is, from the fact that fans are willing to pay more in the first place.
Now, the culmination of all of this is that player pay represents a cost to owners. So the final step in the economic chain of events is that the cost function for owners shifts up as well. So in addition to the fact that increased fan demand raises prices to fans, the increase in cost is partly passed on to fans as well. It is a bit of a technical issue, but owners cannot pass on the full cost of the payroll increase; demand slopes down, price rises, and owners don't raise price to all fans because some fans buy less as the price increases.
So the outcome is, as fans see it, that both prices and salaries go up. But the causality is not at all as portrayed by some owners and taken for granted by fans. Rather than salaries causing ticket price increases, it is ticket price increases that cause salaries to rise. The same is true for television and the growing presence of sports through streaming media, by the way. Increases in fan willingness to pay for games under the standard fee structure and under premium fee structures actually raise the price of those TV offerings. Players will also earn a part of this increase in revenues, but it is the increase in willingness to pay that starts the whole chain of events in motion.
As is always the case with myths, the data reveals this one for what it is. First, let's look at just recent history, sport by sport, where "recent" is defined by the latest available average salary data at USAToday.com or ticket price data in Team Marketing's Fan Cost Index. For MLB, recent is 2011 and 2012. MLB average salary changes ranged from a decrease of $1.6 million for the Cubs to a $2.2 million increase for the Marlins, with an average change of $96,916. The average percentage change across all the teams was 11.3 percent. Changes in the Fan Cost Index average ticket price ranged from a decrease of $11.67 for the Angels to a $10.56 increase for the Tigers. The average change was only $0.06, and the average percentage change across all teams was only 2.1 percent. Finally, the correlation between average salary changes and average ticket price changes across all teams for these two years was 0.01, essentially zero.
Looking behind these summary statistics shows why. Of the seventeen teams that showed average salary increases, four actually lowered their prices in nominal terms and, with inflation right around 2 percent, five more owners did not increase their ticket prices by greater than the rate of inflation. Thus, in total nine of the seventeen teams with increased payrolls actually lowered their prices. Of the thirteen teams that lowered their payrolls, four raised ticket price by more than inflation, counter to the requirements of the myth. Thus, in total, thirteen of the thirty MLB teams (43 percent) behaved counter to the myth for the 2012 season.
Performing the same comparison for the other three leagues generated the following results. Average NBA salaries (recent is 2009–10 and 2010–11) fell 14.2 percent, ticket prices fell 2.6 percent, and the correlation between payroll changes and ticket price changes was a negligible 0.24. Sixty percent of NBA teams behaved counter to the myth. In the NFL (recent is 2009 and 2010), average salaries fell 2.6 percent from 2009 to 2010, average ticket price fell 1.5 percent, and the correlation between payroll changes and ticket price changes was still small, at 0.38. Forty-one percent of NFL teams behaved counter to the myth. Finally, payrolls rose 5.8 percent in the NHL (recent is 2010–11 and 2011–12), average ticket price fell 1.0 percent, and the correlation between payroll changes and ticket price changes was a strong 0.78. Thirty-seven percent of NHL teams behaved counter to the myth. In summary across the leagues, between 37 and 60 percent of teams behave counter to the myth in the most recent data on average salaries and ticket prices. Any correlation between changes in average salaries and changes in ticket prices is small in three of the leagues. In the other, the NHL, the high correlation attests not to the myth but to the fact that ticket revenues are the largest proportion of total revenues in the NHL, compared with the rest. Rest assured that this summary also is true for a significant number of teams in each league back in time.
In fact, even earlier reports by USAToday prior to the Internet, show that the average MLB player salary was $19,000 in 1967, and it was $1,895,630 in 2000. So in nominal terms the average player salary was one hundred times what it was thirty-three years earlier. Again, getting reliable data is an issue, but it appears that ticket prices increased by less than ten times (still in nominal terms) over the same time period. If ticket prices must rise to cover ever-rising salaries, there is quite a large deficit issue revealed here. Other sports tell a similar story. For example, Fort (2011, ch. 7) has shown in his textbook the history of the behavior of salaries and ticket prices over the years for the pro teams in Boston. The same myth busting result occurs—over different periods of time for different sports in Boston, real ticket prices either stay constant or fall, and salaries continue to rise (the most startling example is the NHL's Boston Bruins). The relationship between salaries and ticket prices required to support the myth simply is not there.
Thus, rather than appeal to weak argument and claim that the rest of the teams at least behave according to the myth, the Econ 101 explanation explains these other teams as well. All you have to do is turn to the rest of the revenue streams, as we alluded to for the NHL. Salaries increase at much greater rates than ticket prices because ticket prices represent only a part of the revenue streams that players help to generate. When increases in TV and Internet revenues are added to the picture, it is easy to see why salaries outpace ticket price. The data tell us that player salaries tend to increase when players gain free agency, or when revenues dramatically increase with a big new media contract. So the Econ 101 explanation explains it all, while the myth explains at best a share of the outcomes for teams in pro sports leagues.
Looking at team-by-team payrolls within a league also helps confirm the causality we show. Within a league there is a correlation between market size, ticket prices, and player salaries. Places like New York and Los Angeles tend to have higher ticket prices and higher payrolls because they are larger markets. Certainly players are not greedier in bigger markets. Owners in large markets are not wealthier, either. For example, the wealthiest sports owner, Paul Allen, owns the Portland Trailblazers, not exactly the largest NBA market. The reason payrolls and ticket prices are higher in large markets is that those markets have higher demand. There are more fans willing to pay high prices to go to an MLB or NBA game in New York than in Toronto. Therefore ticket prices are higher, which creates a greater incentive to win, which creates higher payrolls. Furthermore, demand for the NHL is high in Toronto. And guess what, the highest ticket prices in the NHL are in Toronto, followed by another hockey crazed city, Montreal. While this has not translated into the highest payroll in the league (this might be explained by Maple Leaf fans going to games win or lose, thus reducing the team's incentive to win), higher ticket prices in Toronto shouldn't be blamed on high player salaries. There are typically counterexamples to these situations, but most of the time large markets create more fan demand, which leads to higher ticket prices, which leads to higher payrolls.
THREE OTHER MISTAKES
So, Econ 101 reasoning busts the myth that rising player salaries cause rising ticket prices. But there were three other related issues raised earlier as well ...
What does "high" price mean? Here we bring both a sense of history and the simple but exceptionally important economic tool of inflation adjustment into play. For example, in the NFL case in the introduction, perhaps it has always been true that a trip to the stadium has cost about the same as a trip to Disneyland. And perhaps the actual cost of either one hasn't risen any more than most other things. The only way to know is to look at history and inflation. For example, New England at $117.84 is right behind the Jets' top ticket price, but the Patriots have not changed this price since 2008–09. So ticket price did not rise even though player pay surely did over the last few years, and, actually, this represents a decrease in price adjusted for even the low inflation we observe lately. As another example, adjusting for inflation, the average fan cost index in both the NBA and NHL was higher in 1998 than 2010.
Excerpted from TWO SPORTS MYTHS AND WHY THEY'RE WRONG by RODNEY FORT. Copyright © 2013 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Stanford University Press.
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Table of Contents
1 Player Salary Demands Increase Ticket Prices.................... 5
2 Major League Baseball Should Emulate the National Football League........ 25
References and Further Reading.................... 43