HA HU7A - Economics of Sport

Faculty
Liam Lenten, La Trobe University

Course Coordinator
ISUP Secretariat

Prerequisite/progression of the course

1st year undergraduate Microeconomics.

Course content, structure and teaching

The aim of this unit is to identify the constraints and opportunities that will affect the ability of sports to survive in an increasingly competitive, global marketplace. It is a specialised area of applied Microeconomics, and is thus somewhat different to the more management and marketing-based unit offered currently at CBS by Troels Troelson (HA-E68). Nevertheless, it is a viable option for Economics students looking to take an elective unit with something of an acquired interest.

Particular emphases will be placed on examinations on the main Sports Economics themes with applications to the big four North American pro-leagues, the major European football leagues, as well as Australian professional sports leagues. Topics covered will include: labour markets in various sports, including the effectiveness of regulations such as player drafts and salary caps; the ways in which sports have coped with recent substantial increases in revenues and costs; the identification of the market for particular sports and the extent of competition within those markets; and the extent to which the commercialisation of sport is inconsistent with the traditions and cultures of individual sports.

Introduction (1 lecture)

(Reading: Leeds and von Allmen, Chapter 1)

Microeconomic Principles and Sport (5 lectures)
- Opportunity Cost and Comparative Advantage
- Demand, Supply, Equilibrium and Economic Welfare
- Price Ceilings and Scalping
- Economic Welfare Effects
- Scalping v Queuing
- The Importance of Leagues

Reading: Leeds and von Allmen, Chapter 2)

Economics of Sports Broadcasting (3 lectures)
- Ads and Preference Formation
- The Sports Broadcast Rights Market
- Sports Leagues & Broadcast Rights
- Media Providers & Advertising
- Media Ownership of Sports Teams
- Firms and Advertising Choice
- Sponsorship
- The Impact of Big Rights Money

(Reading: Fort, Chapter 3)

Sports Leagues Behaviour (3 lectures)
- Alternative Models of Firm Motivation
- Profit Maximising US Owners
- Profits: Revenues and Costs
- Leagues and Revenue Sharing
- Costs
- The Importance of Leagues

(Reading: Leeds and von Allmen, Chapter 3)

Competitive Balance (3 lectures)
- Introduction: the US-Style Story
- The Fan’s Perspective
- The Owners’ Perspective
- Measuring Competitive Balance (CB)
- Attempts to Alter CB
- Effects of Attempts to Alter CB

(Reading: Leeds and von Allmen, Chapter 5)

Labour Markets in Professional Sports (3 lectures)
- Introduction
- Overview of Labour Supply and Demand
- Monopsony and Other Restrictions of Competitive Markets
- The Economics of Tournaments and Superstars

(Reading: Leeds and von Allmen, Chapter 8)

Win-Max Pro Sports: AFL Case Study (8 lectures)
- Introduction
- AFL League History, Club Objectives and Ownership
- Labour Market Devices and Revenue Sharing Rules
- Review of US Literature
- Win-Maximising Model for the AFL
- Past and Present Policies Used in AFL
- Gate- and League-Revenue Sharing
- AFL National Player Draft and Salary Cap
- Model's Prediction on AFL Competitive Balance
- Evidence on Competitive Balance
- CB Comparisons with North American Pro-Sports
- CB Balance Comparisons: Other Australian Leagues

(Reading: sections from the following references):

Booth (2003), (2004a), (2004b), (2004c), (2005a), (2005b), (2005c);

Fort and Quirk (1995);

Macdonald and Borland (2004).

(Note: references to these will be made at the appropriate intervals during the lectures)

Public Finance of Sports (1 lecture)
- How Teams Exploit Market Forces

i. Leagues, Cities and Monopoly Power

ii. The All-or-Nothing Demand Curve

iii. The Winner’s Curse

- How Major Events Induce Overspending

(Reading: Leeds and von Allmen, Chapter 6.2-6.3)

Subsidies and Economic Impact Analysis (1 lecture)
- Pros and Cons of Public Sector Subsidies
- Direct Benefits
- Indirect Benefits
- Multiplier Effects

(Reading: Leeds and von Allmen, Chapter 7.1)

Review (2 lectures)

(Time Permitting) Case Study: Scottish Football’s ‘Old Firm’ (2 lectures)
- Origins of Football in the UK
- Formation of the two ‘Old Firm’ Teams
- How They Realised That There Was Money to be Made
- The Souness Revolution
- Role of Growing Importance of ECL/UEFA Cup

(Reading: Murray, 2000, Chapter 11)

Problem sets will be distributed for each topic – these will provide some guidance with study in advance of the final exam.

