Sports Economics

Paul Downward, Alistair Dawson, Trudo Dejonghe

• Publisher: Routledge
• Year: 2009
• Print ISBN: 9780750683548
• eBook ISBN: 9781136435454
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Sports Economics is the ideal introduction for all sport management and sport policy students and those for whom economics is a relatively new area of study. The book will also provide an ideal introduction to sports economics for economics students new to the area. Specifically designed to make economics accessible the context of sport is the focus of analysis, ensuring that this book is lively, accessible and approachable.

The full scope of the sports economy is examined, covering the three main arenas in which sport takes place - mass participation, professional sports and sports events. The key elements of the economic representation of these three markets are considered, such as the underlying demand for and supply of these sports, together with the main policy issues affecting them

Whilst truly international in scope, it focuses particularly on specific comparisons between the US, the UK and mainland Europe. The breadth of discussion and international emphasis is brought to life by a detailed discussion of the evidence throughout the book to illustrate the key themes discussed – ideal for both lecturer and student. Reflection questions and boxes are also used in chapters to prompt the reader to think about specific points as well as to provide the context for specific theoretical or empirical contributions that have been used to analyze sport.

Chapter 1

The Economics of Sport

Objectives

To understand some main features of economics

To understand the relationship between sport and economics

To appreciate the main features of economic methodology

To understand how the perfectly competitive model of resource allocation could apply to sport

To appreciate why market failures are important in sport

1.1 Introduction

To understand how economics can be used to analyze sport requires an initial appreciation of some key tenets of economics on which to base subsequent, more detailed, discussion. To meet this need, this chapter begins by examining definitions of economics and shows, in the subsequent section, how these are related to the methodological emphasis of economic analysis. Section 1.4 illustrates the main emphasis of economics, and draws out the main policy thrust of economics, by outlining the key theory of the perfectly competitive model of resource allocation. A distinction is drawn between the production of predictions from theory, or “positive” economics, and the evaluation of the outcomes predicted, or normative economics. Section 1.5 presents elements of market failure that are invoked to provide a rationale for policy intervention. Each of the theoretical concepts, empirical approaches and policy implications discussed in this chapter are then referred to or elaborated on in subsequent chapters. Section 1.6 discusses the limits to policy action in sport, and a brief introduction to the empirical approach employed in economics to test predictions from theory is presented to conclude the chapter.

1.2 What is Economics?

Box 1.1 presents three historical definitions of economics that Lawson (2003) argues are widely acknowledged as foundations for the emphasis of economics. They are abstract and general, and have similarities and differences. Both Mill and Marshall, for example, emphasize the connection between individual human activity and society, particularly through the production and distribution of material that contributes to well-being. There is some implication that wealth is connected to measurable or tangible material that is, for example, exchanged on markets. It is this that tends to link the traditional study of economics with, for example, financial and industrial subject matter.

Box 1.1Definitions of Economics

1. “Writers on political economy profess to teach, or to investigate, the nature of wealth, and the laws of its production and distribution, including, directly or remotely, the operation of all the causes by which the condition of mankind, or of any society of human beings, in respect of this universal object of human desire, is made prosperous or the reverse. Note that any treatize on political economy can discuss or even enumerate all these causes; but it undertakes to set forth as much as is known of the laws and principles according to which they operate.”
   Mill, J.S. (1900) Principles of Political Economy with Some of Their Applications to Social Philosophy. London: George Routledge and Sons, p. 13.
2. “Political economy or economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus, it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.”
   Marshall, A. (1952) Principles of Economics: An Introductory Volume, 8th edn. London: Macmillan and Co., p. 1.
3. “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”
   Robbins, L. (1940) An Essay on the Nature and Significance of Economic Science. London: Macmillan and Co., p. 16.

Clearly this could apply to professional team sports. In this context money changes hands in the production, distribution and consumption of sport. Money, of course, is the mechanism by which key sporting resources such as players are obtained and allocated between the various teams, to use in competition against their opponents on the field.¹ The purchase and sale of players, as well as payment to them to perform, requires financing decisions. Consequently, gate and television revenues need to be earned to pay players’ salaries. Clubs and their amalgamated organizations, such as leagues and governing bodies, must coordinate match schedules since they cannot be produced in isolation, and potential spectators must be informed where and when matches are to occur. In turn, spectators need accommodation and a means by which payment can be made, while restricting access to the sport to non-payers. Historically, stadia were necessary features of commercial sports supply. Spectators could also pay to watch broadcast sport, although payment has not always been necessary.

Characteristics such as these indicate that, rather like the production, distribution and consumption of other goods and services, professional sport can be viewed as an economic process. Inputs, or factors of production, such as labour (the athletes and manager/coach) are combined with capital (the sporting field, equipment and so on) to produce, along with another team in the league, a product (the fixture) that is sold to consumers (spectators and supporters) typically in a stadium, or via broadcast media.

