Deck 3: Sports Franchises As Profit-Maximizing Firmsintroduction

Question 1

An executive for the Toronto Blue Jays once bragged that he could turn a multi-million dollar profit into a multi-million dollar loss without violating generally accepted accounting principles. Show how a team might be able to do this.

Answer 1

There are many ways to do this. One is by depreciating players as in Question #3. Another way is for the team to pay the ownership a salary. This turns the owners'
return into a cost, thereby reducing profits.

Question 2

Why might a team owner prefer to raise funds by borrowing money to selling part ownership of the team to others?

Answer 2

The team owners may not want to sell part ownership of the team because they do not want to dilute their control over the franchise. Tax considerations also make debt more attractive. First, because the IRS regards interest payments as a cost while it regards dividend payments as profit, dividends are subject to double taxation (as profits and as income), making them less attractive. Since interest payments are considered a cost, teams can therefore understate profits when negotiating lease agreements with their host city. Finally, a team owner must control all (or almost all) of a franchise in order to take advantage of Subchapter S of the tax code, again making dilution of ownership less attractive.

Question 3

Why are the Dallas Cowboys more valuable than the New York Yankees?

Answer 3

The Yankees draw millions more fans and play in a far larger media market, but the Cowboys venue revenue dwarfs anything the Yankees bring in thanks to the hundreds of luxury boxes in Texas Stadium.

Question 4

The Miami Dolphins are not like Blockbuster Video because

A) the Dolphins are worth so much more money.
B) Blockbuster wants to drive its rivals out of business, and the Dolphins do not.
C) professional sports teams cannot act in restraint of trade.
D) Blockbuster seeks to maximize profit, the Dolphins do not.

Question 5

Why is it important for leagues to limit the entry of teams within a given geographical area?

Question 6

Using the revenue and cost model developed in this chapter explain why an NFL team that is losing gate revenue may still make a profit.

Question 7

Maximizing revenue is the same thing as maximizing profits.

Question 8

True or False; explain your answer. "The fact that the Los Angeles Dodgers' profits have risen so dramatically in recent years shows that Frank McCourt is a much better businessman than Rupert Murdoch.

Question 9

Many stadiums have restrictions that prohibit fans from bringing outside food and beverages into games. Under what circumstances will this be a profit maximizing policy?

Question 10

By declaring Subchapter S status owners of professional teams can

A) increase their revenue flow and hence their profits.
B) reduce the corporate tax rate that they must pay.
C) use depreciation to reduce their personal taxes.
D) reduce the interest payments they must make to their creditors.

Question 11

The Kansas City Royals are a "small market" team while the Kansas City Chiefs are not because

A) they draw fewer fans.
B) they rely more on local-not national-broadcasts for their media revenue.
C) they have a much older stadium than the Chiefs do.
D) they have to share more of their revenue with other teams.

Question 12

One reason the Atlanta Braves do not maximize profit is because

A) they add to the profits of TNT.
B) they detract from the profits of TNT.
C) they do not play in a large city.
D) they profit from sponsorship by TNT.

Question 13

Name the sources of revenues and costs discussed in this chapter.

Question 14

Explain why dealing with a single monopolist may be better than dealing with two monopolists in vertically related industries.

Question 15

Show how the ego premium affects the market for professional franchises.

Question 16

The American League succeeded as a rival league where other leagues-like the American Association of the 1880s and 1890s-failed because

A) baseball did not yet have rivalry from the NFL or NBA.
B) TV was not yet a major factor in the marketing of sports.
C) baseball was exempt from anti-trust laws.
D) the National League had restricted itself to too few cities.

Question 17

Why has luxury seating become a prominent issue in the stadium negotiations in recent times.

Question 18

Would fans be better off if the government prevented media outlets such as Disney or local cable companies from owning pro sports teams?

Question 19

How did a quirk in the tax laws allow Bill Veeck to invent a way for sports franchises could make money by losing money?

Question 20

Leagues evolved as the best way for teams to maximize profits because they

A) provided stability.
B) allowed more teams to participate.
C) always shared revenue while other organizations did not.
D) negotiated nationwide media contracts.

Question 21

Every professional sports team follows a strict short-run profit-maximization strategy, rather than focusing on maximizing wins.

Question 22

The most profitable teams in Major League Baseball tend to be those in the largest markets (such as New York and Los Angeles).

Question 23

The Florida Marlins of MLB recently shed most of their best players. In 2006, their payroll was less than one-tenth that of the New York Yankees. Would a team in England's Premier League follow such a policy? Why or why not?

Question 24

When a new team enters a league, the effect on nearby teams is to:

A) Shift their demand curve to the left.
B) Shift their demand curve to the right.
C) Increase their marginal costs.
D) Decrease their marginal costs.

Question 25

Explain how the behavior of one team in a league may result in a problem economists call the tragedy of the commons.

Question 26

With vertical integration in a monopolized environment:

A) The downstream firm has to purchase the output of the upstream firm a P>MC.
B) The downstream firm can purchase the output of the upstream firm at P=MC.
C) There is no relationship between upstream and downstream entities.
D) Market conditions dictate that the downstream firm will always purchase the output of the upstream firm at a 35-40% mark-up over MC.

Question 27

According to James Buchanan's work on the economics of clubs, smaller leagues are always to be preferred over larger leagues.

Question 28

What are the primary risks of the MLS business model of single-entity ownership?

Question 29

The Dodgers moved out of Brooklyn because:

A) They were making large accounting losses.
B) They were making large economic profits.
C) They were only breaking even from an accounting standpoint.
D) The opportunity costs of staying in Brooklyn were too high.