The course's development of personal competences

Analytical, computational, written and technical skills.

Learning Objectives

At the end of the course students should be able to:

Understand that because sports teams and leagues are actually businesses, standard economic tools can enhance your appreciation of sports ‘off the field’;
Understand why team owners, fans and players/athletes have different objectives, and hence why these groups often do not agree;
Explain the concept of demand in the sports industry, why it varies for different types of sports, and why teams have market power;
Discuss the relationship between economic principles in sport, such as: demand, elasticity, total revenue and marginal revenue;
Explain why variation in revenue between teams is a major source of competitive imbalance between teams on the field, and hence tension between teams;
Consider alternative regulatory policies that a league may put into place in order to increase competitive balance between teams, and some of the side-effects that they may generate;
Recognise that the value of athletes and their pay are influenced by numerous factors;
Understand the differences between profit-maximising and win-maximising behaviour of sports teams, and the potential alternative outcomes that they can generate;
Investigate the role played by Governments at various levels in the sports industry, such as regulation and/or funding of sporting teams, events and stadia.

Teaching methods

The bulk of this subject will be taught via conventional lecture-style presentations. However, there will be one major case study (topic 7), in which the teaching style will differ slightly. There is also the possibility of a second case study (topic 11).

Examination

Final exam: 4-hour written exam (closed book).

Total of 100 marks:

Section A: Five short-essay style questions (5 x 5 = 25 marks)
Section B: Five longer-essay style questions (5 x 15 = 75 marks).

Exam aids: No materials will be permitted at the exam.

Re-take exam: 24-hour written exam.

Recommended literature

Primary text:

Leeds, M., and von Allmen, P. (2008) The Economics of Sports, 3rd International Edn., Pearson Education, Boston. (ISBN: 0-321-49693-0)

Supplementary texts:

Fort, R. D. (2006) Sports Economics, 2nd Edn., Pearson Education, Upper Saddle River, New Jersey. (ISBN: 0-13-170421-4)
Murray, W. J. (2000) The Old Firm: Sectarianism, Sport and Society in Scotland (Rev. edn.), John Donald Publishers, Edinburgh (only if topic 11 covered). (ISBN: 0-85976-542-3)

Journal articles and monographs:

Booth, D. R. (2003) “League-Revenue Sharing and Competitive Balance”, Melbourne, Monash University Department of Economics Discussion Papers 03/03: 1-16.
Booth, D. R. (2004a) “Labour Market Intervention, Revenue Sharing and Competitive Balance in the Australian Football League, 1897-2002”, (appears in Fort, R. and J. Fizel, 2004: 319-336).
Booth, D. R. (2004b) “Player Sales, Trade of Players and Draft Choices and Competitive Balance”, Melbourne, Monash University Department of Economics Discussion Papers 05/04: 1-30.
Booth, D. R. (2004c) “The Economics of Achieving Competitive Balance in the Australian Football League, 1897-2004”, Economic Papers, 23(4), 325-344.
Booth, D. R. (2005a) “The Economic Development of the Australian Football League”, (appears in Andreff, W and S. Szymanski, 2006: 552-565).
Booth, D. R. (2005b) “Comparing Competitive Balance in Australian Sports Leagues, the AFL, NBL and NRL: Does the AFL's Team Salary Cap and National Draft Measure Up?” Sport Management Review, 8(2), 119-143.
Booth, D. R. (2005c) “Some Economic Effects of Changes to Gate-Sharing Arrangements in the Australian Football League”, Melbourne, Monash University Department of Economics Discussion Papers 21/05: 1-33.
Subsidisation, Incentives and Outcomes in Professional Team Sports Leagues”, Journal of Economic Literature, 33 (3): 1265-1299.
Macdonald, R. and J. Borland (2004) “Professional Sports Competitions in Australia”, (appears in Fort, R. and J. Fizel, 2004: 295-317).

Reference Books:

Andreff, W., S. and Szymanski, S. (eds.) (2006) Handbook on the Economics of Sport, North Hampton, Edward Elgar. (ISBN: 1-84376-608-6)
Fort, R. and J. Fizel (2004) International Sports Economics Comparisons, Westport, CT, Praeger Publishers. (ISBN: 0-27598-032-4)