Yet Robbins’ definition in Box 1.1, which has come to be embraced by economics, is broader in concept and consistent with recognizing that economic activity is not, of necessity, connected with the creation and redistribution of material wealth per se. In this regard there are similarities between professional team sports, as well as amateur sports and sport in general, as economic phenomena, if choices have to be made over the allocation of resources to supply and consume these activities. These issues are discussed in some detail, for example, in Chapters 3 and 6. If nothing else, participating or volunteering in sports activities “costs” time, which is a resource that is scarce to everybody. This is in addition to the resource allocation issues associated with the commercial provision of non-professional sports activities, as discussed in Chapter 5. Robbins has been one cornerstone of the development of economic methodology, which is now discussed.

1.3 Economic Methodology

Robbins’ legacies for economics are two-fold. The first is that scientific propositions on economizing are associated with attempts to produce generalized understanding or “laws” of behaviour. The second is that economics becomes a tool for assessing rational choices between courses of action.

As far as testing economic theories is concerned, Friedman (1953) has been particularly important and emphasizes testing the predictions of theory regardless of the realism of its assumptions. Friedman’s argument provides a link between theories that can be constructed on idealized conceptions of rational economic behaviour, that are literally false, for example motivated by the definition of Robbins, and the empirical relevance of theory as an aid to policy.

This broad method of analysis, in which rational economic behaviour is postulated for economic agents which is used to deduce predictions that are tested against data, is applied to all economic problems, including those associated with sport. Economics purports to offer “covering law” explanations of phenomena. The specific subject matter analyzed is understood in terms of a general theory of behaviour. In its core assumptions connected with rational behaviour, economic analysis does not make allowance for the analysis of different sports taking place in different countries or in different time periods. However, it does attempt to accommodate different institutional contexts. It is important to bear this issue in mind, as this approach is different to those of disciplines such as sociology, history and politics, which may be more familiar to, say, sports management students, and in which the specific context and character of sports is explored.

The economic approach can be understood more clearly, as well as highlighting some important economic concepts, by considering the core economic model of perfectly competitive market allocation of resources. Both its “positive” and “normative” characters are discussed. Although philosophically contentious these terms reflect, as distinguished by Friedman (1953), that statements about economic activity can have the aspiration of being value-free and concerned with testable theoretical propositions, or be concerned with prescription, for example policy, based on value judgements.

1.4 A Core Economic Model: Perfect Competition and Efficient Resource Allocation

1.4.1 Positive Economics

Although discussed in a more appropriate way in Chapter 9, the representation of a sports league is used to illustrate the model of perfect competition. The sports league can be viewed as the industry, or synonymously the market, producing the output of sporting contests, i.e., fixtures, with individual teams or clubs within the league being viewed as firms within the industry. The fans who pay to watch games are the consumers who demand sports fixtures. As implied earlier, it is assumed that economic agents in markets are rational. They have perfect information about the implications of their decisions, and they pursue clearly defined goals. It is assumed that clubs or firms seek to maximize their profit, while the fans seek to maximize their utility, which is enjoyment, from viewing fixtures from the league, made possible through the purchase of tickets.

While this might seem to be a reasonably plausible scenario, notwithstanding the assumption about the information possessed by clubs and spectators, the model also assumes that each club and fan is “atomistic,” i.e., they are infinitesimally small relative to the total number of clubs or fans. In this regard, their individual decisions to buy and sell tickets to watch sports fixtures cannot affect industry-level activity as a whole. It is also assumed that there is freedom of entry and exit to the industry. This implies that unprofitable clubs can leave the market or league, while profitable clubs may attract the entry of other clubs looking to compete for their profits. Clubs may also offer more or less fixtures to the league as required. In this respect, resources in this sports market are free to come and go. It is also assumed that the product supplied by any set of teams – a sports fixture – is identical to all others,² and there are no differences assumed between the quality of sports fixtures or the identity of fans to particular teams. The only impetus to watching one particular fixture rather than another is the ticket price. However, because clubs cannot affect ticket prices, they cannot brand their fixture, and cannot draw on particular allegiances from fans. Everyone has to accept the ticket price as established in the market as a whole. Clubs are “price takers.” These are clearly unrealistic assumptions.

To explore the implications of these assumptions in more detail requires exploring the demand side and supply side of the market in more detail. Figure 1.1 provides a diagrammatic representation...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• Series editor
• About the authors
• Sports Management series preface
• Preface to Sports Economics
• List of figures
• List of tables
• Chapter 1: The Economics of Sport
• Chapter 2: The Nature, Organization and Economic Significance of Sport
• Chapter 3: The Economics of Sports Participation
• Chapter 4: The Economics of Sports Participation: Evidence
• Chapter 5: The Supply of Participant Sport: The Public and Private Sector
• Chapter 6: The Supply of Participant Sport: Volunteers and Sports Clubs
• Chapter 7: The Market for Professional Sports: General Themes
• Chapter 8: Uncertainty of Outcome, Competitive Balance and Bias in Sports Leagues
• Chapter 9: Cross-Subsidization in Professional Sports Leagues
• Chapter 10: The Demand for Professional Team Sports: Attendance and Broadcasting
• Chapter 11: The Labour Market in Professional Team Sports
• Chapter 12: The Economics of Sports Events and Infrastructure
• References
• List of abbreviations
• Index