CHEERING UP THE DISMAL SCIENCE - PowerPoint Presentation

1. CHEERING UP THE DISMAL SCIENCEUsing Sports to Engage Students in Economics John W. Rogers American International College IACBE Costa Mesa – April 2022

2. Why is Economics sooo …. boring?

3. Economics is a Deductive Science

4. Studying Economics from the Perspective of Sports Sports is one area where most people share a common interestSports is a powerful force for social change at the intersection of business, culture, race relations, and international perspectivesMaybe sports can bring some life into the abstract theories and mathematical calculations that dominate traditional economic thinking and teaching.

5. Students are bored; maybe sports can help

6. THE “LAW” OF COMPARATIVE ADVANTAGE Babe Ruth had Absolute Advantage as both batter and pitcher. He was the best the Red Sox had for both roles. Babe had a Comparative Advantage as a batter. The pitcher who took his place had a lower ERA than BabeBut Babe was more valuable as a batter. The opportunity cost of losing him as a pitcher was less than the gain from his hitting.

7. THE “LAW” OF COMPARATIVE ADVANTAGE Babe Ruth had Absolute Advantage as both batter and pitcher. He was the best the Red Sox had for both roles. Babe had a Comparative Advantage as a batter. The pitcher who took his place had a higher ERA than BabeBut Babe was more valuable as a batter. The opportunity cost of losing him as a pitcher was less than the gain from his hitting.

8. DEMAND CURVES “We are a small market team with a small market payroll.”Steve Schott to Billy BeaneShift the Demand Curve Big Market vs. Small Market

9. SHIFT THE DEMAND CURVE

10. Bill and Mike Veeck The Veecks shifted the demand curve for baseball with a series of marketing gimmicks: ladies' night, pre-game entertainment, kids' competition. Baseball becomes entertainment for the whole family. He was also the first owner to sign black players including Satchel Page, the youngest “rookie” in the MLB.

11. IMPLICIT BENEFITS The recession reduced revenuesFans could not afford ticketsSponsors cut back on marketingThis reduced the value of outputDemand shifted leftSalaries fell

12. THE “LAW” OF SUPPLY Seattle Mariners Short Run Cost Curves

13. TEAM COST PROFILE SEATTLE MARINERS ($million)Short RunFIXED COST $58.6G&A 7.2SRFC $65.8 76%SRVC $20.8 24%SRTC $86.6 100%Optimal attendance < 3.5 million Diminishing returns to variable inputs: TVC increases at increasing marginal rate

14. LONG RUN TOTAL COST CURVE

15. PROFIT MAXIMIZATION

16. TALENT DUMPING “Curse of the Bambino”Florida Marlins payroll: 1997 = $53 million (World Series)1998 = $13 million (0.333 puts team in last placeProfit variation harms competitive balanceOwners spend more on talent if increase in revenues > increase in costs

17. MAXIMIZE WINS Mark Cuban made a fortune as an internet entrepreneur, but he wanted to create excitement and fan engagement as an owner.

18. ECONOMIC PROFIT VS. ACCOUNTING PROFIT MLB Valuations 2021Source: https://www.forbes.com/mlb-valuations/list/

19. Imperfect CompetitionAmerican sports are organized as cartelsOwners acquire a franchise which keeps them in the League regardless of performance Revenue sharing, salary caps, first order draft, luxury taxes allow big and small market teams to be competitive Revenue flows to the least elastic good – ownership

20. IMPERFECT COMPETITION - MONOPSONYAnti-trust exemption for major league baseball created a monopsony relationship between owners and playersIn 1969 Curt Flood challenged the “Reserve Clause” that effectively game owners control over the careers of players who had signed with their team. Ending this Reserve Clause broke up the monopsony; free agency led to a rapid increase in player compensationCompensation in line with player MRP

