Sports Economics for Non-Economists

Wray Vamplew

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000570076
• Edition: 1
• Topic: Business
• Subtopic: Sport & Exercise Science
• Index: Business

This book cuts through the jargon and complicated formulae to focus on the key concepts in sports economics, introducing the fundamentals in a concise and engaging way to give the reader without a background in economics the tools with which to read and apply sports economics in their work.

Full of real-world cases and stories, the book offers a short economic history of sport and explains the economic foundations of the world of sport today, from local leagues to mega-events. Covering both amateur and professional sports, it explores and explains the most important issues in contemporary sports economics, from player transfer markets and the rise of women's sports to the spending behaviour of fans and the growing shadow of corruption.

A fascinating read for any student, researcher or practitioner working in sport, or for the general reader who wants to understand the background to many of the most important stories in sport today, this is the only book on sports economics that you will ever need.

1 The Sports Business Is Different

DOI: 10.4324/9781003128632-1

Is the Business of Sport Different from ‘Real’ Business?

Much of the economics associated with sport is conventional. Funds have to be raised, wages have to be paid, and resources have to be allocated to the production process. Yet in some respects, sport and spectator sport particularly have peculiar economics.

In my first degree, I majored in economics and economic history. My PhD was an econometric history of the Scottish railways, but then I turned to sports history and discovered that the economics I had been using did not readily apply to this new field of interest. This was in the early 1970s, coincident with the emergence of sports economics as a subdiscipline of mainstream economics. What became clear as I pursued my own studies and read what the sports economists were publishing, was that in many instances, the sports business and what I will term conventional business were different creatures.

When I did my degree, the whole basis of microeconomics – the study of the firm – was centred around the idea that firms sought to maximise profits. This I soon discovered did not always apply to the particular sports industry which I was examining: horseracing. Owners often possessed racehorses as a status symbol; the horses were consumption goods rather than profit-oriented investments. Then, as I began to investigate football (soccer) and cricket clubs, I found that they too were often motivated by forces other than profit. This led to me contributing historical evidence to the development of utility theory in which winning in sport is deemed more important than making money. I found that county cricket clubs were dependent on the distribution of revenue from tests to keep themselves afloat, most soccer clubs were in debt, and horseracing existed only because owners were prepared to treat it as a hobby rather than a business. Little seems to have changed!

Now you might ask, ‘Doesn’t winning lead to larger crowds, greater revenue, and profit?’ The answer is ‘not always’. In fact, the two objectives can require different economic behaviours. Profit-maximisers are well aware that profit is determined not by revenue but by revenue minus costs. However, utility seekers, those looking for cups and championships (or sometimes just beating local rivals and gaining bragging rights), will be willing to spend all (or most of) their income to improve the team, leaving little surplus for distribution to owners or shareholders. Although sports economists have tended to prefer the term utility, a few have preferred the concept of satisficing behaviour, which infers that profit-maximising is not the aim of the enterprise. Hence in the case of sport, it might cover utility objectives but also revenue-maximisation or profit-seeking within limits set by other ambitions. Yet utility-maximisers cannot all achieve their aims. Every firm can be a winner in an economic boom, whereas there can be only one champion, only one gold medallist.

Another significant difference is that while most manufacturers in the non-sport world sell the certainty of their output as being reliable, the uncertainty of the result is a bedrock of sport. Sport is a product whose result or quality cannot be guaranteed: there is no script, no template, and no identical replication. Indeed, uncertainty is the selling point of the sport product, and a maxim of many sports economists is that the more unpredictable a contest the greater the attendance is likely to be. This brings in two related, and often conflated, sports economic concepts: uncertainty of outcome and competitive balance. Uncertainty of outcome generally refers to the potential result of any individual match within a league or tournament and, by extension, to the competition as a whole; whereas competitive balance is usually considered as having teams or competitors of equal playing ability or handicapped in some way as to render their abilities more equal. We will return to these concepts in Chapter 9.

