Deck 9: The Economics of Professional Sports: What Is the Real Score

Question 1

Explain why professional sports teams must cooperate with one another in order to produce competitive games for fans.

Answer 1

The professional sport business:
The professional sport business is an activity that includes creating, expediting, indorsing, or organizing any activity that is solely focused on sports. Under this business, professional players received the payments based on their performance. Due to the presence of mass media and better leisure, it brings larger audiences. As the audiences have increased, the sports organizations churned into large incomes.
Corporation between professional sports teams:
In the quest of making profitable professional sports team, they face a myriad of economic decisions. Competition is lifeline for all sports. A professional sport team is required to compete on the field against other teams, and this brings the attention of the ticket-buying fans. Thus, a professional sport team will not be able to operate independently, but it has to seek cooperation from other professional sports teams to entertain the public. This is required for the institutionalization of professional sports teams into professional sports leagues.

Question 2

What is a cartel? What industry characteristics are necessary for the successful formation and operation of a cartel?

Answer 2

Cartel
Cartel is formed by two or more producers through formal agreement to protect their own interest. The objective of cartel is regulating the market either by manipulating price or regulating supply.
Requirement for successful cartel:
The requirement for successful cartel is that all cartel members must be accountable for the output supplied in the market. The greater proportion of total market is supplied by cartel members, and the carter has greater degree of monopoly in the market. To maintain the monopoly in the market, the cartel must restrict the entry of new players in that market or integrate new players into the cartel as members.
Another requirement for successful cartel is that goods produced by cartel member must be homogenous. Pricing and output agreements allow cartel members to enforce and maintain homogenous products.
Third requirement for successful cartel is that cartel member must agree to determine the methodology to share the combined market power. In professional sports, the professional sports league structure determined the market territories and output quotas.
The last requirement for successful cartel is the preventive method to check on "cheating" cartel member.

Question 3

Professional baseball enjoys a special legal exemption in the United States. What is this exemption, and why does it exist? Does it apply to other sports leagues?

Answer 3

Sports league:
Sports league refers to a group of professional sports teams that compete against each other in a particular sport.
Professional baseball is exempt from Sherman Antitrust Act, which protects the league from getting sued for violations of federal antitrust.
Sherman Antitrust Act of 1890 is a legislation that was passed by congress under the presidency of Benjamin Harrison. This legislation provides ammunition to check the oppressive practices with cartel activities and unjust monopolies. It is used to remove illegal behavior and promote free and fair business activities.
In the United States, the professional sports teams of football, hockey, and basketball are exempted from Sherman Antitrust Act of 1890.

Question 4

Explain how professional sports leagues maximize joint profits through coordinated behavior in the product market. Will each team earn the same amount of profit under a cartel agreement as it would if market competition prevailed?

Question 5

Why does a cartel's marginal revenue curve lie below its demand curve? Explain with a numerical example and a graph.

Question 6

Why do taxpayers continue to support the public financing of new stadiums and arenas for professional sports teams? Are new stadiums and arenas good investments for a metropolitan area? Why or why not?

Question 7

Discuss the economic pressures and incentives for professional sports teams to relocate. Are professional sports teams an important tool for a city's economic development? Explain why or why not.

Question 8

What is a monopsony? What conditions give rise to a monopsony? How can professional sports teams be considered monopsonies?

Question 9

What is free agency? How has it eroded the monopsonistic power of professional sports teams?

Question 10

For many years professional football players have earned on average less than half of what professional baseball players earned. Using economic reasoning, how can this fact be explained?

Question 11

Why do team owners rigorously regulate the number of teams in their league? Under what circumstances would team owners vote for an expansion in the number of teams? When would they vote for a reduction in the number of teams?

Question 12

What is the difference between a strike and a lockout? Why are labor disputes so common in the professional sports industry?

Question 13

Define what is known as monopsonistic profit. How is it different from normal profit? If an employer is earning monopsonistic profit, are workers being "underpaid"? Why or why not?

Question 14

What is a salary cap and why is it an important issue during labor negotiations in professional sports?

Question 15

Use economic analysis to explain why labor disputes have become common in professional sports. In your opinion, which side has the advantage during collective bargaining-the owners or the players? Why?

Question 16

From an economic perspective, explain why some professional athletes choose to consume performance-enhancing drugs. What can professional sports leagues do to reduce the incidence of illicit substance use among players?

Question 17

How does a single-entity sports league differ from the traditional structure of professional sports leagues in the United States? What is the consequence on player salaries of a single-entity league? Explain.

Question 18

From an economic perspective, are professional sports players worth their multimillion-dollar salaries? Explain.

Question 19

Use economic analysis to explain why the average NBA player salary is greater than the total salaries of all players on an average MLS team.

Question 20

Explain the economic consequences that would unfold if one of the major four sports leagues reorganized into a single-entity league. Discuss the consequences for players and fans.