Economics of sports

Stadium Ownership and Incentives to Relocate

One economic model that has proven to be effective in determining why and how teams relocate uses three factors. The three factors that are used are: the franchise owner, the stadium owner, and the local government. The assumptions that are made are that the franchise owner is primarily concerned with the net revenues of his team, and that the goal is profit maximization. The major determinants of net revenue are players salaries, stadium rent, television income, ticket revenue, capital gains from franchise value, and subsidies from the local government. The stadium owner is also concerned about net revenue and the local government is concerned with two things: the presence of the team and the cost of subsidies to the taxpayer. The equation is as follows:

P(Mi = I) = ZiBn + B1Si + Ei

The probability of a team to move in year I, Mi, depend of a variety of franchise factors including: metropolitan population growth, annual attendance growth, team’s winning percentage, and league-wide team expansion. Other factors that will effect a team’s movement would be falling attendance, losing seasons, declining metropolitan economies, or stagnant metropolitan population.

In sports, where a significant source of team revenue comes from ticket sales and local or regional broadcast revenue, owners will prefer to locate their teams in large and growing metropolitan areas. The reason for this is that these larger cities allow for increased ticket sales (or higher ticket prices) for a given stadium capacity. A final factor that might cause the owner to relocate is based on the team’s success and popularity. If a team has a losing tradition or when fan loyalty is low the owner has more incentive to move. Conversely, if the team is successful they will have strong fan loyalty and will more than likely stay in the same city.

Based on the data from 1950-1995 we can see that baseball attendance has risen 2.2 percent per year between 1960 and 1995. Also it is interesting to see that until the 1970’s only one-third of baseball seats were occupied on average, whereas today that number has risen to 50 percent. The data also shows that the likelihood of a sports team moving has been in decline. In the 1950’s the probability of a baseball team to move in a given year was 3 percent. That number has cut in half in the 1960’s and again in the 1970’s. It is also of note that between 1950 and 1995 there have been 10 major league franchises to move cities, however, all of these moves have come prior to 1972. From 1972 to the present day no Major League Baseball team has relocated.

New Collective Bargaining Agreement

Major League Baseball has suffered through six work stoppages; however none has been more severe than the 1994-1995 strike. The players strike was made because baseball wanted a salary cap which would even out the revenues of the teams. Gate and media revenues soared during the 1980’s and 1990’s, but not all baseball teams were equal benefactors. Teams located in the largest cities saw their revenues increase dramatically while the teams in smaller markets only saw modest growth. This fact allowed the larger market teams to sign high prices free agents while the smaller market teams simply did not have the money to sign them. Therefore, the smaller market teams wanted a salary cap so they could be able to sign some high quality free agents while the larger market teams did not want a salary cap because then they could not buy all the players that they wanted to. In the end the two sides elected on a luxury tax rather than a salary cap in order to end the strike without losing their audience of fans. The luxury tax would require teams whose payrolls exceeded a set limit to pay a tax. The main use of the luxury tax was to limit the seemingly endless growth of players salaries. The way the luxury tax works is that before the owners with the most money could afford to pay the most for their players without being penalized. However with the luxury tax if a team signs too many players with large contracts they will have to pay a luxury tax. This will hopefully lead to a more modest growth in player contracts in the coming years.