Eco 383: PPT lecture slides, September 2007

• Topics:– MLB’s monopoly– Ticket prices and salaries, demand, and supply– MLB’s monopoly and antitrust exemption

Each MLB team as a local monopoly

• Most MLB teams have a city all to themselves– Even teams in the same city are not really

substitutes

• Prohibitive restrictions on entry (of new teams)– Owners generally oppose expansion.

• When it does occur, expansion fee is very high.

Salaries and ticket prices

• Q: Do higher player salaries cause higher ticket prices?

• A: NO, because player salaries are fixed costs, which are not part of marginal costs (MC) or marginal revenue (MR). The price that equates MC and MR is the profit-maximizing price, regardless of the level of payroll.

• Ticket prices are essentially set by the level of DEMAND.

• 2001-2002: Average salary rose 5%, while average ticket price fell 4%

Q: What if a team increases its payroll by signing a superstar player? Wouldn’t that tend to increase ticket prices?

A: Yes, not because of the increase in (fixed) costs, but because of the increased DEMAND for tickets, which will cause the new profit-maximizing price to be higher.

In most recent years, MLB ticket prices have increased much faster than prices overall (e.g., 25% in 1999-2001, 6% in 2004-2005).

Why: Demand for games has gone up, thanks to --

• General U.S. prosperity

• Renewed interest in the game (cable TV coverage, home-run records, expanded playoffs, improved marketing)

• Attractive new stadiums (S.F., Pittsburgh; Baltimore, Cleveland, Texas)

Ticket prices once again

• Recall: Ticket prices are driven mostly by DEMAND.– Higher demand higher ticket prices.

• Causes of higher demand?

– Most MLB costs are fixed and don’t affect price.

• SUPPLY matters too, but not as much.– Can teams increase profits by restricting

output? Not in the models we’ve seen, but…

Restricting supply to raise profits

• Wouldn’t work in basic monopoly model:– Team charges same price for all seats.– Team is already at profit-maximizing P and Q

makes no sense to change either

• How it could work in real life:– If new, smaller ballpark is more intimate and exciting

D rises (more attractive product)

– Reducing the number of seats, esp. cheap seats:• Some fans will buy costly tickets instead (if D is inelastic)• Fewer walk-up sales more advance-ticket sales (substitute)

– Advance sales are better because team gets the $ even if fan is a no-show.

MLB as a sports league monopoly

MLB as a monopoly league

• No other league provides a comparable product

• Prohibitive restrictions to entry of new leagues– Fan loyalties to existing teams, AL, NL– Stadium construction costs– MLB’s power to sign exclusive TV deals

• MLB, exempt from antitrust laws, has more license to squash competitors than most firms do.

Baseball’s antitrust exemption (AE):A history

• U.S. antitrust laws were passed in 1890 (Sherman Act) and 1914 (Clayton Act) in order to – (1) break up and prevent monopolies

– (2) prevent firms from colluding on prices and output

• The antitrust acts did not exempt baseball, but . . .– Lawsuit, ~ 1915: Federal League team owner sued NL

and AL for antitrust violations in crushing the Federal League. Case went through the courts, finally to Supreme Court.

History of Baseball’s AE (cont’d)

• Supreme Court, 1922: antitrust laws do not apply to baseball. Why:– Under the Constitution, federal government can only

regulate “interstate commerce.”

– Court said professional baseball games were not “interstate commerce.”

• “exhibitions of baseball are purely state affairs”

• The Court has upheld the AE ever since.– Respect for precedent (stare decisis).

MLB expansion over the years

• 1903-60: same 16 teams

• 1961-62: 4 new teams (total of 20)

• 1969: 4 new teams (total of 24)

• 1977: 2 new teams (total of 26)

• 1993: 2 new teams (total of 28)

• 1998: 2 new teams (total of 30)

Franchise relocations in MLB

• 1903-51: same 16 teams in same cities

• 1953-72: ten teams switched cities

• 1972-2004: no teams moved– The AE makes it easier for MLB to prevent

team movements– “Territorial rights” allow teams to block

another team’s locating within 75 miles of them

• 2005: one team moved (Expos to D.C.)

Curt Flood Act (1998)

• Named for the player who challenged MLB’s reserve clause in court in early 1970s

• Decreed that MLB’s antitrust exemption did not exempt MLB from U.S. labor laws

Curt Flood Act (continued)

• A result of the 1994-95 work stoppage – Strike ended after a federal judge issued an injunction

against the owners in 1995, ruling that the AE didn’t apply to labor issues.

– 1996 Collective Bargaining Agreement: owners and players agreed to press for a law to that effect

– Congress passed the law in 1998 without dissent or fanfare

• What is left of MLB’s antitrust exemption?

Some possible effects of MLB’s AE …• FEWER TEAM RELOCATIONS

– from small cities to big ones, or to growing regions (South, West)

• Restrictions on municipal ownership

… and of sports league monopolies in general

• FEWER TEAMS• The amateur draft; restrictions on minor leaguers

– no “judicial review” of such policies (can’t challenge in court)

• Barriers to entry of rival leagues• Broadcasting deals for entire league• (Before 1976-77: the reserve clause)

James Surowiecki,“How to Bust the Baseball Trust”

• Says MLB’s divide between haves and have-nots is a serious problem. How best to level the playing field?

• Discusses two very different options:– (1) “SOCIALISM”: more complete revenue sharing,

like the NFL has.• (Could do this with or without the AE.)

– (2) “THE FREE MARKET”: get rid of MLB teams’ territorial rights

• (Implies ditching the AE, enforcing antitrust laws.)• Profit-seeking teams would migrate to NYC, other big cities

– Migrating teams could be new ones (expansion) or existing teams (relocation).

Zimbalist on “What Is to Be Done?”

• Suggests Congress take action– MLB’s blanket AE should go

• MLB can use a “rule-of-reason” defense to prevent relocations, keep minor-league system and amateur draft

– Break up MLB into two truly independent leagues• (Also implies strong antitrust enforcement.)

• The two leagues could collaborate on playing rules and postseason play, but not on host cities, players’ labor market, or broadcasting deals.

• Each league would rush to fill a potential baseball market before the other.

MLB’s AE makes little sense in economic terms, but . . .

• J. C. Bradbury (in The Baseball Economist) says it’s harmless– Hard to say that MLB abuses its monopoly

power worse than NFL, NBA, and NHL do theirs

• Restricted Q? # of teams ~same in all four sports

• Higher P? Lower in MLB than the other three– (Note: Need to take other factors into account.)

Bradbury on MLB’s monopoly (cont’d)

• Q: Is baseball a contestable market?– Defn.: CONTESTABLE MARKET: a market that

currently has only one or a few firms (non-competitive by defn.), but functions like a competitive market because entry is unrestricted

• Other firms (rival leagues) could enter the market if there were unexploited opportunities for big profits.

– Threat of rival leagues forces MLB to provide more teams and lower prices than it otherwise might.

• A: Bradbury seems to think so.

Larry G. Bumgardner*: Keep the AE• (* law professor at Pepperdine U.)• Admits, Supreme Court’s 1922 decision creating baseball’s

antitrust exemption (AE) was based on dubious reasoning• Says there are no major welfare losses from the AE

– Curt Flood Act eliminates perhaps MLB’s worst abuse of monopoly power, unfair labor practices.

• Says major problems could arise if the AE were ended– minor leagues and farm systems could be in jeopardy– antitrust lawsuits, with crippling “treble damages”– continued threat of Congress abolishing the AE helps keep MLB in

line– too much uncertainty in general about what would happen