A further difference between sport and conventional business relates to monopolistic and monopsonic behaviour in which a single seller or a single buyer dominates the market. Becoming a monopoly is not an objective for clubs or individuals in sport, whereas in the business world, a firm can prosper if it can eliminate all competition and become a monopoly supplier, as this will allow it to raise prices and increase profits. Such a position in the sporting world would be self-defeating since, unlike in conventional business, firms and individuals in the sports industry need a competitor before a saleable product is available. As Walter Neale, a pioneer in sports economics, remarked, ‘[I]t is no good being heavyweight champion of the world if you have no one to fight’ (Neale 1964). He coined the term product-joint in contradistinction to the joint product that economic textbooks mention when (say) crude oil is processed to make petrol, lubricants, or asphalt or when milk is used to obtain butter, cheese, and cream. No other form of commerce requires rivals to work together to produce a saleable product.

Leagues often operate as cartels, something generally illegal today for conventional businesses in order to prevent them from fixing prices and restricting competition. Yet this is precisely what has happened in most professional team sports. The sports industry has a history of regulations, determined by leagues, which have impacted the free movement of labour and not allowed employees to choose where they want to work or for whom. Equality of competition has been promoted by weakening the stronger teams and strengthening the weaker ones by such methods as salary caps, reverse-order drafts, and various forms of revenue redistribution. Moreover, the leagues can impose restrictions on new entrants to the sports industry. In other businesses, if you can raise sufficient start-up funds, you can become a new bank, an oil company, or whatever, but in sport, your application to join a league can just be refused, or you may have to join at the lowest level of the pyramid in a promotion/relegation system. Moreover, in no other labour market can employers collectively impose restrictions on payment to workers, as giving teams exclusive property rights to the human capital (see Chapter 5) of their labour force is illegal in most economic activities.

A final difference is that, whereas conventional business can often respond immediately to market signals by increasing or decreasing output, most sports leagues operate on a fixed supply schedule in the short to medium term as league size (and hence the number of matches) is determined for a season at a time. Upwards expansion in terms of tickets sold can also be restricted by stadium capacity, though this also applies to normal firms that wish to build new production capacity.

The Americans Are Different

The standard model of American sport is different from the European version (van Bottenburg 2011) with the caveat that both are different from the European model that developed in the former communist bloc. As a sweeping generalisation, European sport has developed in a different way to that in the United States. America developed basketball, baseball, ice hockey, and its own version of football, whereas virtually all Europeans have kicked a soccer ball and others have made tennis, gymnastics, and cycling significant participant and spectator sports. The development of these sports was organised in different contexts. Again to generalise, schools, colleges, and universities were paramount in the United States, while in Europe the major role was taken by voluntary clubs and associations. There will be exceptions to all these statements. Some sports, like tennis and golf, are played everywhere; America does have voluntary clubs and non-profit-oriented sports bodies, but they don’t have the significant influence that they have in Europe; finally, Europe is a collection of nations, many of whom had their own sporting characteristics.

As a basic generalisation, American professional sports teams have making money as their primary objective, whereas in Europe owners were consumers seeking utility from their spending rather than profit-seeking entrepreneurs. The literature on North American sports has tended to de-emphasise utility-maximisation on the grounds that there is no evidence that owners have received less than a market return on their investment, and generally, they make capital gains when they dispose of a franchise. Even poorly performing teams can make profits and few US teams make losses in any season. In contrast, few professional teams in Europe make consistent profits and instead rely on benefactors (wealthy individuals or supporters groups) to keep them afloat so that they can focus on winning cups and championships, gaining promotions, and avoiding relegations (Szymanski 2004, 2006; Sloane 2006). In neither case does this infer homogeneity in the club structures, just an overarching motivation. American sports were commercialised and professionalised earlier and more thoroughly than in Europe, which had consequences for the way in which they were operated. Given their commercial proclivity, it is no surprise that to protect their investments, American team owners opted for their leagues to be closed institutions of competing franchises in which the sole quality control mechanism was gate-money. In contrast, meritocracy was the key feature of European leagues, which were generally open ones in which teams were promoted or relegated between divisions.