21. IMPERFECT COMPETITION - MONOPSONY

22. LABOR ECONOMICS – MONOPSONY

23. One Way to Measure Labor Demand in the NBADavid Berri, Stacey Brook and Martin Schmidt (2006) claim: MRPij = MRwin*DwinsijMRPij = MRP of player i on team jMRwin = Revenue from 1 more win (~$1.67 M)Dwinsij = Added wins team j gets from player iThey also claimDwinsij = points + rebounds + steals + .5(blocks+ assists) – field goal attempts – turnovers – .5(free throws + personal fouls)

24. Tournaments and SuperstarsIn 2009, Roger Federer barely beat Andy Roddick at WimbledonGentlemen’s final: 5-7, 7-6, 7-6, 3-6, 16-14If both players received their marginal product, the two should have received almost identical prizesIn fact Federer received twice as much (£750,000 v. £375,000) The winner of a tournament typically gets a huge prize regardless of the margin of victoryThe runner up gets half as muchPlayers eliminated early get virtually nothing

25. Tournament Player Compensation Tournaments reward individual rather than team performanceDifference between winner and others is rather small Higher purse stimulates greater effort as players strive to maximize their own utilityParallel with CEO compensation: how to justify packages that are huge multiples of other workers

26. Tournament Purse in Golf vs. Racing

27.

28. Computing Within-Season BalanceRatio of actual to ideal standard deviationN = # TeamsThe G = # GamesWPCTi,t = Winning percentage of team i at time t

29. The Lorenz Curve for the NBARed line shows perfect balanceAdding 10% more teams adds 10% more winsBlue line shows realityBottom 10% wins less than 10%Sags below red lineAs we add better teams, blue curve catches upAt 100% of teams, we account for 100% of winsThe farther the blue line sags, the greater the inequality

30. REGRESSION ANALYISSports enterprises need to use data in making strategic decisions ATT = f(WPTC)Should we increase payroll to win more games?What is the relationship between payroll and winning percentage?A simple regression may not have great statistical significance R2 = .311Include multiple variables to account for population size and leagueInterpret the statistical significance using t-statistic and p-value

31. Human Capital and Player CompensationInvestment is a sacrifice that brings future gainsInvestment is an increase in capital Firms invest in physical capital (plant & equipment)Gary Becker introduced the theory of human capitalPeople invest in human capital (embodied knowledge or skills)Attending college is one such investmentOn-the-job training is anotherAs human capital rises, so do MPL and wageAthletes acquire human capital like other workers

32. Gary Becker Human Capital How is human capital formed?What is the return on investment?How does it drive productivity?General Human Capital Applies to variety of situations Formed in family, school, college, by coaches and mentors Skills are transferrable Specific Human Capital Skills that apply to a specific team and strategy: Brady and Belichick Makes labor less mobile

33. IMPLICIT BENEFITS Business Opportunity: “Being able to share the ownership experience with clients is extremely rare and a huge competitive advantage in business” Shifting costsSalaries to family and selfBorrowing Cross selling Revenue ShiftingShift expenses among entitiesMedia buying

34. SEATTLE SUPERSONICS EXAMPLE Cumulative losses over four years = $217.9 million x 33% owner personal tax rate =$71.9 million value of tax saving from loss Howard Schulz purchases Sonics for $200 and sells for $350 (million) after six years (+75%)Roster depreciation = $124 million/5 years 20012002200320042005Net Loss- 47.5- 63.7- 46.6- 27.7- 33.1

35. COSTS OF DISCRIMINATION Gary Becker: “Taste for discrimination” carries a cost Employers fail to take full advantage of available talentIn 1950s integrated teams – other than Yankees – were better; Dodgers and Giants won pennantsMonopsony and imperfect competition tend to promote discrimination – or reverse discrimination MLB kept Bill Veeck from buying the Phillies in 1943Veeck had wanted to hire Negro League playersHe was the first to integrate AL with 1947 Cleveland Indians

36. COSTS OF DISCRIMINATION

37. THANKS FOR LISTENING QUESTIONS AND COMMENTS?