A significant difference between European sport and that of North America has been the development of pan-national team sport competitions. Entry to these comes from performing better than other clubs in their domestic leagues and cups, of which there is a plurality at the elite level across Europe. Despite discussions, there are, as yet, few European-wide leagues in sports, but there are several knock-out cup competitions. These European-wide competitions are additional (and significant) revenue generators for the clubs, giving them an added incentive to strive to win. In North America, there is some interchange between Canada and the United States, but only within the context of existing leagues. Generally, the American leagues have remained national in orientation without any international regulatory bodies. This has sometimes led to competing leagues in the same sport, something relatively unknown in Europe with basketball a notable exception (Szymanski 2004). Additionally, North American leagues are generally run centrally by a decision-making body in which all club owners participate, whereas, for example, UEFA, a non-profit federation, runs the pan-European soccer competitions independently of full club representation.

Among other differences which will be discussed in more detail later in the book are as follows:

• Americans punish success (via the reverse-order draft) while Europeans punish failure (via relegation).
• Americans pursue the drafting and trading of players rather than a monetary transfer system.
• American leagues operate on a franchise system with territorial exclusivity granted so as to protect the investment of the owners, whereas Europe has larger leagues with several cities having more than one team. In America, this only applies in major metropolitan areas such as New York, Chicago, San Francisco, and Los Angeles.
• With very few exceptions professional sports teams in North America are privately held businesses that do not issue shares on the stock exchange. None are operated by clubs or supporter groups, as is common in Europe.
• American clubs own teams in minor leagues so that in effect promotion and relegation applies to players not the clubs.
• Revenue sharing is more common in North America, whereas in European football, for example, the only centralised sharing comes from television revenues and with no implication of equal shares.
• Surprisingly in the land of the free and free enterprise, there is significantly more intervention in the labour market in North America.

Have globalisation (Chapter 12) and hyper-commodification (Chapter 2) on both sides of the Atlantic led to a convergence of the two models? Certainly, European clubs have sought to learn merchandising lessons from their American counterparts, the growing size of television contracts have encouraged equity capital companies to move into franchise sports like Formula 1, and some see the move of American owners into European sport – or, more precisely, British football – as the thin end of the wedge (Nafziger 2008). Things are changing, but have they changed enough to render these models invalid? Closed competitions in team sports have been rejected in Europe (so far) and the franchise principle has not caught on (yet). I wrote this before the short-lived proposal for a cartelised, closed-shop European Super League in soccer. It fell victim to an outraged European soccer public and media, but its proposer has warned that the idea is dormant not defeated.

Public Policy and Political Economy

The sports business does not operate in a political vacuum. Public policy can involve exemptions from the law (consumer and trade practices) and often substantial levels of public funding. Governments can influence sport through their ideologies: because they want to demonstrate the superiority of their system through winning a haul of gold medals, because they want to announce their arrival on the world stage by hosting an international event or to do the same to stimulate economic regeneration, or perhaps because they want a fit and active population able to increase the country’s economic output. Sport can also be affected by general government fiscal and monetary regulations, such as the tax they demand from itinerant foreign nationals like professional athletic, tennis, and golf stars, or the decisions to bring in an austerity or an expansionary economic policy. Then there are regulations aimed specifically at sport either to impose a restriction or give sport leeway from rules applied to other businesses. In the interests of profit-maximisation, the US government allows its major team sports leagues to practise pseudo socialism with revenue sharing and reverse-order draft systems while, as part of its strategy for World Cup glory; communist China encourages private investment in its leading soccer teams. In North America, most revenue-sharing schemes have not been challenged in the courts, though the collective selling of broadcasting rights, which was deemed anti-competitive by the courts, was exempted by Congress from anti-trust law. In Europe, redistributive arrangements have been encouraged by the European Commission with the aim of maintaining competitive balance and allowing the professional leagues to aid the amateur game (Szymanski and Késenne 2004).

Essentially, towards the close of the twentieth century, there were three prevalent systems of sports financing in operation. At one end there were the fully planned (but not always efficiently organised) sports systems which were state-run and state-financed. At the other end was the United States, where sport is dominated by private, usually profit-seeking, enterprises, and in the middle lies the European model where most funding, especially at the grassroots level, emanates from household and local authority spending with sponsor finance and national government aiding elite sport. Compared with Europe, the American government scarcely influenced the development of the sporting organisation, function, or culture, and the government takes no overall responsibility for sport at either state or federal level. Sports in the United States were market-driven and developed indepe...